Thursday, 17 June 2010
Tax Laws Amendment (Research and Development) Bill 2010; Income Tax Rates Amendment (Research and Development) Bill 2010
Debate resumed from 13 May, on motion by Dr Emerson:
That this bill be now read a second time.
I am pleased to speak today on Tax Laws Amendment (Research and Development) Bill 2010 and Income Tax Rates Amendment (Research and Development) Bill 2010. At the time the Rudd government was elected there were four tax incentives for business research and development: the 125 per cent R&D tax concession, the 175 per cent incremental premium concession, the 175 per cent international premium concession and the R&D tax offset. What we are seeing here with the introduction of this legislation by the government is clearly a revenue-raising exercise. The government’s publicly stated intent was to offer enhanced incentives for companies to invest in R&D. It claimed that the new R&D tax credit would offer more predictable, less complex and more generous support.
Labor has made various concessions since its original announcement. They have included: changes to definitions, the reversal of its decision to largely treat software development differently from other forms of R&D activity, the elimination of certain forms of R&D that had originally been placed on an exclusions list, and changes to feedstock rules. However, throughout the process the government has continued to signal its intention to substantially alter the definitions of core and supporting R&D, restrict the eligibility criteria so that supporting R&D will only be funded if it is undertaken for the dominant purpose of supporting core R&D, confer sufficiently vague meaning on the term ‘dominant purpose’ so as to render it confusing and subjective, and revise the objects clause to reduce support for spillover and additionality benefits.
The government’s changes to the eligibility requirements are sweeping and threaten to significantly erode support for R&D investment in Australia. They are also fundamentally inconsistent with Labor’s stated intent of making R&D tax support arrangements simpler, more predictable and more generous. Instead, they impose a series of barriers upon firms rather than offering encouragement for innovation. In narrowing the definition of what constitutes genuine R&D the legislation will disqualify from assistance many forms of R&D undertaken by Australian businesses. In turn, the overwhelming expectation of those groups who have launched submissions on the exposure drafts is that Labor’s changes will reduce the number of firms qualifying for concession.
The proposed definitions of R&D will also foster significant uncertainty and complexity and will impose unnecessary administrative and compliance costs on many firms, especially small and medium enterprises. Indeed, Business Strategies International has advised that it is likely that protracted and expensive legal challenges to the interpretation of the new definitions will even be initiated in some cases.
So, in short, the legislation radically alters a regime that has been operating effectively since the 1980s and does so in a way that disadvantages a large number of Australian businesses. Where companies must currently demonstrate that their R&D activities are novel or have high technical risk, Labor proposes to fund firms only in cases where they can show that they have introduced a wholly new technique, process or solution. Its effect is punitive on a large number of companies whose best innovations are often based upon making refinements to existing practices, as well as the small business sector given that approximately 60 per cent of current applicants are small or medium enterprises. The changes have attracted substantial criticism from a variety of stakeholders. Increased innovation and productivity are both key factors in Australia’s future economic success, but this legislation seeks to gut an incentive that is integral to assisting and encouraging a diversity of companies to improve their business operations.
Within the last couple of days the Senate committee that inquired into this legislation handed down its report, and there was a comprehensive dissenting report by the coalition senators. I would like to draw on some of the comments made in that report to underline the opposition’s feeling and disappointment with this legislation and obviously to underscore the fact that we will be voting against the legislation in the House.
The coalition does support increased business investment in research and development and appropriate reforms to legislation to help achieve this outcome. Clearly, we do. We also accept the general principle that changes to the current law may potentially help to achieve a higher R&D rate for a greater number of Australian businesses, but we will not be supporting this bill because of its several significant shortcomings. The first problem area that the coalition senators have drawn people’s attention to is the consultation process. Throughout the inquiry, there have been considerable complaints made about the failure of appropriate consultation associated with the legislation. The government has given itself an absurdly short timetable for community consultation and examination by the parliament of what is a fundamentally new approach to the definition of ‘eligible expenditure’. The new approach would apply to all business R&D expenditure undertaken from 1 July 2010. Under the timetable presented, business will have two weeks to examine the new act before R&D spending will come under the new regime. Even putting aside the particular features of the proposed changes, this timetable for introducing a fundamentally new approach will increase the range of grey areas surrounding the tax incentive and the resulting uncertainty will see businesses scale back their expenditure. This outcome sits in stark contrast to the purpose of the R&D tax incentive, which is to encourage additional R&D expenditure by business.
A consistent theme of the submissions to the committee’s hearings was the inadequate time to digest the key documents associated with the introduction of the bills. Proper consultation with all relevant industry stakeholders over an extended period of time would have, we believe, prevented the numerous problems identified in the coalition senators’ report. There is no evidence of any supporting documentation, rulings, regulations, guidelines or forms for the new legislation, and this is really concerning, particularly if the bills are to take effect from 1 July 2010. How can we expect business to pick up on such a complex new regime, with no supporting documentation, in little under a month?
It was stated at the hearings that the educational material was still being developed by AusIndustry. The fact is that this legislation is being unnecessarily rushed through the parliament, leaving the Department of Innovation, Industry, Science and Research to prepare education campaigns, regulations and guidelines which have not been adequately tested with industry and stakeholders. This is a totally inappropriate state of affairs when industry is recovering from the global financial crisis and possibly facing further rough times ahead.
The first recommendation from the coalition senators’ dissenting report is that the start date for these bills be amended to 1 July 2011. Let us at least give it 12 months. An additional result of the hasty development of the bills was numerous drafting errors, as well as inconsistencies between the explanatory memorandum and the bills as identified in several submissions. We continue to be alarmed at the regular drafting errors that keep coming up in the Rudd government’s legislation. This is hardly surprising, given that there is such limited time between drafting and introduction. In no way do I blame the parliamentary draftspeople, who do an excellent job, but time is necessary and time is clearly not being made available to them. The second recommendation the coalition senators made is that the passage of the bills be delayed in order to rectify those drafting errors.
I would now like to move to the substantive problems with the legislation itself, centring on the definitions of ‘core’ and ‘supporting R&D’. This bill substantially alters the definitions of core and supporting R&D. In narrowing the definition of what constitutes genuine R&D, the bill will disqualify from assistance many forms of R&D undertaken by Australian businesses. In turn, the overwhelming expectation of the groups who have lodged submissions on the exposure drafts is that the government’s changes will reduce the number of firms who will qualify for the concession. There will be particularly grave consequences for firms focused on industrial R&D and other non-white lab coat activities, including those involved in manufacturing, prototyping and process development.
This was well explained in a submission to the Senate committee by Michael Johnson Associates. They explained that the problem with the new definition was that it is not better aligned with the Frascati Manual definition as had previously been contended by Treasury. In fact, the eligibility of the third limb of the Frascati definition, ‘experimental development,’ is in real doubt. R&D expenditure and concessions have been built on this definition for as long as I can remember. There is a very narrow definition of a ‘core activity’, ‘experimental work’, ‘unknown outcomes’, ‘new knowledge’ and then there are a range of choices as to what ‘supporting activity’ might be, with a strong flavour that anything in a production environment is in danger of not being eligible. It is those trials that could be unable to be claimed. Certain companies, when they look at this definition, believe that the majority of what they do is core and that their claims might be able to be sustained in this environment, but other companies look at this definition and say that a lot of what they do is in a production context—hence, the considerable confusion.
The second and central basis for the coalition senators’ strong opposition to this new approach to defining eligible business R&D is that it is highly restrictive. As I said, for approximately 25 years our R&D tax incentive has been based on what is known as the Frascati model, which has been developed under the auspices of the OECD over a number of decades. Under this model R&D is defined as:
… creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society and the use of this stock of knowledge to devise new applications.
The second part of the definition—‘the use of this stock of knowledge to devise new applications’—is central to the objections that many people have made about this new approach proposed by the government. The objects clause of the bill states that it is to encourage industry to conduct research and development activities:
… by providing a tax incentive for industry to conduct in a scientific way experimental activities for the purpose of generating new knowledge or information in either a general or applied form.
So, critically, this clause omits the second critical element in the Frascati approach: ‘the use of this stock of knowledge to devise new applications’.
Similarly problematic is the ‘supporting R&D activities’ definition in the bill. This was raised with considerable concern in several submissions and I understand it was followed up quite substantially during the hearings. The Australian Industry Group pointed out two major concerns with the definition of supporting R&D:
Firstly, supporting R&D expenditure is only eligible if it is ether “directly related to” core R&D activities or if it is “undertaken for the dominant purpose of supporting” core R&D activities. This means that businesses would have to be undertaking core R&D before any of its R&D expenditure could qualify as supporting R&D expenditure. If a business has no expenditure that qualifies as core R&D, it will have no eligible R&D expenditure.
Secondly, in any case much experimental development is neglected by the dominant purpose test in the definition of supporting R&D activities. In the Bill (s355-30), a supporting R&D activity is defined as an activity directly related to core R&D activities except if it is an activity that is: explicitly excluded, or if it is an activity that “produces goods or services”, or if it is an activity “is directly related to producing goods or services”. In any of these cases the expenditure needs to be undertaken for “the dominant purpose of” supporting core R&D activities.
So the third recommendation of the dissenting report of the committee is:
The Coalition recommends that the definitions of core and supporting R&D be reconsidered to be more closely aligned to the Frascati model of R&D.
Another area of concern is the eligibility criteria. The government’s changes to the eligibility requirements are sweeping and they threaten to significantly erode support for R&D investment in Australia. They are also fundamentally inconsistent with the government’s stated intent of making R&D tax support arrangements simpler, more predictable and more generous. Instead, they impose a series of barriers upon firms rather than offering encouragement for innovation. The major concern was the use of the term ‘dominant purpose’. Several witnesses at these hearings expressed concern about what the term actually meant. In submissions and during the hearings, there was evidence of continual and considerable confusion about what was meant by ‘dominant purpose’. The introduction of the dominant purpose test appears to be a large impost on businesses. As KPMG said in their submission:
The overwhelming feedback from our diverse client base indicates that a “dominant purpose” test will exclude a large proportion of production trial activity that is a necessary and legitimate part of the research and development cycle. If the aim is to contain the cost to revenue associated with large and open-ended production trials, the introduction of a cap on the total value of the group’s R&D claim would better achieve this objective, whilst also providing clarity and simplicity for claimants.
The dominant purpose test should be removed as it imposes an unnecessarily high threshold as evidenced in the EM, and does not target the minority of excessive claims which the Government purports are occurring.
Several alternative models were suggested, such as ‘a purpose directly related to’ test; a ‘substantial purpose’ test; apportionment of expenditure; dollar-capping the extent of production trials on the total value of the R&D claim, or on eligible R&D expenditure, for companies with group annual revenue exceeding a billion dollars; using more sympathetic language; specific provisions for specific excesses; time limits for trials; and pre-approvals for projects above certain values. All of those are options, either individually or in combination. So recommendation 4 was:
The Coalition recommends that the dominant purpose test be removed and be reconsidered.
The last area of technical objection concerns the object clause. The object clause needs to be revised in respect of spillover and additionality benefits. The object clause currently reads:
(1) The object of this Division is to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy.
(2) This object is to be achieved by providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form.
It was pointed out that this definition is much more restrictive and could impact on Australian industry. The Corporate Tax Association said:
While those concepts may be well and good, they are impossible to prove and therefore should not be part of the statutory framework—even as part of an objects clause. Such language might well be appropriate for a second reading speech but, in our view, does not belong in the law itself. We would much prefer the objects clause to make reference to increasing the efficiency and international competitiveness of Australian business, which reflects what we regard as the proper rationale for the incentive.
The fifth recommendation of the coalition senators is:
The Coalition recommends that the Object clause be amended to ensure that both research and development are given equal tax benefits.
In short, this bill radically alters a regime that has been operating effectively since the 1980s and alters it in a way that disadvantages a large number of Australian businesses. While companies must currently demonstrate that their R&D activities are novel or have high technical risk, this government essentially proposes to fund firms only in cases in which they can show they have introduced a wholly new technique, process or solution. Its effect is punitive on a large number of companies whose best innovations are often based upon making refinements to existing practices, as well as on the small-business sector, given that approximately 60 per cent of current applicants are small or medium enterprises.
Together, the proposed changes to elements of the legislation, such as the definition of R&D activities, the dominant purpose test for supporting activities, the registration processes and the feedstock rules, will have an effect opposite to the government’s stated intentions of providing greater generosity, predictability and simplicity. They will disadvantage rather than benefit most Australian companies intending to undertake R&D. The changes have attracted substantial criticism from a wide diversity of stakeholders, including major organisations. This is notwithstanding that during the development process of this legislation there were changes made that did meet with the approval of those stakeholders. Those changes did not, however, answer all the stakeholder concerns.
The government itself implicitly acknowledges a large number of potential problems with the legislation, including drafting errors and definitional concerns. It is not appropriate that bills be rushed through when they contain such errors and therefore give rise to considerable uncertainty. Reviewing elements of bills after three years is not an appropriate means of addressing problems of the kind that are evident in this legislation. A more practical step would be to make sure they are more appropriately drafted in the first place. I am not reflecting on wasting the parliament’s time when we have to fix up poorly drafted legislation but on wasting the efforts and the energy of small businesses, who will often back away if they do not understand and cannot conclude that they fit into a published set of criteria and cannot be confident that, if they make an investment, they will get the R&D tax benefit they seek.
