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

12:31 pm

Photo of Mike SymonMike Symon (Deakin, Australian Labor Party) Share this | Hansard source

I speak in support of the Tax Laws Amendment (Research and Development) Bill 2010 and the supporting bill, the Income Tax Rates Amendment (Research and Development) Bill 2010, which will introduce a new research and development tax incentive for Australian businesses. But I do speak against the amendment as moved by the member for Indi.

I have previously spoken on the lapsed bills which were introduced in the last parliament in this regard, but they did not progress through the Senate at that time. The parliament simply expired. These bills reflect the changes made to the original bills in response to the report on the bills by the Senate Economics Legislation Committee. Changes have been made to the those bills to clarify that the new research and development tax incentive supports experimental activities for the purpose of generating knowledge in the applied form of new or improved materials, products, devices, processes or services.

Research and development is critical to the future prosperity of our nation. I really do not think anyone disputes that. Government incentives that encourage research and development directly assist business to develop new innovative products that will build national income and create jobs. It was the Hawke government that introduced the original research and development concession back in the 1980s. Originally set at 150 per cent, it was then cut back to 125 per cent under the Howard government, which as we have seen was at a significant cost to Australia’s research and development output.

As a former member of the House of Representatives Standing Committee on Industry, Science and Innovation in the 42nd Parliament, I was involved in the examination of national research and development funding as a part of the committee’s 2008 inquiry that produced the report entitled Building Australia’s research capacity. At that time, the committee heard evidence from Universities Australia that the gross expenditure on research and development in Australia was $14 billion in 2007-08. When compared to the OECD average, there was an estimated shortfall of $5 billion per annum.

The most recent Australian Bureau of Statistics data confirms that there has been an increase in research and development expenditure. In 2008-09 business expenditure on research and development rose to $16.9 billion, up 13 per cent on the previous year’s figure. Although expenditure on R&D as a proportion of gross domestic product rose to 1.34 per cent, up from 1.26 per cent, pushing Australia to 11th place in the OECD rankings, that still leaves Australia below the OECD average. The OECD average expenditure on R&D is 1.63 per cent.

Much of this increase was due to expanded research and development investment in the mining industry, with an additional $860 million invested in the 2008-09 financial year. The next highest increase in R&D expenditure was in the financial sector, which rose $587 million. In 2008-09 manufacturing invested $4.34 billion in research and development, the mining industry invested $4.24 billion, scientific and technical services invested $2.51 billion and financial services invested $2 billion. This increase in research and development has been a great result; however, there is more work that needs to be done to continue this trend. The new tax concession provides increased assistance for genuine research and development and will redistribute support in favour of small and medium-sized enterprises.

These bills will expand the number of businesses that can access government support for their research and development expenditure and investments. Currently, there are more than two million businesses in Australia, but at present only around 8,000—yes, that is 8,000—of these businesses benefit from the current research and development tax concession. There is a bias in the existing system towards large companies. As we can see from the figures, the 100 largest companies tap 60 per cent of the $1.5 billion research and development funding pool. The intention of these bills is to provide higher rates of reward for research and development expenditure and expand the number of companies drawing on that support.

There are two core components to this. One is that larger firms—that is, companies with an aggregated turnover of $20 million or more—will receive a 40 per cent non-refundable tax credit. Companies accessing the non-refundable tax credit can carry forward any unused offset amounts to reduce future tax liabilities. The 40 per cent tax credit raises the base research and development tax incentive for larger firms by a third, taking it from 7.5c to 10c in the dollar. The other component to the program is that smaller firms will receive a 45 per cent refundable tax credit, which doubles the base rate available to SMEs under the existing research and development tax concession from 7.5c to 15c in the dollar. For smaller companies this tax credit can be used as a cash rebate if a firm is not yet making a profit.

This is a substantial change and a substantial incentive for new and innovative companies to invest in research and development even though this investment may push them into a loss for that financial year. To give an example, a company with a turnover of $10 million that spends $1 million on eligible research and development activities in an income year may end up in a tax loss position. Under the new research and development tax incentive, that company would be entitled to a cash refund of $450,000. Under the existing research and development concession there would be zero benefit as the company in that example was not running at a profit. For the first time, companies will receive a cash benefit because they have taken the risk and invested in research and development in the early years of operation.

This proposed R&D tax credit was ranked as the world’s best policy for developing innovation by a 2010 KPMG study comparing research and development incentives. In further endorsement of this bill before the House, the Chief Executive of the Australian Private Equity and Venture Capital Association, Katherine Woodthorpe, said that this legislation will:

… be a real boon for the small research-intensive companies that venture-capital invests in.

In addition to higher rates of support and the ability to receive a cash return for the company not in profit, there is now a clearer and better targeted definition of ‘eligible research and development activities’. This is to ensure that the incentive is available in circumstances consistent with the underlying rationale for government intervention and, what is more, that the public know the incentive is delivering real innovation.

There has been growing concern about the current scheme and how much of the R&D is truly in line with broad expectations of what constitutes research and development. The scheme has more than doubled in just five years to 2008-09 and there is concern that this is being driven by companies claiming spending that has more to do with ongoing business instead of cutting-edge research and development. As the resource boom continues, mining companies have been making very large whole-of-project claims which can draw substantially on the funds available to support research and development. Whole-of-project claims rely on an argument that an entire project qualifies for tax concessions if its viability depends on research and development that meets existing research and development definitions. Examples such as new mining or processing techniques in the resource sector fit into this category.

Another concern is the use of R&D tax incentives for information technology programs in the banking sector. It is interesting to note that the two sectors to record the greatest increase in research and development spending in the latest ABS figures were the mining and banking sectors.

A key aspect of these bills is to establish a clearer definition of ‘core research and development activities’, to introduce a test for supporting R&D activities and to have stronger administration of the incentive. These changes will ensure that the new research and development tax incentive rewards a company’s genuine R&D, but not their business-as-usual activities.

The new R&D tax incentive will ensure most software research and development is treated consistently with R&D occurring in other sectors. In Australia this is a growth industry.

To ensure that businesses understand the new definitions, the 2009-10 budget provided an additional $38 million over four years for administrative agencies to support companies through the transition. AusIndustry will provide comprehensive public guidance material and will introduce a new system of private binding rulings, called ‘advance findings’.

A further reform of these bills is to open up the new research and development tax incentive to foreign corporations that are resident in Australia and those that carry on R&D activities through a permanent establishment in Australia. These bills create a new incentive for expenditure on eligible R&D activities conducted in Australia, regardless of where the resulting intellectual property is held. This reform strengthens the case for foreign companies to conduct research and development activities locally rather than in offshore locations. Many foreign owned companies conduct research and development in Australia—companies in the automotive sector like Ford and Holden, which develop new models for Australia and overseas.

The recent announcement made by the Prime Minister of IBM opening a new multimillion dollar research centre at the University of Melbourne, which will create 150 research jobs, is a great example of this. The new incentive will encourage more research and development in Australia by world renowned companies such as IBM and many others.

Small companies will be the big winners from the research and development tax incentive, with access to cash refunds on R&D expenditure if they do not make a profit 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 research and development tax credit will continue to deliver $1.6 billion of benefit annually for business R&D in Australia. There is no reduction in the amount available for research and development support. However, the aim of these bills is to deliver more effective stimulation of research and development by more companies with the same expenditure of funds as from the previous budget. It is the intention of the government that the research and development tax credit will be available for income years starting on or after 1 July 2010, as was put forward to the House in the lapsed bills of the last parliament. I commend these bills to the House.


No comments