House debates

Monday, 22 November 2010

Tax Laws Amendment (Research and Development) Bill 2010; Income Tax Rates Amendment (Research and Development) Bill 2010

Second Reading

4:30 pm

Photo of Bill ShortenBill Shorten (Maribyrnong, Australian Labor Party, Assistant Treasurer) Share this | Hansard source

I thank members who have contributed to the debate on the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. These bills deliver one of the biggest improvements to public support for business innovation in over a decade. Small companies are the big winners from the R&D tax incentive with greater access to cash refunds and higher base rates of assistance being provided through the new 45 per cent refundable tax offset. Larger companies can invest knowing that they can claim a non-refundable tax offset of 40 per cent of their expenditure on eligible R&D activities. The new R&D tax incentive better focuses public support towards activities likely to produced economy-wide benefits. This will ensure that the new R&D tax incentive rewards a company’s genuine R&D, not business as usual activities. The new R&D incentive is an important part of the government’s plan to encourage industry to boost productivity and activity in all sectors of our economy.

There have been assertions from the opposition that the level of consultation around the R&D tax legislation has been inadequate. I believe that assertion to be unfounded. The changes to the existing R&D tax concession were first canvassed in the independent Review of the National Innovation System back in 2008. There has been an extensive program of consultation over the last 12 months. Industry has had numerous opportunities, including three rounds of public consultation and, when the bills were being considered in the previous parliament, a Senate committee process in which to participate. The government has received over 380 submissions during the three rounds of consultation and held public hearings attended by over 550 people. The government has made some significant changes where stakeholders made constructive suggestions for improvement, as well as clarifying changes in response to recommendations by the Senate Economics Legislation Committee.

There have been assertions made by the other side that, in tightening the definition, this new scheme will not adequately cover development as opposed to research activities. This simply is not true. The objects clause clarifies that both research and development activities are supported. This is achieved by referring to activities undertaken for the purpose of generating new knowledge in either a general or applied form. The development aspect of R&D is captured by the term ‘applied’, which is consistent with the approach taken in the Frascati manual. To clarify this point further, the objects clause now explicitly states the knowledge in applied form:

… including about the creation of new or improved materials, products devices, processes or services.

This clearly acknowledges that factory floor R&D often takes the form of experimental development, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new and improved products, materials, devices, processes or services. This point is further reinforced in the explanatory memorandum. The definition of core R&D activities includes:

… experimental activities … conducted for the purpose of acquiring new knowledge (including knowledge or information concerning the creation of new or improved materials, products, devices, processes or services).

I would like to address the specific points raised by the opposition amendments. Opposition amendment 2(a): the proposed start date of 1 July 2010. I would say that in introducing the bills following the election the government retained the 1 July 2010 start date to avoid delay in accessing the very substantive benefits that the new scheme offers to firms conducting genuine R&D. However, the government is also aware of calls for the start date to be altered and is willing to reconsider this question should it be raised in the Senate.

Opposition amendment 2(b): there has also been some comment on the dominant purpose test. The dominant purpose test is a well-defined concept commonly used in tax law. The explanatory memorandum states:

Dominant purpose means the prevailing or most influential purpose.

It is consistent with the terms used commonly in tax law. Following passage of these bills, AusIndustry will produce comprehensive guidance material to assist firms to prepare their registration, including guidance on how the application of the dominant purpose test applies.

Opposition amendment 2(c): there has been some comment that the feedstock rule in the bills is broader than the existing law. The feedstock provisions in the bills have the same scope as the feedstock rule in the existing legislation. The bill continues to apply feedstock adjustment only for the cost of goods or materials transformed or processed in R&D activities, along with the energy used.

Opposition amendment 2(d): there has also been some comment on the treatment of R&D in relation to building and construction. The bills retain the longstanding exclusion from concessional treatment if expenditure is incurred in the acquisition or construction of a building, or part of a building, or an extension, alteration or improvement to a building. It has been claimed that this exclusion would stop all property R&D by those constructing a building on their own account or under a contract, or developing products to be incorporated into a building. This is not so, as the exclusion is only intended to apply to expenditure on the specific activity of the building. For example, companies experimenting with innovative construction techniques in the course of actual construction will continue to be eligible for non-building R&D activities such as research, consulting, conceptual design, computer testing and other testing not physically incorporated into the final building. Those merely developing components that are then included by others in a building would not be incurring expenditure to construct a building and so would not be captured by the exclusion. The government has not changed either the longstanding policy or the law in relation to these building industry issues and therefore has maintained the exclusion of building expenditure as it has existed under previous governments.

Opposition amendment 2(e): there was some comment that the bills will disqualify many small and medium-sized businesses from support. The bills use the concepts of turnover and aggregate turnover that apply throughout the Income Tax Assessment Act 1997.

Opposition amendment 2(f): there has been some comment that the bills impose unreasonable compliance costs. However, the requirement to identify both core and supporting activities on registration is not new. The only difference is that the bills expressly require these two types of activity to be clearly separated in the registration form. Removing this requirement would undermine the efficient administration of the new R&D tax incentive.

Opposition amendment 2(g): Comments have been made that the bills now impose new restrictions on third-party investment in R&D. The expenditure not at risk rule in the bills is substantially narrower than that implied by the wording of the corresponding provision in the current law and reflects the manner in which the Commissioner of Taxation has administered the existing rule.

Opposition amendment 2(h): Concerns have been raised that the bills apply new rules relating to the disposal of R&D results to actions prior to the commencement of this legislation. Where receipts arise after 1 July 2010 in relation to deductions obtained prior to 1 July 2010, or obtained both prior to and after 1 July 2010, the old law will apply. This means that the tax treatment on disposal of intellectual property will be the treatment that would have been expected under the law at the time the project commenced.

The opposition, in section 3 of their amendment, are urging the government to release full modelling demonstrating the impact of proposed changes and to reconsider our approach in order to ensure encouragement of business R&D activity. It has been said by the opposition that in effect what is going on here is a revenue-raising measure. This is wrong. The Treasury’s costing of the changes to the R&D tax law made clear that this is a proposal which is broadly revenue neutral. Indeed, that was confirmed in the Senate Economics Legislation Committee’s report in the previous parliament. That report took into account each of the key aspects of these bills—that is, the increase in the base rates, additional cash payments, the estimated change in the take-up of R&D assistance, as well as the abolition of the 175 per cent incremental tax concession and the tightening of the eligibility criteria.

The R&D tax incentive must keep abreast of industry developments if it is truly to encourage the right kind of R&D, the kind that strengthens our nation’s economic performance. The government is therefore committed to reviewing the tax incentive after two years of its operation. In the interim, the government will establish a broad based working group to provide advice on the implementation of the new tax incentive. This group will seek to optimise the incentive by canvassing widely to seek a broad range of views from interested parties on its operation.

In summary, a vibrant national innovation system is essential for Australia’s future development. We see the role of innovation as utterly critical to improving productivity in Australia, and these bills are a key component of supporting Australia’s productivity growth. I commend the bills to the House.

Question put:

That the words proposed to be omitted (Ms Mirabella’s amendment) stand part of the question.


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