Increased innovation and productivity are both key factors in Australia’s future economic success, but as I said earlier these bills do damage to an incentive that is important in assisting and encouraging a great array of our wonderful small and medium enterprises to improve their business operations. The coalition will not be supporting these bills.
I rise to support the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. It should not come as a surprise to anyone in the community that the opposition is opposed to this legislation. This is an opposition that is opposed to a two per cent cut in the company tax for all businesses. It is an opposition that wants to put a new tax on businesses as well. The fact that it has taken a position opposed to what is a very beneficial piece of legislation that is supportive of business should not come as a surprise to any of us here. Indeed, the opposition is the worst friend that business has ever had and it is demonstrating that again here today with its opposition to these bills.
These bills implement the government’s new tax incentive for research and development to replace the existing R&D tax concessions. The new R&D tax incentive is about boosting investment in research and development, strengthening Australian companies to become more innovative, productive and prosperous, and creating jobs for the future. I want to talk little bit about productivity for a moment. I would have expected the member for Farrer, who is a member of the House of Representatives Standing Committee on Economics which recently delivered a report on this subject, to have made a more meaningful contribution in this debate. Unfortunately, the position of the opposition really is to oppose everything and we again had a demonstration of that today.
I recently had the pleasure of presenting the Standing Committee on Economics report entitled: Inquiry into raising the productivity growth rate in the Australian economy. Over the past decade, Australia’s productivity growth has slowed considerably. Average annual labour productivity growth fell from 2.1 per cent in the 1990s to around 1.4 per cent in the 2000s. Compared to other countries in the OECD, Australia’s average annual productivity growth has performed relatively well since 1985, approximating the OECD average and ranking 12th, one below the US. But the productivity growth rate has been in decline since the 2003-04 productivity cycle, with growth rates averaging minus 0.2 per cent per year.
What would it mean if we were to increase our productivity again? An increase in productivity growth rates would mean a larger economy, higher living standards, and a reduction of the fiscal pressure from ageing. It is useful to remind ourselves of this simple fact: if we were to boost productivity growth from an average of 1.6 per cent to two per cent a year and sustain this over the next 40 years, real GDP per person would be around 15 per cent higher. That is equivalent to raising living standards by $16,000 a year in today’s dollars by 2050 for every man, woman and child in Australia.
Given that increasing productivity is one of the desired outcomes of the new research and development tax incentive, it is pertinent to talk about how we can increase productivity. Productivity growth was responsible for 80 per cent of the increase in our incomes over the past 40 years, but achieving this higher average productivity growth will not be easy. It will take the right investment and effort and it also requires all sectors of the economy to work together to achieve this goal.
The government has a broad agenda to increase Australia’s productivity including: investment in critical nation-building infrastructure such as roads, rail, ports, clean energy, water, and health and education infrastructure including computers and trade training centres in schools; investment in skills and human capital, including measures to enhance teacher quality, the early childhood quality education agenda, and investment to achieve ambitious targets for higher education attainment rates; support for innovation in critical areas, including innovation by business, collaboration between private and public sector researchers and investing in the research capabilities of our universities and public research agencies; economic reform, including reducing business costs from regulation and tax reform as part of this government’s response to the Australia’s Future Tax System Review.
Productivity-enhancing reforms, particularly through nation-building infrastructure and improving the skills base, will grow the economy, improve living standards and partly offset the fiscal pressures of ageing. By growing the economy we increase our capacity to meet the fiscal costs of ageing without increasing the overall tax burden on working Australians. The best way to grow the economy is to maintain our focus on productivity and on investing in skills and infrastructure—nation building, the education revolution and regulatory and tax reform to underpin productivity growth in the decades to come.
Building productivity, of course, is not just a challenge for government. Ultimately, it is Australian workers and businesses that will deliver higher productivity by skilling themselves up, tooling up, and working smarter. With an ageing population, productivity growth is the key driver of future growth prospects. Reforms that reduce barriers to participation will also lift growth and reduce future pressures. Steps to grow the economy and ensure permanent spending growth is sustainable, including through the implementation of the government’s fiscal strategy, will reduce future adjustment costs and the economic and fiscal consequences of ageing.
Of course, the bills I am speaking on today will do a number of things besides offering better incentives to Australian firms for increasing productivity. The new research and development tax incentive provides more generous benefits and is better targeted towards R&D that benefits Australia than the existing concession. It redistributes support in favour of small and medium firms which are more responsive to fiscal incentives. It provides cash upfront to small innovative firms, giving them the certainty they need to invest in growing their business. It is also substantially simpler and accompanied by improved administrative arrangements. The new R&D tax incentive replaces the existing R&D tax concession for all income years starting on or after 1 July 2010.
The two core components of the new incentive are a 45 per cent refundable R&D tax offset for eligible entities with a turnover of less than $20 million, which is small and medium enterprises, and a non-refundable 40 per cent R&D tax offset for all other eligible entities. This doubles the base rate of existing support for small and medium enterprises and raises the base rate for larger firms by a third. Instead of receiving 7.5c in every dollar, small and medium enterprises will receive 15c for every dollar and larger firms will receive 10c for every dollar. The new refundable tax offset provision makes upfront cash support available to more small and medium-size companies. The new refundable tax offset is available to corporations with turnover under $20 million. Under the current law, a refundable tax offset is only available to corporations with an annual group turnover of less than $5 million whose group aggregate R&D expenditure is not more than $2 million per year.
The government aims to lift Australia’s R&D performance through increasing the number of businesses undertaking R&D. There are two million businesses in Australia and only around 8,000 of these businesses benefit from the current R&D tax concession. The government’s intention is for the higher rates of reward under the new incentives to attract more firms to the program. It is fairly obvious that a very small proportion of Australian businesses—only 8,000 out of two million—are taking advantage of the current R&D tax concession. Without a doubt we need to encourage many more businesses into R&D and this legislation will help towards that end.
This legislation also tightens up the scheme of R&D tax concessions. The existing scheme is allowing some companies to use taxpayer dollars to subsidise ‘business as usual’ activities rather than research and development activities. It appears from the member for Farrer’s contributions she is keen to ensure this continues. The government has a responsibility, however, to deliver value for money for taxpayers through better targeting of the scheme. This has been achieved in the new legislation through a more focussed definition of eligible R&D activities.
The new definition of core R&D activities still covers both research and development activities. A common misperception—and one that the member for Farrer tried to perpetuate—is that the new incentive excludes R&D activities carried out in a production environment. It is not true that production trials are effectively excluded by the dominant purpose test. Manufacturers will still be able to claim core R&D activities that fall within the definition of an experiment generated for the purpose of acquiring new knowledge. The dominant purpose test only applies to supporting R&D activities that are production activities. The explanatory memorandum emphasises that the fact that an activity serves a commercial objective as well as being directly related to R&D does not preclude it from qualifying as supporting R&D.
The government has undertaken—despite what the member for Farrer said—an extensive consultation process, including inviting public submissions on a consultation paper and two exposure drafts of legislation. The government has received over 380 submissions during these three rounds of consultation and has held public hearings attended by 550 people. In addition, there have been extensive discussions with key industry representatives and advisers over almost a year. So for the member for Farrer to say that this legislation is rushed is simply not true and a misrepresentation of what occurred in what was a very extensive consultation process.
During this consultation process the government has made some significant changes where stakeholders have made constructive suggestions for improvement. In particular, the definition of core R&D is now simpler and the dominant purpose test for supporting R&D has been limited to production activities and activities on the exclusions list. The government has decided not to enact the widely criticised ‘augmented feedstock’ rule that was set out in the first exposure draft legislation. The government still plans for the new R&D tax incentive to start on 1 July 2010. Although some industry groups have called for its introduction to be delayed for a year—as the member for Farrer did—a delay would mean that many Australian companies would not get the very substantial benefits that the new scheme offers, with a doubling of benefits and cash upfront to smaller firms.
Introducing the new incentive is critical to Australia’s future, to enhancing productivity, to making us more competitive and to creating new wealth and jobs. Stakeholders in the biotechnology and pharmaceutical industries have been supportive of the new incentive and are keen to see the new R&D tax incentive enacted as soon as possible. The information technology industry has also welcomed the revised approach to software R&D. The government provided $38 million in the 2009-10 budget to ensure that AusIndustry and the ATO are equipped to assist taxpayers in adjusting to the new scheme. AusIndustry will provide guidance and educational material to industry, including specific information on those industry sectors in which there is the most concern—manufacturing and mining.
Research is critical to Australia’s prosperity. That is why this government has committed itself to a program of renewal and reform for Australian innovation and research. Our overarching goal is to create a stronger, fairer and more productive Australia. We must be a country where individuals, communities and industries all benefit from the fruits of research and innovation. This government is helping boost R&D performance, encouraging researchers and industry to collaborate in ways that make both more competitive, and helping translate new ideas and technologies into high-skilled, high-wage jobs.
Australia does a lot of research and much of that research is brilliant. In recent years we ranked 11th in the world for output of research papers and ninth in the world for total citations. We averaged ten citations per paper, which puts us in the top 20 internationally and which most people would agree represents a pretty high impact. But is this good enough? Can we do better? China and India have become research superpowers in a relatively short time and we need to be aware of that competition. China is increasing its total expenditure on R&D as a share of GDP by eight or nine per cent a year. In Australia, it is only one or two per cent. India lifted its spending on academic research by 180 per cent in the seven years to 2005.
Not only do we need to lift our productivity growth, but we also need to increase our overall research. If there are to be more new jobs and new economic opportunities, there has to be also a dramatic increase in collaboration between universities and industry. This is one of the great weaknesses of our innovation system and an area in which we fell further behind under the previous government. Australia ranked 16th out of 28 OECD countries for research collaboration between industry and universities in 1997. By 2004, we had fallen 10 places to be last out of 26 countries. ABS data for 2006-07 suggests that less than one per cent of Australian firms get information or ideas for innovation from universities.
Australian businesses will receive a significant boost in support for research and development under the new R&D tax incentive legislation about which I am speaking at the moment. This important reform will encourage more Australian companies to engage in R&D, providing Australians with the high-end technologies and skills needed to compete in a competitive global market. This will make Australian companies more innovative, productive and prosperous and position them to create jobs for the future.
This government is replacing a complex and outdated R&D tax concession with a simplified R&D tax credit that gives business better incentives to invest in research and development. The scheme will stimulate more of Australia’s two million businesses to undertake research and development—rather than just the 8,000 businesses that benefit from the current concession.
The R&D tax credit doubles the incentive for small and medium enterprises—the engine room of the economy —while increasing by a third the incentive for big business to undertake R&D. Small innovative firms will be the big winners from the new R&D tax credit, with greater access to cash refunds for their R&D expenditure and more generous rates of assistance. The R&D tax credit will focus on supporting genuine R&D and be worth $1.5 billion a year to industry.
These bills deliver one of the biggest improvements to public support for business innovation in over a decade. Small companies have greater access to cash refunds and a higher base rate of assistance being provided through the new 45 per cent refundable tax offset. Large companies can invest knowing 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 produce 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, as proposed by the member for Farrer. The new R&D tax incentive is an important part of the government’s plan to encourage knowledge-creating and knowledge-using industries to boost productivity and activity in all sectors of the economy.
I commend the bills to the House.
When I gave my maiden speech to the House in February this year, I mentioned key policy areas in which I hoped over time to be a voice for change. One of the areas I spoke about was the process of commercialisation of innovation—that is, moving smart ideas from the laboratory to the market place. In my speech at that time I mentioned that I saw this as requiring:
… closer ties between research institutions and industry … choosing key areas of research where we can build real scale and leverage that into a national competitive advantage.
In addition, the emphasis on the commercialisation stage is very important to bear in mind and goes to perhaps one of the key differences between the coalition and the government on this legislation, which seems to embody a philosophy which fails to recognise the importance of the commercialisation phase and fails to recognise the relative importance of the development phase, as contrasted to the research phase.
I want to pay particular tribute to the Howard government Minister for Communications, Information Technology and the Arts, Senator Richard Alston, for whom I worked. Senator Alston had a deep interest in the issues of innovation and commercialisation. It was a privilege to work with him and others, including Neville Stevens, the then secretary of his department, David Quilty, his then chief of staff, and indeed Dr Terry Cutler, who was an important informal adviser on these issues. Dr Cutler’s name is prominent in this policy area as the author of one of the key reports which influences the policy changes put forward today. It is unfortunate perhaps that the connection between Dr Cutler’s recommendations and the specific policy changes appears to be less direct than it ought to be.
It is very disappointing that the legislation before the House is flawed in its approach to re-engineering the mechanism of concessions for Australian businesses for research and development. This legislation does not give effect to the theme which the Labor Party took to the 2007 campaign of promoting innovation. Its substantive effect is quite at odds with what is claimed and in fact winds back support for research and development in Australia.
It is certainly true that Australia’s research and development levels are running at below the OECD average and the objective of increasing research and development levels is one which all of us support. The key issue before the House is whether the mechanism proposed in this legislation is going to be effective in encouraging research and development. On this side of the House, we are clearly of the view that it will not be effective.
It is important to understand the context for the current research and development tax concession and the way it has worked in practice. It has been an important mechanism to support business expenditure on research and development. The Australian Industry Group, in one of its submissions during the process of developing these bills, had this to say:
The case for public support of business research and development arises because of the direct and indirect spillovers that arise when the full value that flows from the expenditure is not captured by the businesses making the expenditures but part of which flow to other parties … Without public support, the total quantity of business expenditure undertaken would be less than the socially optimum level.
It is clear that inherent in that is the notion of a public good and it is well accepted that an appropriate area of public policy activity by a government is to encourage public goods because, for the reasons the Australian Industry Group has articulated, private players may not sufficiently act to encourage those goods themselves.
The existing research and development incentive arrangements consist of four elements: the basic 125 per cent tax concession; the 175 per cent premium concession; the 175 per cent international premium concession, and the refundable R&D offset for small companies. The Rudd government’s stated aims are to make the R&D tax support arrangements simpler, more predictable and more generous. None of these aims, regrettably, has been achieved in this bill.
One of the things that is particularly striking is the profound internal contradictions between the two major reports that have been used by the government as the basis for these legislative changes. There was the Productivity Commission report, which was released in 2007, which concluded that the basic 125 per cent tax concession was failing in its purpose as it gave concessions in relation to R&D that would have happened anyway. I do not express a view as to the merits of that conclusion; I just note that there is a contradiction between the underlying philosophy of the 2007 Productivity Commission report and the review that was conducted in 2008 by Dr Terry Cutler, of whom I spoke earlier. He is a man who has been involved in policymaking in this area for many years.
Objective observers have described Dr Cutler’s recommendations as being the polar opposite of the Productivity Commission report. He recommended an increase in the base concession, a greater concession available for smaller entities and a closure of the incremental provisions. When the government first responded in May 2009, in its Powering ideas statement, it supported the move to a tax credit. But the story then got very murky as the Treasury got involved in the consultation process, issuing a paper in September 2009 and exposure drafts in December 2009 and March 2010. The Treasury’s paper seemed to revert to the Productivity Commission approach of substantially tightening up eligibility criteria for the tax concessions. It is important to note that the Productivity Commission conceded that its proposals for restricting the scope of the concession would increase administrative and compliance costs and that there would be unforeseen consequences.
One industry participant I have spoken to expressed the view that the September 2009 paper could have been written based wholly on the Productivity Commission report, as it makes so little reference in substantive terms to what was recommended by Dr Cutler. It is for this and other reasons that a number of industry observers have asked whether this is simply a revenue measure in substance, designed to reduce the amount of tax expenditure in this area, and that that is the overriding policy objective as opposed to stimulating research and development.
The key provisions in this bill create a 45 per cent refundable tax credit for entities with a turnover of less than $20 million and a 40 per cent non-refundable tax credit for all other eligible entities. But there is an important sting in the tail: this bill brings a new and more restrictive regime to determine eligible research and development activity. The bill creates two key categories for eligibility, being core research and development activity; and supporting research and development activity. There are very significant problems with both of these definitions. Many industry participants have made that point, including the Australian Industry Group.
It has been widely pointed out that the bill and the new provisions that it introduces are not consistent with the Frascati definition of research and development, which has been the basis for the approach used by the OECD in this area for decades. Under that approach, research and development is defined as ‘creative work undertaken on a systemic basis in order to increase the stock of knowledge, including knowledge of humanity, culture and society, and the use of this stock to devise new applications’.
Importantly, under the existing arrangements in Australia consistent with this definition, research and development includes both creating new knowledge and using existing knowledge to create new applications. The problem with the approach that the bill takes is that it limits, in both its objects and its specific provisions, the availability of the credit for activities that are undertaken for the purpose of ‘acquiring new knowledge or information’.
In other words, this bill involves a clear shift to put a greater emphasis on research and a reduced emphasis on development. We do not believe that that is a good policy approach. It removes from the application of the credit a key aspect of what research and development involves—what in the Frascati model is called ‘experimental development’ which is defined as, ‘Systemic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed.’ In other words, under the bill, novelty becomes a prerequisite, and the use of existing knowledge to develop new applications is rejected.
The bill seeks to address this concern with the notion of ‘supporting R&D activity’ but the definition of that term is so circumscribed that most observers believe it is going to be very difficult to take advantage of it. A whole range of activities are specifically excluded—for example, an activity that produces goods or services or an activity that is directly related to producing goods and services. In addition, there is an overarching test that the activity must be for the ‘dominant purpose’ of supporting core research and development activities.
This dominant purpose test effectively operates to kill off any application of the credit to experimental development. Some experts have pointed out that it is difficult to envisage a situation where a supporting activity would not fall within one of these exemptions and thus be barred from eligibility for the credit. There is, in addition, real uncertainty as to what this new term ‘dominant purpose’ means.
Heather Ridout, of the Australian Industry Group, has called the new approach deeply flawed and says that it will significantly reduce innovation. Indeed, the Australian Industry Group commented in its submission:
In a manufacturing environment, research and development is necessarily heavily biased towards development in a live production environment—whether that be to commercialise research into new marketable products, to improve existing products, or to improve the efficiency of manufacturing processes. All of these activities are essential in order to remain competitive in a mature global industry, continue to export, and compete against imports.
Another party making submissions on this bill estimated that 60 per cent of their activities would no long be eligible under the new definition. It is also noteworthy that that 2007 Productivity Commission report to which I referred earlier found that 61 per cent of business research and development was experimental development—that is, drawing on existing knowledge. In other words, there is a huge area of ground which has now been excluded from being eligible for the tax credit. So we are at risk of moving from a regime which provides incentives for research and development to a regime which simply provides incentives for research. Therefore, one has to be very sceptical about the government’s real motives for this legislation, particularly given the strong involvement of the Treasury in the final form of the legislation. It is hard to avoid the conclusion that the primary motivation is to achieve cost savings.
An additional aspect of this legislation which is deeply troubling is that the consultation process has been wholly inadequate. It is interesting how often that is the theme of the Rudd government. The timetable for these proposals was completely absurd. The first draft exposure bill was released just before Christmas. There were very substantial rewrites and a second draft exposure bill was released with entire concepts having been altered. The new regime is supposed to take effect on 1 July—that is, in less than 15 days. The bills have not even been passed. A Senate committee inquiring into this matter reported only one or two days ago.
So we have flawed policy and policy which has been developed with inadequate consultation. We also have policy which has a substantive effect which is quite different to the government’s rhetoric—once again a clear theme in the way the Rudd government operates. What we have seen, regrettably, is an all too clear example of the atrocious process that characterises the way that the Rudd government operates. In substance, what we are seeing is a bill which introduces a complete change to a regime that has operated effectively for quite a number of years to provide tax incentives for research and development activity. The way in which the changes have been introduced has maximised confusion and uncertainty in the sectors that rely upon this research and development tax concession.
The underlying substantive policy impacts of this legislation do not conform to the government’s rhetoric and its stated objectives, so it is no wonder that amongst the comments which have been made by expert observers about this legislation is the following:
The R&D tax concession was broad-based and available to every company. With this nonsensical and complex piece of legislation, they are killing it.
That comment comes from a KPMG partner. A tax partner at PricewaterhouseCoopers described this legislation as ‘a kick in the guts for business’. The Dean of Business at the University of Technology Sydney, Roy Green, was quoted in the Australian Financial Review as saying the proposal ‘seems mainly designed to bring about cost savings on support for large corporate R&D budgets’. The CEO of the Australian Information Industry Association has stated:
… the whole success of the NBN rests on the value-added services to be delivered on the back of the network. This is a huge area of opportunity that will be stifled by the proposed changes to R&D that limit what software companies can claim.
Without expressing any additional views on the merits of the NBN—my views on that topic are well known—I would simply point out that that is yet another piece of evidence of the internal contradictions which are absolutely rife in this legislation. The fact is that its substantive effect will be at odds with its stated purpose. The fact is that the regime of consultation which has occurred has been wholly inadequate and has left most interested parties frustrated and disappointed that their expertise has been disregarded. The fact is that we have, in substance, a piece of legislation which not only is not going to achieve the stated objectives but in fact, on all of the evidence, appears designed to achieve a quite different set of objectives. Sadly, this is a story which is all too common under the Rudd government, where we hear one stated policy objective but the actual substance of what is done is quite the opposite. For these and many other reasons, the coalition is not supporting this legislation.
Order! The question is that this bill be now read a second time. Before calling the member for Canberra, I understand that it is the desire of the House that there be no points of order during the speech. I call the member for Canberra.
Thank you, Mr Speaker. Wouldn’t it be good if that happened all the time! It is indeed a challenge for me to do justice to almost 15 years in this place in just over 15 minutes. But I suppose I cannot complain about the constraint, given the opportunities I have had over those years to burden our long-suffering Hansard reporters with just under 250 speeches and 40 questions without notice, which I suppose is something I can claim a little pride in. I have to admit, though, that there are probably a lot of people with a higher record than mine—but I have left that to others to prove!
I would like to reflect on these 15 years and, in doing so, I would like to thank a few people. The first thankyou, of course, is to the people of my electorate of Canberra. It is such a special place and it is easy to love every part of it. In this ancestral land of the Ngunawal people, from the Gordon Valley, under the eaves of the snow capped Brindabellas—and they have been of late—to the rural areas to the south, through the picturesque Tuggeranong and Woden valleys and Weston Creek, right into the old heart of the city and the inner south, it is a very beautiful place of idyllic family living, a free and relaxed city, confident in itself and proud of its place at the heart of the democracy of the nation. But it is the double-sided nature of Canberra, the city and the seat of government, which makes it a special place, and this is a subject that I would like to come back to a little later. I thank my fellow Canberrans for the trust they have placed in me. I can genuinely say that representing them in this place has been pretty special.
I want to thank the people of the ACT Labor Party. Of course, Bill Hayden famously said, ‘Hell hath no fury compared to the ACT ALP.’ The real quote, of course, is: ‘Hell hath no fury compared to a woman scorned.’ Well, I am glad to say that neither quote described my experience. In fact, on both counts, the contrary is very much the case. The ACT branch is a wonderfully loyal and talented part of the ALP that makes a major contribution to the federal party in so many different ways. It has been a great honour to be their choice to represent the people of Canberra and I thank them for their support.
I have been fortunate to enjoy wonderful support from so many gifted and generous individuals over my career. Sadly, I cannot and will not try to list all of them here, so I want to thank all of my supporters, both inside and outside the party, who have done so much to help me over my 15 years as the member for Canberra and, originally, the member for Namadgi. I want to issue a special thanks to the members of Centre Coalition, my own party grouping; to the trade unions in the ACT, whose support I have always valued; and most especially, of course, to my own staff through all of the years who have worked so tirelessly and effectively for me on both the bright and the darker days.
I want to thank the member for Fraser and Senator Kate Lundy. Bob and Kate and I have formed what I would call an effective triumvirate in this territory, and I am happy to think we have grown to four recently with Mike Kelly in Eden-Monaro not that far away. I want to thank the previous long-serving member for Canberra, Ros Kelly, for her encouragement and her strong mentoring role. I also need and want to recall the contribution of Terry Connolly, a close friend and former Attorney-General in the ACT who, sadly, passed away three years ago.
I came to this place at an immense time of change in Australia. A long period of Labor government had come to a stark end and a new period of uncertainty was emerging in Australian political life. I want to remind the House of the shock the people of Canberra had to face through significant Public Service cutbacks at the time which caused considerable pain for many of my constituents and saw this community plunge into a recession. It was indeed a very challenging time. I also recall the manner in which a former member for Oxley announced the arrival of the One Nation Party on the national scene.
But Labor’s response to this time of uncertainty was defined by the tremendous campaign waged by federal Labor under Kim Beazley in 1998, when we actually won the popular vote. Difficult times followed, with the tough debate on the GST legislation and the stressful period of East Timorese independence, but Labor remained a strong and effective opposition and our electoral prospects looked positive in 2001. Then came the flow of asylum seekers, and the infamous Tampa incident on that fateful dawn of 24 August 2001. Then there was the ‘children overboard’ affair—in my view, one of the darkest days of government in Australia, eventually leading later to the tragic so-called ‘Pacific solution’ to deal with the issue of asylum seekers. As I reflect on this period and the long cold years of opposition that followed it, I cannot but conclude that Australia seemed to retreat in on itself a little. The great compassionate element to the Australian personality, which I cherish and see as crucial to the national personality, seemed to grow just a little dimmer over those years.
Although overall these were very tough times for those on this side, there were some extremely rewarding things occurring for me. I was given the opportunity to come to the shadow ministry, with responsibility at different times for family and community services, ageing, seniors and disabilities. I am very grateful for the confidence my colleagues placed in me to hold those important roles. I had the opportunity to push the social justice concerns which I am passionate about and, I believe, position the ALP fairly well in policy terms.
I would like to leave a message here today. I think Australia is still coming to terms with the issue of disability. There is a need for an increased consciousness in the nation of the enormous challenges that those with disabilities face and the incredible strains placed on those that care for them. There is no doubt that, over time, decisions have been taken to help improve opportunities and life participation for those living with disability. However, they need more support from us, the Australian community, and we need to work more closely with them to deal with the immense practical day-to-day challenges that they face. I do not in any way wish to diminish the gains made and the work that has been done. But there is a need for a change in national consciousness and I hope that I, along with colleagues, have played some small part in assisting this.
A courageous policy response is also called for. We do need to think seriously about a national disability insurance scheme, federally funded as Medicare is. Such a scheme would be a significant change, but it has to be placed firmly on the debate for social policy reform in this country. We now await the Productivity Commission inquiry, which is due to report in July 2011.
I want to make a few other points which I think are really important. I do not think there is a political cookie cutter that you can use to cut out the shape of the perfect politician. If so, it certainly wasn’t used on me! But my point is that there is no one profile for success in this place. I entered this parliament slightly further along the age scale than many—well, not many, but some—and without the perceived advantage of a tertiary education. I carry these two elements with a certain sense of pride and I encourage others out there to consider what they might do. Also, I loved very much being on Labor’s front bench but I also loved the work that I have done as a normal parliamentarian. I reckon there is a bit of a mentality around that unless you have got to sit up the front then you have not really made it.
I do not agree with that at all. Some of the best things I have done to serve this House have been in the committee work I have been involved with. I have certainly done my fair share. I calculate that I have served to some degree on around 50 inquiries. I want to mention two, but before I do I want to take the opportunity to thank the incredibly professional committee staff that we have in this place. Their calibre is incredibly high and, may I say, there are not enough of them. We need to pay attention to that.
The 2½-year inquiry into Indigenous health, leading to the Health is life report in 2000, was in my view a significant turning point in facing up to the scandal of Indigenous health in Australia. It was a long and difficult journey and I know that it changed the attitudes of the members in this House who were involved. I was also very fortunate to chair the inquiry into the challenges facing carers and their support needs. I am glad to say that the report’s key recommendation—to increase financial assistance for carers—has been acted on by this government, along with other important recommendations. Of course, there is always much still to be done.
Another great privilege I enjoyed in this place was to see the apology given so eloquently by the Prime Minister to the victims of the stolen generation. I know that all those around me were, like me, deeply aware of the power of the moment, the quiet sacredness of it and the real healing that it can and will lead to and has led to. This of course flowed from the excellent Bringing them home report, which we on this side read into the Hansard through the adjournment debate back in 1997, if I recall, because the government of the day would not allow us to debate it.
But where I want to conclude is to return to where, of course, it all counts the most: my work in the electorate. I have been asked many times lately what has been my biggest or best achievement during this career. I look at it in a slightly different way. It has been a privilege to be able to assist individuals or families or local organisations within my community in a very personal way at times. No matter the issue, if you are able to guide them through difficult times or circumstances, to me that is the great achievement. So there have been thousands of great achievements. Over the years, people have shared their private and personal stories with me, and I have to thank them for their trust and confidence in so doing.
As well, I must recall that fateful Saturday in 2003—and I look at the member for McEwen as I do this—when this city was under terrible threat. The Canberra bushfires were a shocking and horrendous experience, but we saw the best in people at the same time. I had the privilege of being appointed to the ACT Chief Minister’s bushfire recovery community reference committee and worked very closely with a variety of community representatives for over 18 months. The bushfire recovery response processes established by the ACT government were remarkable in their structure and detail. They became a model for emergency response generally and, I believe, had some reflection in the Victorian processes.
Now I want to make a comment specifically about this wonderful city, as I did in my maiden speech. It is a home to people born here and people who have chosen to move here for work or other reasons. They make up a great little Australian community. They also happen to live in the country’s national capital, and they are very proud to do so. They do their bit to promote the national capital, to defend it when the odd sledging comes along—and that comes along a little bit too often—and to care for it. They realise that at that level it does not belong just to them; it actually belongs to the whole country—to all the people in all the electorates represented here in this House. So, if I could leave a parting request, please, please, please always remember that this city has two personalities: it is a local community, much like every other local community represented here, but it happens also to be the national capital of all of Australia. It is a city we would like all Australians to be particularly proud of. May I remind you that its centenary is coming up in 2013.
I very much cherish the opportunity I have had to serve the people of Canberra. It is a very large electorate in population terms—we should have a third seat soon, one would hope—and the demands have always been there. I have made working with community groups a key focus. I am proud, like many members in this place, to be a patron of a number of organisations. They include groups such as the ACT Eden Monaro Cancer Support Group, the Tuggeranong Festival, the Australia Thailand Association, the Tuggeranong Hawks Football Club, Special Olympics ACT Region and Arthritis ACT, to name but a few. These and so many other groups have given me so much energy and enjoyment. I also cannot help but mention the thrill I have had at seeing my much loved Sydney Swans play so many games at Manuka Oval. I am sorry to see they are diminishing in number. I only hope to enjoy seeing many more in future footy seasons. I hope the ACT Minister for Sport and Recreation hears that comment.
I did my thankyous at the beginning but I have left a couple till the end. I want to thank all the Parliament House staff who do such a wonderful job helping us. We know it is not easy, as we pollies can sometimes be a high-maintenance bunch of people. I will mention all of them, I hope—the attendants, Hansard, the clerks, the drivers, the printers, the cleaners, the library staff, the plumbers, the painters, the education unit. If I have missed you out, please forgive me, but this place would not operate without all of you.
My last thankyou is to my caucus companions and my colleagues opposite. It has been a delight—in fact, an absolute privilege—sitting here with you. Of course, it is the friendships with the people you work with that make this business so rewarding. I thank you for helping me in this difficult yet privileged role of serving the Australian democracy for almost 15 long, happy years. It will depend on when the election is called whether I reach that 15-year mark. In conclusion, Mr Speaker, my thanks to you as well and to all of my colleagues, both present and past. I would like to mention a couple in particular: Graham Edwards, who left the House a couple of elections ago, and was a great friend and mentor to me; and Janice Crosio, who left a little bit earlier than that, and under whose wing I was placed on the first day I came into this place. Any ill behaviour I have displayed I attribute entirely to her! I am sure she is proud of the one time that I was ejected from the chamber! Mr Speaker, I thank you.
I rise to speak on the Tax Laws Amendment (Research and Development) Bill 2010 and related bill. This legislation contains a number of significant changes to the eligibility criteria and requirements for government support for research and development. These changes, as we know, have attracted substantial criticism from a wide range of industry groups—the very groups that need to be taking advantage of the research and development support. There is great uncertainty and there is great concern.
Following a review of the National Innovation System administered by the newly elected government, Labor announced in its 2009-10 budget that it would replace the four current tax incentives for business R&D with a new R&D tax credit. The main components of the Labor government’s new R&D tax credit packages are restrictions to the categories and types of eligible activities, a 45 per cent refundable credit for firms with an annual turnover of less than $20 million and 40 per cent non-refundable credit for firms with a turnover of more than $20 million. The new tax credit actually imposes restrictive barriers on firms rather than offering encouragement for research and innovation. No-one should underestimate the need for research and innovation as a proven driver of continuous and evolving economic growth, productivity, competitiveness and profitability. That is why the coalition has serious concerns over the government’s changes to the R&D tax concession.
The changes to the eligibility requirements are quite broad. Less emphasis appears to apply to development and it is a real issue. It threatens to significantly erode financial support for R&D investment in Australia—an unintended consequence, I would hope, but one that is very real. The eligible R&D activities under the legislation to qualify for the tax incentives are categorised as either ‘core’ or ‘supporting’. There is a stricter test on the definition of ‘supporting’ R&D in this bill. What I would not want to see is any reduction in innovation as a result of this restrictive part of this particular bill. It may disqualify assistance from many forms of R&D currently undertaken by Australian businesses—the drivers of innovation, productivity and profitability.
The proposed definitions of R&D will cause significant uncertainty—they are already. They are extremely complex and, for practical purposes, will impose unnecessary administrative and compliance costs on many firms, particularly small to medium enterprises. When you read through the definitions in the legislation, it becomes clear and apparent where the complexity and uncertainty is arising and will continue to arise.
The concern has been echoed by Business Strategies International, which has said that it is likely that protracted and expensive legal challenges will be initiated in some cases. That is something businesses do not need and should not have to afford. It could well lead to a reduction, as I said, in investment in R&D as a result. Interestingly, in their submission to the Senate Economics Legislation Committee inquiry, the Corporate Tax Association detailed concerns they have regarding this legislation, largely about the proposed new definition of R&D. Their submission stated:
From what members have said to us, many corporates expect to see their claims reduced significantly, mainly as a result of the proposed dominant purpose test for supporting R&D activities in a production environment. In some cases, corporates may form the view that the compliance costs involved in working up a claim are not warranted, and will not register projects they might have under the existing rules.
That certainly will not be of benefit to this nation. Coincidentally, in the current political environment of the resource super profits tax, in both the explanatory memorandum and in oral briefings from Treasury and the Department of Innovation, Industry, Science and Research, the examples of offending behaviour were dominated by those in the mining sector, one after another. I am afraid that this is just another attack on Australia’s mining and resource sector. The legislation is seeking to change not only the new resource tax but also R&D in the mining industry. The Minerals Council of Australia, in its submission to the consultation paper, described this legislation with the heading ‘A shift in the wrong direction’. The submission also stated that the exposure draft was ‘likely to have extensive adverse effects on the minerals industry’. The MCA further stated:
… the second exposure draft fundamentally alters the nature of the R&D tax benefit by the replacement of long standing and well understood concepts …
They are two very important issues for those engaged in R&D, and they certainly are longstanding and well-understood concepts. Similarly, an article in the Australian Journal of Mining from September-October 2009 stated:
Based on the recommendations contained in the Cutler review, tightening of the definition of eligible R&D activities may focus on preventing what are referred to as ‘whole of mine’ claims.
The article continued:
Companies with increasing levels of R&D expenditure may also wish to bring R&D spending forward to take advantage of the … concession before it ends on July 1st, 2010.
As I mentioned, the changes contained in this legislation have attracted substantial criticism from a wide range of industry groups. In an article in the Australian newspaper on 2 June 2010, the Advanced Manufacturing Coalition was quoted as saying:
… the new system could “increase the time, cost and risk of undertaking R&D in Australia”.
I am certainly very concerned about that. This indicates that the scheme could threaten some manufacturing firms’ international competitiveness during the next decade, and we should be seriously concerned about that. In their submission to the Senate inquiry, the Advanced Manufacturing Coalition raised concerns that this legislation increases the risk that some manufacturers will defer or cancel R&D or simply take it offshore, a move that would be highly detrimental to the Australian manufacturing industry, researchers and workers.
KPMG Australia has expressed concerns that the changes will restrict the access of all companies, irrespective of size—not just small- and medium-sized enterprises—to the R&D system. That may be the intent of this legislation, but it is not a sound intent. The petroleum industry also provided a submission and participated in the public hearings. During the Sydney public hearing, Caltex’s Manager for Government Affairs and Media, Mr Topham, stated:
We have a long history of investment in R&D, averaging approximately $15 million per annum. Our concern is that the current drafting of the legislation could leave a substantial amount of our R&D expenditure ineligible for tax credits. … We believe the eligibility rules are flawed and that the implementation timetable is unreasonable and impractical.
This has been a repeated complaint. The Minerals Council of Australia submission also highlighted their concern:
… the Bill fundamentally alters the nature of the R&D tax benefit by the replacement of—
as I said earlier—
long standing and well understood concepts with new and … completely unheralded concepts.
I note, on the examples in the biotech and surgical industries being quoted by those opposite, that those industries may not be affected by the changes in this legislation.
I believe that research and development is a vital component of this nation and of any industry, whether it is health, mining, petroleum, natural resource or environmental management, agriculture or any other. I do see, as does the coalition, immense benefit in R&D programs. The fact that this legislation seeks to remove an incentive that is integral to assisting and encouraging a diversity of companies to improve their business operations has to be of concern to everyone in this House, on all sides, and the need for clear, concise guidelines for R&D for small to medium enterprises is very important. As stated in the dissenting report by coalition senators to the Senate Economics Legislation Committee inquiry report:
The Coalition supports increased business investment in research and development (R&D)—
as we should—
and appropriate reforms to legislation to help achieve this outcome.
That should be the desired outcome of any legislation of this type: to support increased business investment in research and development. However, we cannot support legislation that has shortcomings that include the failure to have appropriate consultation, the substantial alterations of those definitions of ‘core’ and ‘supporting’ R&D, the government’s changes to the eligibility criteria, the object clause contained in the legislation and the intellectual property issues.
The new regime is due to start on 1 July, but there is very serious confusion and uncertainty out there, right across the board, and I note that the education campaign to inform companies of various sizes will not come into effect until after the legislation is passed. The education campaign needs to happen prior to the legislation changing. As I have said, the changes proposed by the Labor government have attracted substantial criticism from a variety of stakeholders, for very, very good reasons. Unfortunately, and it is typical of this government, this legislation is seriously flawed.
I speak in support of the Tax Laws Amendment (Research and Development) Bill 2010 together with the supporting bill, the Income Tax Rates Amendment (Research and Development) Bill 2010. These introduce a new research and development tax incentive to replace the outdated and complex R&D tax concession.
Expanding research and development in our business is a central requirement of building an innovative and productive country. Increasing research and development that is conducted in Australia by businesses and companies is important; indeed, it is vital to our country’s future. If we look at where R&D tax concessions came from, we go all the way back to the 1980s when it was introduced by the Hawke government, with the tax concession originally set at 150 per cent. But, as we have seen over the years, there was a problem with that—that is, companies could not claim the tax concession until they turned a profit. I see that as a bit of a chicken-and-egg problem when it applies to small and innovative start-up companies who are spending money on R&D but, as in many cases, not making a profit so there is nothing to claim. The 2008 Cutler report also highlighted that issue.
The House of Representatives Standing Committee on Industry, Science and Innovation examined national research and development funding as a part of its 2008 report entitled Building Australia’s research capacity. At that time, the committee—of which I am a member—heard evidence from Universities Australia that, in Australia, gross expenditure on research and development as a percentage of GDP stood at 1.76 per cent in 2007-08. But that was in comparison to the OECD average, where that same measure of gross expenditure on research and development was 2.26 per cent. In dollar terms that gap was estimated to be $5 billion.
Research and development comes from two main sources, of course—public institutions such as universities, CSIRO, research institutes and government organisations; and the private sector. I think it has been a challenge for everyone in this parliament over the years to increase that private sector research and development expenditure. In 2001 Australia ranked 15th out of 21 nations of the OECD for private expenditure on R&D, and yet ranked third at that time for government expenditure on research and development. In 2001 Australian private sector R&D was 0.76 per cent of GDP. But this compared to Sweden investing 2.84 per cent of GDP in private R&D, Finland investing 2.39 per cent and Japan investing 2.11 per cent. In the figures from 2007-08 Australia’s private R&D has increased so that 1.27 per cent of GDP is invested by the private sector in R&D. However, we still remain 14th in the OECD ranking for that.
Any sustained rise in private R&D leads to the development of better products and innovations that generate more economic growth, create jobs and help keep Australia at the leading edge of technological advances. As an example of the benefits that can be derived from successful developments from R&D we need look no further than the CSIRO patent on Wi-Fi technology. It has been in the news quite a lot lately through various legal cases. CSIRO first applied for its Wi-Fi patent in 1992, and of course we now all use it. Every day, anywhere you take a portable device, you are more than likely—whether it is a portable computer, an iPad, a PDA of any sort, or one of a whole heap of other gadgets—to have a Wi-Fi connection. That is one of the things that we now take for granted in the 21st century. When it was first invented it was unprecedented, of course. People did not do that sort of thing in those years, and they were not that long ago. It is estimated that this patent alone could deliver $1 billion to the CSIRO in years to come as this patent is applied and enforced—and of course actions are still going on worldwide to apply that patent to make sure that CSIRO and, ultimately, the Australian people benefit from that discovery.
In 2007-08 Australian businesses invested over $14 billion in R&D. We can do much better, and that is why the Rudd government is introducing this new R&D tax incentive. The new R&D tax incentive provides benefits more generous benefits for eligible research and development activities. It provides more than the existing concession and is better targeted towards research and development that benefits Australia. It is also substantially simpler and accompanied by improved administrative arrangements. The new R&D tax incentive will replace the existing research and development tax concession for all income years starting on or after 1 July 2010.
These bills provide for increased assistance for genuine R&D and redistribute support in favour of small- and medium-sized enterprises with annual turnovers of less than $20 million. R&D activities contribute to innovation by creating new knowledge and technologies, and by increasing productivity, jobs and economic growth it allows Australia to respond to present and future challenges. These bills will expand the number of businesses that can access government support for their R&D expenditure and investments. There are more than two million businesses in Australia but at present only around 8,000 of these businesses benefit from the current R&D tax concession.
The intention of these bills is for the higher rates of reward under the new incentive to attract more firms to the program. The two core components of this program are: a 45 per cent refundable R&D tax offset for eligible entities with a turnover of less than $20 million, as I have mentioned, and a nonrefundable 40 per cent R&D tax offset for all other eligible entities. With this change of rates and delivery mechanism there is a clearer and better-targeted definition of ‘eligible R&D activities’ that ensures that the incentive is available in circumstances consistent with the underlying rationale for government intervention and, what is more, that taxpayers get real value from it.
These bills double the base rate of existing R&D support for small to medium enterprises and raise the base rate for larger firms by a third. Instead of receiving 7.5c for every dollar in R&D, small to medium enterprises will receive 15c and larger firms will receive 10c. Small, innovative firms are big winners from the new R&D tax incentive, with greater access to cash refunds for their R&D expenditure and better rates of assistance. To give an example, suppose a company with a turnover of $10 million spends $1 million on eligible R&D activities in an income year and that they are in a tax loss position. Under the new R&D tax incentive that company would be entitled to a cash refund of $450,000. Under the existing R&D tax concession the company would only receive a tax deduction worth $375,000. Of course, there would be zero benefit if the company was not running at a profit. Profit can be many years away, and many start-up firms may never get to access it. They may actually not survive that start-up process. So small to medium enterprises will be encouraged to take the risks on R&D through the government substantially increasing the overall concessions and, for the first time, introducing payments for companies that are yet to make a profit because they have invested in R&D.
This new scheme will really help small start-ups and encourage innovation in Australian industry. The new R&D tax incentive will better target government support towards genuine R&D activities. The key elements of an approach such as this are to establish a clearer definition of ‘core R&D activities and to introduce a test for supporting R&D activities and stronger administration of the incentive. These changes will ensure that the new R&D tax incentive rewards a company’s genuine R&D, not their business-as-usual activities. The existing scheme is allowing some companies to use taxpayer dollars to subsidise business-as-usual activities rather than genuine research and development activities.
This new legislation provides a more focused definition of eligible R&D activities. The new definition of core R&D activities still covers both research and development activities but it is focused at a project level. It recognises that the innovation dividend for the economy will come from refocusing public support on genuine R&D, not on routine business activities as has been previously commentated on in many sources of the media and, indeed, in this place. Obviously, these changes will cause current recipients of research and development incentives to examine the impact of the definitional changes, and I would hope that they would then apply it to genuine R&D that does benefit the country as a whole. Business-as-usual support is not what is needed when we are talking about innovation. We want new ideas. We want support to chase those ideas so that Australia benefits.
Recognising the importance of information technology in a modern economy, the new R&D tax incentive will ensure most software R&D is treated consistently with R&D occurring in other sectors. Importantly, these bills further open up the new R&D tax incentive to foreign corporations that are resident in Australia and those that carry on R&D activities through a permanent establishment in Australia. The bills also ensure a new incentive will be available for expenditure on eligible R&D activities conducted in Australia, regardless of where the resulting intellectual property is held. That strengthens the case for foreign companies to conduct R&D activities locally.
On an underlying cash basis, the new R&D tax incentive is expected to be budget neutral over its first four years of operation. Small companies are the winners from the R&D 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 new R&D tax incentive better focuses public support on activities likely to produce 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.
Finally, the new R&D tax incentive is an important part of the government’s plan to encourage knowledge-creating and knowledge-using industries to boost productivity and activity in all sectors of the economy. I commend the bills to the House.
I am speaking in unequivocal opposition to the government’s Tax Laws Amendment (Research and Development) Bill 2010. I am the only person in this House that I am aware of who has worked as a research scientist within both CSIRO and the Defence Science and Technology Organisation. I have spoken in this House many times on this government’s short-sighted penny-pinching budget cuts to such organisations as CSIRO and ANSTO. This legislation just drives another stake into the heart of scientific research in the form of business R&D in this country. So much for the clever country!
The first question which should always be asked about legislation is: is it necessary, especially when there is a very good system already in place? Given this government’s dismal track record based on the philosophy of ‘if it ain’t broke, let’s break it’, what are the alleged problems? Michael Johnson Associates is Australia’s leading specialist R&D tax concession firm, and this is how it views the so-called flaws in the current system that are used as excuses for this legislation:
… 1—The current Concession facilitates bogus, illegitimate claims against the taxpayer
… … …
In fact, all the evidence over the history of the program is that it is responsibly used by the vast majority of users and very few risk assessments proceed to prosecutions. Removing benefits from all taxpayers for the inappropriate behaviour of the few is not a rational response to the issue of alleged misuse.
… 2—The Concession provides assistance to non-genuine R&D
… … …
The real mischief here is when one starts to import a moral dimension to what is genuine R&D. The strength of the current Concession is that it delivers an internationally-competitive definition of eligible industrial R&D. The proposed definition in the Credit, in seeking to narrow the definition to limit assistance to “genuine R&D”, manages to disqualify the vast majority of R&D actually conducted by Australian businesses, large or small.
… 3—The criticism of the Credit has come from those with a vested interest in the status quo
… … …
If a submission comes in arguing for the status quo, does it automatically follow that the submission can be discounted because it is designed to protect a vested interest?
… … …
… responses such as the recent public submissions to the Treasury will always come in the main from those with a vested interest. That is the usual driver for a party to respond at all.
Blind Freddy could see that! Using that ridiculous and specious argument, can we then look forward to the union movement being locked out of any input into IR legislation? It continues:
… 4—80% of the Concession goes to 100 companies
For decades, Australian Bureau of Statistics on R&D have indicated that the vast majority of innovation spend is incurred by a handful of Australian companies. This is, and will always be, a matter of fact. The current trends in the Concession simply reflect this fact. Given that the Concession is open-ended, the share of those 100 companies will be determined by the prevailing rules and the amount they identify and claim. When added to the spend and claim of the other 7,900 firms in the program, the proportions will then be determined as a matter of mathematics.
There is not a finite amount of claims and assistance available. The proportions are only determined after the claims are identified and made against the rules.
The thinking behind the restrictions in the new Credit is that the rules can be changed to alter these proportions. This is entirely possible. You can rewrite the rules so that the proportion of assistance accessed by the other 7,900 is a much larger figure. The problem comes in when the rules are so restrictive that the proportion is larger but the overall value of the assistance to those 7,900 companies falls.
This is exactly the concern being reflected by the commentators regarding the Credit. We are being offered a program that wipes out assistance across-the-board. A larger slice of the cake might go to SMEs but so what if we are now cutting up a cup cake as opposed to a passionfruit sponge.
Yet again, the good old socialist focus on distributing current wealth instead of enabling individuals and companies to create more is writ large in bold italics. This is the classic Fabian sheep clothing of R&D funding hiding the wolf of grabbing back money and wrecking proven and effective programs.
This bill has been condemned by groups and individuals across the business and scientific spectrum. Let us hope that this dissent will not prompt another unscrupulous and indefensible ad campaign from this government. Last February, Peter Roberts wrote a comprehensive article in the Australian Financial Review giving a cross-section of responses about why this bill should be defeated. He said that the change in definitions of eligibility and exclusions will ‘slash the $1.4 billion cost of assistance by as much as half’, according to KPMG. Roberts continues:
While the new credit is a big boost for start-up companies and some foreign companies, it has been condemned by business groups, tax professionals, academics and staunch Labor supporters as betraying an innovation agenda pioneered by Hawke government minister John Button.
Of course we know the respect the Prime Minister showed for John Button and his work. He chose to visit a film star for a photo opportunity rather than pay his respects at John Button’s funeral.
Well, it is true. Celebrity over substance has been one of the hallmarks of our egocentric Prime Minister. The general feeling is that the main aim of this legislation is to bring about cost savings in the R&D area. One of the main criteria is that core R&D be both innovative and risky when in the past it could be one or the other. This incompetent and fiscally destructive government knows nothing about being innovative but a lot about being risky. As if the mining industry has not already been bludgeoned with a proposed resources rent supertax, this R&D legislation will, according to Roberts, ‘reduce the claims of mining companies for pilot plant expenditure and manufacturers for the cost of prototypes.’
So, what sorts of investment levels have we enjoyed in the past? According to reports on a Booz & Company innovation study, Australia was the sixth largest importer of global spending on research and development in 2007, attracting $4.3 billion in global R&D investment. Booz’s strategy practice principal, Bernadette Howlett, was reported as saying that Australia is ‘clearly benefiting from the globalised outsourcing of R&D spending’. She continued:
The long-term outlook is encouraging because of the capability of our local skill base, and the increased reputation our R&D teams have for innovation and for being able to respond to consumer demand …
Now that the full impact of this legislation is starting to be appreciated, that long-term outlook will not look anywhere near as rosy. Furthermore, the government cannot resort to its tried and true ‘plan A’ when things start going rapidly round the U-bend: pretending they were not aware of problems.
The Senate inquiry into the scheme was told by grants experts only last month that the scheme is too restrictive and complex. Let me repeat that: this legislation, which the government claims will simplify and improve funding for R&D, is too restrictive and complex. Accounting firm BDO told the inquiry that modelling it had conducted involving its clients in the mining and manufacturing sectors showed that those sectors would be particularly hard hit. One must ask again: why is this government doing its level best, or actually worst, to destroy the mining and associated industries? This is economic treason. BDO’s R&D partner Tracey Murray said:
In the mining industry, 90% of our current claimants would have their R&D claim reduced under the R&D tax credit program by at least 80%, with 10% of claimants not being able to access the incentive at all.
And what of manufacturing, where I am sure at least a few of the Prime Minister’s favourite ‘working families’ are employed? BDO’s assessment was:
When we modelled the manufacturing industry, the very industry that Australia is striving to increase productivity in, our modelling indicated a significant number of clients would have their access to the R&D program reduced by at least 65% in terms of value, with a number of well-known, world-leading companies unable to access the provisions at all because of the operation of the dominant purpose and the feedstock provisions.
The compliance burdens of this proposal are also going to increase, another blow to businesses which are keeping this company afloat despite the Prime Minister’s cynical and pathetic attempts to portray himself as the great saviour of our economy.
Sandra Mason, a partner at PricewaterhouseCoopers, says it appears that the government is trying to target some sectors or groups who it feels are getting more than their fair share of R&D tax incentives. However, she says that the legislation is too broad and will capture or rope in many other companies. Using a sledgehammer to crack a nut is another familiar and abiding failing of this grossly incompetent administration, so those critical comments sadly have a ring of truth as loud as Big Ben. Ms Mason was also reported as expressing concern at the introduction of a dominant purpose test, which requires that companies hoping to claim for supporting R&D will need to prove that the work complies with the dominant purpose test of supporting core R&D. According to critics, this goes too far as many traditional supporting activities, such as market research, market development and feasibility studies, have the dual purpose of supporting core R&D and furthering a firm’s commercial strategy. But then, what would this government know about how business operates? Thanks to the calamitous handling of the BER and insulation programs, we can clearly see the answer—absolutely nothing. The Prime Minister has been saying he wants Australia to become more productive. How does this alleged desire marry with the R&D tax legislation?
A major issue with R&D is trying to quantify much of it. Dean Parham, until recently an Assistant Commissioner of the Productivity Commission, wrote a paper on the empirical analysis of the effects of R&D on productivity. According to that paper, while growth in the OECD area was slower in parts of the eighties and nineties, that was a period of major growth in R&D in Australia. He wrote:
Local tax incentives are thought to have contributed substantially to the growth and timing of change in Australian R&D activity.
The problem really comes when you attempt to measure the value of R&D. As Dean Parham wrote:
… R&D activity is an investment in knowledge accumulation and in the development of technologies. The corresponding assets—the stocks of knowledge and technologies—are intangible assets whose values are largely unobservable.
… … …
This measurement difficulty looms as a fundamental problem in establishing a link empirically between R&D and productivity.
Therefore, if these changes are being driven by Treasury and taxation officers who are seeing an opportunity to claw back some of the money this government has wasted, this paper illustrates the difficulty of measuring R&D outputs, and the inherent dangers in trying to quantify intangibles.
I should remind the government that this is not an esoteric philosophical debate; it is about real companies, real employees and the real future of our country. I have received representations from companies in my electorate who are reiterating many of the concerns that major players have voiced. I hope that the government will listen to these concerns now and act accordingly, instead of barging ahead with deeply flawed legislation and then wanting to consult with industry. Where have we heard that one before? One of my constituents said that R&D tax incentives have been critical to the recent growth of his company and to increasing the level of intellectual property and the resulting design and manufacture undertaken in Australia. He posed questions about keeping promises, which are very relevant to this government. I must say I admire his optimism.
He wants to be assured that the stated aims are fulfilled by this legislation—remaining revenue neutral at $1.4 billion funding; shifting the benefit to SMEs; removing compromising claims for whole-of-mine style projects and supporting activities which form a large part of the expenditure; increasing the number of claimants; increasing business expenditure on R? and targeting R&D with concepts of additionality and spillovers. He explained that there are major economic pressures on companies to relocate their design and manufacturing activities to low-cost centres offshore. However, while the current R&D tax incentive scheme is in operation, the development of intellectual property can be economically pursued in Australia.
The only real question about the intent of this legislation is: is it yet another desperate attempt by an ideologically driven and intellectually destitute government to reclaim money to fill in the gaping black hole of debt it created, or is it yet another mean spirited and vindictive attempt to destroy another success story of the Howard government? Or is it a bit of both? My constituent warns that:
Any move to constrain or reduce the support of R&D to companies would only hasten and increase the tendencies to move offshore.
I do hope that this statement of fact, which is blindingly obvious to anyone outside the Labor Party, will prompt the more intelligent and economically literate members of the Labor Party to for once abjure the party line and stand for what is good for the country by not supporting this bill. We shall soon see which is more important to them—their own continued existence as Labor Party ciphers or people genuinely concerned for the greater good of Australia.
I am pleased to support the Tax Laws Amendment (Research and Development) Bill 2010 and the associated Income Tax Rates Amendment (Research and Development) Bill 2010. Those who have known me for a while will know that I have a great passion for innovation in all areas and that I see our nation as one with great talent in this area. Innovation and R&D drives productivity growth and it drives the creation of national wealth. We are very good at it. Many Australians know that ours is a land with great wealth in its soil—both under it and within it—but we also have great talent in mines. Whether it is through science or research, as a percentage of our population we lead the world in terms of our creativity. We are very good at it. Fifteen years ago we led the world in solar technology; we do not now. But we did and the capacity is there to lead the world again in so many areas. When we look back at the period of the last government, one of the great regrets we will have as a nation is that, in the time of one of the greatest booms we have ever seen, we did not invest in that natural talent. In fact, our level of innovation as a percentage of GDP dropped. We dropped further and further down the OECD table until we sat well and truly at the bottom in terms of innovation between our universities and businesses at the end of the last government’s term.
We did not invest in our talent for innovation and, as a nation, we were let down as a result of that. We were one of the few developed countries in a parallel area that reduced expenditure on education as a percentage against GDP. There can be no doubt that, in the modern world of global competition, innovation must be at the core of any strategic plan that a nation has for its future. We must continue to improve the way that governments encourage business to invest in innovation because it does drive productivity and growth and it drives the wealth of the nation.
The current scheme does not get the return that we might expect for the investment that we make. Funds are increasingly going to business as usual, to projects which include parts of what we might legitimately call innovation in R&D but which go to the whole project. The consultancies that have grown up around the program have increasingly regular clients and we now find that there are only about 8,000 small businesses out of the two million out there that apply for funding. We also see a narrowing of the field of successful applicants. This is not an indication that there is bad behaviour going on. It is just an indication of a pattern that tends to happen when a grant program exists for a long period of time and consultancies get involved.
I know this because I fulfilled that role for a while before I came into parliament. I was not working in the R&D area, but I did have five grant writers that worked for me in procuring grants for small business. I know very well that over time, as a consultant, you get better and better at squeezing projects into the guidelines, extending the guidelines out a little year by year, and that your client base does tend to narrow. You get very, very good at getting grants year after year for the same businesses. There was one year when my clients received 100 per cent of the funding in one particular federal government grant category and it was well known that, if you wanted funding in that area, you had to come to me. So I do actually know how good you can get at stretching those boundaries and reducing the number of clients that receive the funding.
We are now down to a situation where, out of two million businesses, only 8,000 apply and a relatively small number of those receive the bulk of the funding. Our innovation needs to be spread across the economy and it is recognised internationally as an important driver of productivity and growth. It encompasses a wide range of activities including workforce skills, venture capital, knowledge transfer, management practices, technology uptake and, of course, R&D. In our global economy, companies must invest in R&D to improve their competitiveness and their ongoing profitability. Knowledge produced by a firm’s R&D often has benefits to other firms and to the economy as a whole—that is, the R&D can have a net positive impact beyond the benefits that accrue to the firm. However, from an individual firm’s point of view, uncertain returns from the R&D activities may mean that a firm chooses not to undertake them. Where this happens, less R&D may take place than would be desirable from a whole economy perspective. A carefully designed incentive lowers the cost of doing R&D and helps boost productivity and economic growth. To this end, this new R&D tax incentive focuses assistance on activities that are likely to deliver economy-wide benefits that would not be enjoyed in the absence of public support. It also significantly improves the incentive for smaller firms to undertake R&D.
The current scheme, as I said, does not get the return that we might expect because so much of current funds are going to what would be called business as usual. The new scheme is more generous and better targeted towards R&D that benefits Australia than the existing concession. It redistributes support importantly in favour of small and medium firms. We all know that small and medium firms are more responsive to fiscal incentives than large firms, so that is a very sensible measure. It provides cash upfront to small innovative firms, giving them the certainty they need to invest in growing business. I worked in small business for a substantial part of my career before entering parliament and I am well aware of how important that upfront cash payment is in encouraging innovation.
The new system is also substantially simpler and accompanied by improved administrative arrangements. It is also very important that we reduce the burden on businesses applying for this concession. The new incentive replaces the existing R&D tax concession for all income years starting on or after 1 July. There are two core components of the new incentive—a 45 per cent refundable R&D tax offset for eligible entities with a turnover of less than $20 million and a non-refundable 40 per cent tax offset for all other eligible entities. This effectively doubles the base rate of existing support for small to medium enterprises and raises the base rate for larger firms by a third. So, for small businesses, instead of receiving 7.5c for every dollar they will receive 15c for every dollar and larger firms will receive 10c for every dollar. The new refundable tax offset provision also makes upfront cash support available to many more small- and medium-sized companies. The new tax offset is available to corporations with a turnover under $20 million. The current law sets the cap at companies with an annual group turnover of less than $5 million, so there is a substantial improvement for small- to medium-sized enterprises there. The government also aims to lift R&D performance through increasing the number of businesses undertaking R&D up from that relatively small 8,000 businesses that apply now. The government has a responsibility to deliver value for money for taxpayers through the better targeting of the scheme and I believe that the new legislation achieves that through a more focused definition of eligible R&D.
The new definition is simpler than the old one. Core R&D activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience but can only be determined by applying a systematic progression of work that is based on principles of established science and proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions and is 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.
The new definition of core R&D activities still covers both the research and the development activities. The government has undertaken an extensive consultation process on this, including inviting public submissions on a consultation paper and two exposure drafts of legislation. That the member for Tangney could see that as a lack of consultation defies belief because there has, as I said, been extensive consultation over two exposure drafts and prior consultation. The government received over 380 submissions during these three rounds of consultation and held public hearings which were attended by 550 people—again, considerable consultation in this area. There have also been extensive discussions with key industry representatives and advisers over almost a year.
The government have made some significant changes where stakeholders have made constructive suggestions for improvement, as we should. In particular, we have simplified the R&D definition—and I have read that out—and the dominant purpose test for supporting R&D has been limited to production activities and activities on the exclusion list—again, simplifications requested by the sector itself. The government still plan for the new R&D tax incentive to start on 1 July 2010. We acknowledge that some industry groups have called for its introduction to be delayed for a year but a delay would mean that Australian companies do not get the very substantial benefits that the new scheme offers, which is a doubling of benefits and cash upfront to smaller firms.
Introducing the new incentive is critical to Australia’s future—to enhancing productivity, to making us more competitive and to creating new wealth and jobs. I have to say I am quite shocked to hear that the opposition will not be supporting these amendments. Stakeholders in the biotechnology and pharmaceutical industries have been supportive of the new incentive and are keen to see the new R&D tax incentive enacted as soon as possible. The information technology industry has also welcomed the revised approach to software R&D. I am also pleased that the new scheme will reduce compliance costs—that is very important for small business. The measure provides a tax benefit above the normal corporate income tax benchmark and the benefit is voluntary, so all associated compliance costs are also voluntary but we still must work towards keeping them to a minimum. The draft R&D provisions are shorter, clearer and simpler than the existing R&D provisions, mainly because we have avoided the four different benefits available under the existing law and replaced them with a single entitlement to a tax offset. They are important simplifications.
There will be compliance costs associated with the change from the former arrangements during the early stages of the new incentive but these will reduce as taxpayers become accustomed to the new scheme and adjust their practices. We have also provided $38 million in the 2009-10 budget to ensure that AusIndustry and the ATO are equipped to assist taxpayers in adjusting to the new scheme. AusIndustry will provide guidance and educational material to industry, including specific information on those industry sectors in which there is most concern, including manufacturing and mining.
These are very sensible reforms to an incredibly important area of government incentives, namely research and development. As I said, research and development and innovation, particularly in the modern world, drive growth and wealth creation and are fundamental to any nation seeking to position itself as a strong economy in the future. I commend these bills to the House.
This legislation, the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010, proposes altering the basic structure of Commonwealth government incentives for business research and development spending for the first time in almost a quarter of a century. If passed, it would replace the existing R&D tax concession available to businesses since 1986 with a new R&D tax credit, effective from 1 July 2010.
The existing tax concession has been the key mechanism supporting business innovation for 24 years under both Labor and coalition governments. It has been repeatedly refined and amended over the years, but is very familiar to businesses and currently assists around 8,000 firms. The concession is estimated to have a cost to the budget of $1.5 billion in the 2009-10 financial year.
Not only is the existing concession well understood by business; it also has been very successful over time in encouraging a higher level of private investment in innovation in Australia. So it is not surprising that the Rudd government’s proposal to replace it with an entirely new incentive scheme has been contentious, most of all among those Australian businesses most committed to investing in science and innovation.
The government is presenting its proposed shift to an R&D tax credit as a ‘more generous, more predictable, and less complex tax incentive’ that provides better value for money. I agree, as I am sure all honourable members would, that taxpayers have every right to demand value for money when they support the business sector. And there are a number of features of this legislation that are sensible, in particular the ideas of replacing tax deductions with tax credits and making tax credits for eligible R&D refundable in cash to small firms without tax liabilities. But in the end, the coalition opposes this legislation for the same reasons that many innovative Australian businesses have opposed it. Firstly, the government’s claims that these changes would be revenue-neutral over the forward estimates do not seem credible. While it is true the level of assistance for eligible spending will increase modestly, the activities eligible for support have been drastically narrowed. The bills look more like a revenue grab than a reallocation of resources. Secondly, Labor claims that the new regime will be simpler and easier to administer are already in tatters, given the business uncertainty and legal questions created by sweeping changes to the eligibility rules and tests, in particular the new distinction between ‘core’ and ‘supporting’ R&D and the ‘dominant purpose’ test. And thirdly, these changes replace a well-understood policy with a successful track record of encouraging business activity critical to our economic future with an incentive very different in design which may deliver very different outcomes. These risks posed were summarised very well by AVCAL, the venture capital industry group, in their response to the exposure draft:
… the narrowing of the eligibility criteria for the R&D tax incentive will materially affect the future of many innovative businesses in Australia. These businesses, which would have been at the forefront of the Government’s efforts to foster home-grown innovation, will now be ineligible for the very incentives which are intended to propel innovation forward in Australia.
While it claims this legislation is revenue neutral, the government concedes it dramatically alters the types of R&D eligible for public support. This can be seen if we consider the most important features of the bill. Assistance would be directed to core R&D and away from supporting R&D—to basic research, for example, but not industrial process improvements. Supporting R&D activities could still be assisted if innovation rather than commercial advantage is their dominant purpose but, as so many businesses have pointed out, virtually all R&D serves both objectives. Dominance of innovation alone is likely to be difficult to establish.
Tests for spending eligibility would be tightened. Currently, activities must be innovative or involve high levels of technical risk to receive support. The legislation would change this requirement to ‘considerable novelty’ and ‘high technical risk’. As AVCAL’s response to the exposure draft points out:
This change to the definition may unintentionally lead to the exclusion of many genuine value-adding R&D activities that should be supported and are currently eligible for support …
The form of the incentive would change. The current tax concession applies an uplift to eligible R&D spending to create a tax deduction which varies in value if the company tax rate changes. The new legislation would replace this with a tax credit which has a dollar value uncoupled from other tax rates. In the case of small firms without tax liabilities the credit would be refundable in cash.
The level of assistance would rise. Currently, firms receive a tax deduction of 125 per cent of eligible R&D spending or a premium tax deduction of 175 per cent when spending exceeds the average of the three previous years. Under the new legislation firms that turn over under $20 million would receive a 45 per cent tax credit—equivalent to 150 per cent deduction. Larger firms would receive a 40 per cent tax credit—equivalent to a 130 per cent deduction. Because of the narrower range of activities that would be supported, a larger proportion of assistance is expected to go to small firms with a turnover of under $20 million.
It is helpful to consider these proposed changes in the context of the original rationale for the R&D tax concession and the backdrop of the government’s broader role in science and innovation. The R&D concession was introduced by the Hawke government in 1986, with broad aims to encourage Australian firms to lift onshore research and development and so become more innovative and internationally competitive. This appeared to be a daunting challenge in the 1980s, when most Australian manufacturers were struggling to survive and modernise, and local firms invested far less in innovation on average than their counterparts in other OECD countries.
Private spending on science and innovation started rising gradually, in relative terms, in the late 1980s but as recently as 1998-99 gross business expenditure on R&D in Australia was still only 43 per cent of the OECD average. Happily, over the past decade that gap has narrowed quickly. In 2006-07, the most recent year for which we have international data, business R&D spending in Australia was 80 per cent of the OECD average. If the data is adjusted for industry structure, recognising Australia’s smaller than average manufacturing sector for an OECD country, business R&D exceeded the OECD average.
In 2007-08, the most recent year of the ABS data, Australian companies spent $14.4 billion on research and development—up 85 per cent from four years earlier. Most of that investment took place in the manufacturing and mining sectors, as we would expect. Growth rates for business R&D in Australia have been particularly rapid in the last four or five years, but this spurt is just the latest phase in a long uptrend which has transformed Australia from a laggard in private R&D into a normal advanced economy. Since the existing R&D tax concession was introduced 24 years ago, business spending on innovation has grown by almost seven per cent in real terms, annually—double the growth rate of the economy.
Obviously, the R&D concession has played a critical role in all of this—almost certainly in kick-starting business investment in innovation from its moribund levels of the mid-1980s; probably in driving strong subsequent growth; certainly in making R&D less costly for firms which spent on eligible activities. It is notoriously difficult to measure the precise impact of policies such as incentives for R&D since we cannot observe what would have happened in their absence. But it goes without saying that innovation—the introduction of new or significantly improved products or processes—should be, must be, a critical policy concern for government. In the long run a nation’s capacity to innovate determines how quickly its economy can grow, how quickly its living standards can increase and how well equipped it is to surmount economic, social or environmental challenges. Climate change and the health needs of an ageing population are just two examples of public policy challenges where it is clear innovation and new technologies are going to play a major role in the solutions.
Market economies obviously provide wonderful incentives for innovation in the private sector, but the public sector also has a critical role—and not only in providing well-educated workers, fair laws, stable macro-economic and tax policies, and the other institutions and infrastructure essential for a strong economy.
As the Productivity Commission has pointed out, there are two powerful rationales for direct use of public resources in science and innovation. The first is to pay for R&D that improves the functioning of government or the quality of the products and services it delivers. This includes advances in areas from defence to transport, health and education. Obviously, not all of this R&D needs to be carried out in the public sector, but much of it needs to be funded by the public sector. The second is to pay for R&D that generates ‘spillovers’—benefits that are not easily or completely captured by the innovator but boost the economy as a whole. Such spillovers often arise from basic research or ideas and processes that are readily mimicked, adapted or diffused without any reward to the inventor. Understandably, the private sector tends to underfund such spending.
The Commonwealth government currently spends more than $8 billion a year on what can be broadly defined as research and development, or around a third of gross expenditure on R&D in Australia. The bulk of this spending—almost $5 out of every $6—is channelled through research institutes, research grants, universities or public sector agencies such as the CSIRO or the Defence Science and Technology Organisation. The remaining $1 in $6 is largely delivered through the R&D tax concession, which of course is the main instrument for encouraging private spending likely to create spillover benefits for the wider economy as well as commercial value for the investing firm.
In the past three years the design of the existing R&D concession twice came under scrutiny during inquiries into innovation policy, first by the Productivity Commission, in 2007, and then by the review led by Dr Terry Cutler, in 2008. In each case changes were recommended. The Productivity Commission found the eligibility criteria for the basic 125 per cent tax concession did not fully screen out R&D which would have happened anyway and suggested economic pay-offs could be increased by restricting it to small firms. It recommended the 175 per cent premium rate be retained for all firms but the criteria for eligible R&D spending be tightened. Finally, the Productivity Commission acknowledged that restricting the concession would increase administrative and compliance costs. The Cutler review urged that the existing R&D tax concession be converted to a tax credit of 40 per cent for larger firms and a refundable tax credit of 50 per cent for firms with turnover under $50 million. It also recommended that all R&D undertaken in Australia which met the relevant definitions be eligible for the tax credit, including R&D by foreign companies.
There is merit in both sets of recommendations, and each review raised legitimate questions over aspects of the design of the existing R&D tax concession—in particular the provision of support to some R&D which provides sufficient returns to the companies that undertake it and which would happen in any case.
The government’s response, however, combines the most onerous features of both and ignores the generous aspects of each. Cutler’s proposed 50 per cent tax credit for small firms is reduced to 45 per cent and limited to a turnover of $20 million, not $50 million. The idea of premium support for firms which invest consistently in R&D over multiple years does not make the cut. The arbitrary distinction between ‘core’ and ‘supporting’ R&D is a heavy-handed response to the challenge of screening out spending on innovation that does not need assistance, that does not pass the additionality test. And there is little doubt the proposed legislation would add to uncertainty and complexity in the near term, rather than reduce it. There are also several positive features of the legislation, as I mentioned earlier: specifically the replacement of tax deductions with tax credits, the scope for cash refunds of credits to small firms without tax liabilities, and the higher rate of assistance provided to small firms. But on balance, however, the negatives outweigh the positives.
As I noted earlier, incentives to private firms are only a fraction of the government’s total commitment to R&D—$1.5 billion out of more than $8 billion. So while it is important to get the mechanism for distributing the $1 in $6 right, it is even more important to ensure we also spend the other $5 in the most economically beneficial way. This is a much broader topic than the scope of this legislation but it is important to address nonetheless. I have always believed Australia should develop more of its own intellectual property, and a large part of my experience before politics involved starting innovative businesses which created jobs and indeed exported technology. Over the past couple of decades Australia has evolved into a much more conducive environment for innovation than it has been in the past. I have described the growth in business investment in R&D over the past two decades, which in turn has increased the cost of the concession. We can be pretty positive about the existing environment Australia presents for innovation, particularly innovation in early-stage companies. In fact, according to a survey by Ernst & Young in 2009-10, Australia ranked as the fourth most attractive market for venture capital investment, behind the United States, the United Kingdom and Canada. But there is always room for improvement.
Our combined government and private expenditure on R&D now exceeds two per cent of GDP and is above the OECD average but it still lags behind the high levels of spending on innovation in leading countries such as the United States, Japan and Israel. Many countries have tried to emulate the dynamic level of innovation seen in the US economy, but most have failed: the web of economic, educational and cultural forces and institutions that create a Silicon Valley are hard to untangle or replicate. Israel is an interesting contrarian example, however, and over the past decade has emerged as an economy increasingly driven by innovation and technology. There are more Israeli than European companies listed on the Nasdaq, the world’s main stock exchange for tech firms, and the per capita venture capital investment in Israel is twice the per capita level in the United States and 30 times the level in the EU.
As with Silicon Valley, there are many forces behind this story, some of them difficult to replicate. Favourable immigration policies and a flow of technically skilled migrants from the former Eastern Bloc, the use of military procurement to develop targeted areas of technical expertise, higher education funding that promotes interdisciplinary collaboration and university-business linkages, and high but targeted public spending on R&D all contributed. Australia shares some of these advantages and lacks others. But perhaps the most important lesson to take away from Israel’s experience is that the public sector’s role in leading and encouraging this economic transformation was not driven by direct support for private R&D. It involved effective policy design and coherent objectives across the whole of the public sector’s support for innovation—or, in Australian terms, the $5 in $6 as well as the $1 in $6.
It would be easier to accept the Rudd government’s bona fides on innovation if it were committed to better economic returns and taxpayer value for money across the whole of public spending on science and innovation. Instead, we find it focused on narrowing the R&D tax concession, the one part of that spending which unequivocally benefits business. So much as there are some positive features of this legislation, they are outweighed by its negatives and the very strong underlying hint of Labor antibusiness ideology. I will not be voting for this legislation.
I am delighted to be able to speak to the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010 in far less conditional terms than the previous speaker, the member for Wentworth. I feel this legislation is a very significant reform that aims to achieve a number of things. Firstly, it will support investment in research and development. Secondly, it will strengthen companies either undertaking or seeking to undertake research and development activities in Australia and encourage them to become more innovative, productive and prosperous. Thirdly, this is about the promotion of high income, high quality jobs for the future. The research and development tax credit is also a central element of the Rudd government’s long-term agenda to lift Australia’s innovation capacity and indeed our performance.
The minister, Senator Carr, set out late last year in his landmark Powering ideas report the government’s framework for a 10-year reform agenda to make Australia more productive and more competitive. The Powering ideas report in turn was borne out of Dr Terry Cutler’s 2008 review of the National Innovation System. The recommendation there, of course, was delivered in August 2008, and that was that the research and development tax concession be changed from a tax deduction to a tax credit. We have been pursuing this case since we came into government in 2007.
I am particularly pleased to speak in this debate because this reform is especially important for the many innovative companies in my electorate, the bulk of which are located in the Macquarie Park Corridor. More than 30,000 people work there, the vast majority of them in research driven industries. There is also the Macquarie University campus, so it is a very exciting hub. The City of Ryde’s own economic development strategy says the total floor space of the corridor could accommodate in the future as many as 18,000 workers. This corridor is an important and growing part of what is sometimes called the northern Sydney global technology corridor. It is also the northernmost tip of what the New South Wales and Metropolitan Strategy calls the state’s global economic corridor, often described as the powerhouse of the Australian economy, and with good reason.
There are also major pharmaceutical companies, the likes of Johnson & Johnson, Novartis, Sanofi-Aventis, and Astra Zeneca. Pfizer’s head office is on the other side of Bennelong, down at West Ryde. In Macquarie Park you have major information technology companies—Microsoft, Oracle, CA, CSC and Compuware. There are also some of the giants of consumer electronics—Sony, Toshiba, Philips and Canon—including Canon Information Systems Research Australia. They had their 20th anniversary recently and I was given a guided tour of the marvellous facility on Thomas Holt Drive. That was by the managing director Dr Kenji Kobayashi and director Dr Jim Metcalfe. In telecommunications, Optus also has its corporate headquarters there. This is all by way of saying that really there are few parts of Sydney, let alone the rest of the country, which boast such a rich concentration of research dependent industries.
It is certainly the case that not all of them manufacture or research in this country. That is true, but Bennelong certainly has a strong case to make that it is the hub of Australian research and development—which leads me of course to these bills and the new R&D tax credit. What we are creating with this new system is a fairer, more efficient system that will provide greater incentives to foster research and development activity. It is a system that is already rated the world’s best system for providing R&D incentives. I will come back to that in a little more detail. First, I want to explain a bit about the technical details of this legislation. The new R&D tax incentive replaces the existing R&D tax concession. There will be a 45 per cent refundable tax credit for companies turning over less than $20 million and a 40 per cent non-refundable credit for larger corporations. This doubles the base rate of existing support for small and medium enterprises, restoring support to pre-1996 levels. It also raises the base rate for larger firms by one-third. Instead of receiving 7.5 cents for every dollar, small and medium enterprises will get 15 cents of every dollar and larger firms will receive 10 cents for every dollar. That will apply for all income years starting on or after 1 July this year.
Certainly for people on this side of the chamber the most important consideration when it comes to matters of taxation and incentives is the concept of fairness. This concept of fairness is at the heart of everything that we attempt to do on this side of the chamber: fairness for workers when it comes to our changes to the former government’s unfair dismissal laws; fairness for all Australians in across-the-board investments in schools and in our health facilities; fairness for young parents in our universal 18-week paid parental leave scheme that I spoke on just a week or so ago; and fairness for all Australians by boosting our retirement savings through the important tax reform debate going on right now over the resource super profits tax. Importantly, the new refundable R&D tax offset provisions make upfront cash support available to many more small- and medium-sized companies. It is a fairer system. The new refundable tax offset will be available to corporations with a turnover of under $20 million. Under the current law, a refundable tax offset is available only to corporations with an annual group turnover of less than $5 million where the group aggregate R&D expenditure is not more than $2 million a year. There are two million businesses in Australia and only about 8,000 of these benefit from the current R&D tax concession. The Rudd government’s intention is for these higher rates of reward under the new incentive to attract more firms to the program. We are widening the net, and I think that is fair. It is a major step towards lifting Australia’s R&D performance through increasing the number of businesses undertaking R&D.
We are also improving efficiency. The new administrative arrangements that this legislation puts in place will be a lot simpler. As many have noted, Australia is very good at designing efficient tax measures. Tax credits are already in use in the United States, in Japan and in many parts of Europe. The new system will be familiar to international firms headquartered in those places. However, the existing scheme is allowing some companies to use taxpayer dollars to subsidise business-as-usual activities rather than what we call genuine research and development activities. Last financial year, a record number of companies registered for the tax concession, but the majority of the funding went to only 100 of the 7,754 companies approved for the concession.
The government has a responsibility to deliver value for money for taxpayers through better targeting of the scheme, and this has been achieved in the new legislation through a more focused definition of eligible R&D activities. So let us be clear about this: we want to fund business innovation, not business as usual. The new definition of core R&D activity still covers both R&D activities, but it will weed out companies taking advantage of the scheme for business-as-usual activities for which they receive normal business deductions.
I note that the Cutler review mentions whole-of-project claims using the R&D tax concession. The report from the review described this phenomenon in the following terms:
In recent years several firms have been successful in the aggressive use of the R&D Tax Concession to make claims for a very large share of expenditure in large one-off projects like mines and civil engineering. These claims have demonstrated that some aspect of the project is new and technically risky. This having been done it has been possible, despite the efforts of the Australian Taxation Office, to claim as much as 80 percent or more of all investment expenditures in the project.
The Panel appreciates that such ventures are both risky and innovative. At the same time it is clear that such ‘whole of mine’ claims are gaining for themselves a degree of assistance disproportionate to the benefits available to many other innovative projects. While they are also being undertaken by firms with very good access to capital, it is also true that capital markets are averse to risks in long term technology projects. This is an issue which needs to be addressed in its own right and not by default through a general tax concession.
That was the problem identified in 2008. Further, in comments about Labor’s new R&D tax credit to the Adelaide Advertiser last month, Dr Leanna Read, the head of TGR BioSciences and a former member of the Industry Research and Development Board, had this to say:
Certainly some claims from some of the big companies … were based largely on supporting activities rather than core, so something might be 99.9 per cent for supporting activity but because it supported some tiddlywink of R&D it got through.
Our legislation will promote real innovation by closing that loophole. There are, I am afraid, some other examples of loopholes that show how far the funding has been stretched in the past. Funding has been made available to companies to construct a new building to test air conditioning, for instance, and to upgrade a processing plant and install a computer system in a large bank. All these are activities with inherent worth, but they are not research driven. Clearly we can do better than we are doing to reward real innovation.
I mentioned earlier that the R&D tax credit system is already acknowledged as the world’s best system of its kind. As part of their Competitive alternatives 2010 report into international business costs, the consultants KPMG studied general tax competitiveness across 95 cities in 10 major countries. The countries in the study were Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, and the United States. The report details just how competitive Australia’s R&D sector is. In the section of the report on R&D, Australia is the runaway winner at No. 1, and on the strength of Labor’s new R&D tax credit we moved from fifth place to first in the rankings. Further into the KPMG report, it is also interesting to see the city rankings. Melbourne and Sydney are first and third respectively. It is not that I subscribe to the old supremacy arguments, but I think we might see Sydney climbing back up to No. 1 there.
Those rankings are well ahead of other global cities such as London and New York, and this endorsement by KPMG is unsolicited. Earlier this month the Minister for Innovation, Industry, Science and Research, Senator Carr, who has been driving all these changes to deliver the new R&D tax credit, welcomed KPMG’s conclusions. He observed that they place our new tax credit ahead of other, similar offerings by Canada, the United States, France, Italy, Japan and Mexico. In fact, it also ranks higher than the R&D assistance provided in the Netherlands and the UK. The minister then went on to describe KPMG’s unsolicited endorsement as ‘one of the strongest possible vindications of the Australian government’s new R&D support measures’, and I concur with that wholeheartedly. Getting praise from the experts is good, but getting praise from the industries involved is even better. I am confident that, when we are able to cut company tax to 28 per cent as part of the implementation of the resource super profits tax, the R&D environment in Australia will become that much more competitive.
Labor’s R&D tax credit has also already won glowing endorsements from several major players in the R&D sector. Dr Brendan Shaw, the Chief Executive of Medicines Australia, said:
This could be a massive opportunity for the pharmaceutical and biotech industries in this country … All indications are that the new program will help bring global investment in pharmaceuticals R&D to Australia, in large part by reducing the cost of conducting eligible R&D in this country.
The bottom line is that this new program will reduce the net cost of undertaking R&D in Australia and make us more globally competitive.
We look forward to continue working with Government to ensure this program delivers tangible benefits to companies who bring R&D investment to Australia.
I look forward to continuing to work with Dr Shaw, because he and many of his members know that they can rely on me as their local member to be a strong voice for the interests of the pharmaceutical sector and ensure they get a good hearing. I bump into Dr Shaw on a fairly regular basis up on ‘Pill Hill’, as it is known in my area. I was with him recently at the official opening of the new permanent Australian office of the global biopharmaceutical company Shire, which is on Waterloo Road in North Ryde. They had a terrific gathering there in April.
Shire is a company that specialises in life-saving treatments for very rare or, as they say, ‘orphan’ genetic disorders in which there are few or no therapeutic options. Shire employed 11 permanent full-time staff and four people as contract part-timers in the last year, and they intend hiring another seven permanent full-timers over the next year. Their general manager, Dominic Barnes, tells me they have about three treatments available—two are currently being reviewed by the TGA—and they are intending to submit four more to the TGA this coming year. I mention this because this is precisely the kind of company I am sure is keen to take advantage of the government’s R&D tax credit. So are other pharma companies like Johnson&Johnson and GlaxoSmithKline. The J&J family of companies is headquartered in North Ryde. Their pharmaceutical company Janssen-Cilag Australia is built on research and development. GSK has its division in Melbourne, but it has its healthcare division in Ermington in my electorate. I am emphasising all this, Madam Deputy Speaker, because many roads lead back to Bennelong.
What do these companies have in common and what are they like? There are several things. The fact is that ongoing compliance with this new system will be much simpler. The fact is that this legislation takes into account variable levels of investment from year to year. The fact is that it makes Australia as competitive as other companies or divisions of the same R&D companies in the US or the UK. In the case of Janssen-Cilag, this change to an R&D tax credit system will assist them to attract and employ more researchers to carry out early-stage pharmaceutical research on new molecules in diseases in areas like cancer and virology. It will mean more demand for local clinicians and allow R&D companies to at least maintain and possibly increase research in hospitals across the country.
These companies have been supportive of a move to a tax credit for a number of years. They know that a tax credit is a better way of supporting real R&D and that many parts of our health sector will benefit—more so than under the previous scheme. Dr Anna Lavelle, the CEO of AusBiotech, is certainly on the record in this regard. Dr Lavelle represents around 3,000 member organisations in the Australian biotechnology sector. She has said this legislation is ‘good for the biotech sector and good for small innovative Australian companies’. In her submission to the Senate Economics Committee, Dr Lavelle said the following:
Cognisant of the unique business model required by biotechnology, where significant funds are required often over many years and up-front before any return can be realised, the tax credit, especially the refundable credit, is vital if innovations and the start-up biotechnology industry are to thrive in Australia.
The biotechnology, medical technology and pharmaceutical industries all believe the move to the tax credit is the right government policy, and best for Australian innovation - with spillover benefits to the Australia community in terms of jobs, economic growth and access to technological developments.
Dr Lavelle went on to observe:
… the move from the tax concession, which is not working for the industry as a whole, to the tax credit … will provide a much-needed lifeline.
I note as well that in Dr Lavelle’s submission she said that her sector had lost 16 of its 128 listed biotech companies between 2008 and 2009—the height of the global financial crisis. She said:
Any further delay will mean young innovative companies will not be able to access the refundable credit—
and that would have adverse consequences. So biotech is undoubtedly our future, and the sector needs the support of the credit tax to replace the tax concession now.
The Rudd government has no intention of jeopardising this vital sector—quite the contrary. Through these proposals we are providing much needed support. Let there be no misunderstanding about these incentives. They do not exclude R&D activities carried out in a production environment. It is not true that production trials are effectively excluded by the dominant purpose test. Manufacturers will still be able to claim core R&D activities that fall within the definition of an experiment generated for the purpose of acquiring new knowledge, and the dominant purpose test only applies to supporting R&D activities that are production activities. So the government have undertaken an extensive consultation process. We invited public submissions and there were two exposure drafts of the legislation. As a result of all of this, the government has made some significant changes. (Time expired)
I rise on this Tax Laws Amendment (Research and Development) Bill 2010 and will be joining my colleagues in opposing it. It is a clear demonstration of this government’s inability to consult with key stakeholders, including small- and medium-sized businesses, and there are a couple of areas in my electorate that I want to discuss. I listened to the parliamentary secretary, and she seemed to be focusing on the very big end of town—international companies with their head offices located in other parts of the world rather than Australian companies, small- and medium-sized businesses. It is these businesses that I will focus on in my contribution.
There is a lot of confusion and uncertainty with this legislation, and that has been a typical feature that we have observed of this government. There has always been little consultation with affected stakeholders. The exposure drafts were ushered through in the weeks before Christmas and Easter, but with this legislation going through the House this week, firms, companies and businesses will have just two weeks to read and understand the legislation and how it pertains to their process and industry before the new rules come into place on 1 July. There simply has not been enough consultation, information or education about what the new rules are and how they will be applied. That is why we are asking that the implementation date be delayed until at least July 2011 so that there is an adequate time for consultation with community, particularly with small businesses and of course the key stakeholders. Industry needs that time to deal with the impracticalities and the realities of how this legislation would apply, and the legislation does need to be amended.
Perhaps the most blatant and adverse implication of this legislation is how it will erode incentives for R&D. Concerns have been raised by stakeholders that these legislative changes will be a disincentive to undertake R&D here in Australia; instead, it could well encourage a shift of R&D offshore. The dairy industry is just one stakeholder group which has voiced its concern. In my own electorate of Maranoa there is a significant dairy industry. This legislation is more about research than development and it will have a punitive impact on those companies which, through innovation, can refine and improve an existing product and make a better product. The bill limits R&D eligibility to the creation of new knowledge, which was acknowledged by the Parliamentary Secretary for Infrastructure, Transport, Regional Development and Local Government, rather than applied research and development.
Let me touch on some issues that were raised by the Australian Dairy Products Federation, a very reputable body. As you would know, Madam Deputy Speaker Moylan, the dairy industry has been through massive deregulation, but it has always been at the forefront, moving forward, and R&D has been a key factor in bringing new products to the market. I will read into the Hansard some of the federation’s concerns, as outlined in its submission to the exposure draft of the legislation:
Many different R&D outcomes are sought, for example new dairy products, new pharmaceutical applications of extracted milk factors and compounds, new processes and techniques to extract and process milk, milk by-products and fractions, environmental and sustainability driven developments, herd, pasture and on-farm development …
This occurs across a range of products including … milk powder and cheese products, products such as infant formulas and specialised products including functional food products … and cosmeceutical products. These factors will complicate the application of new concepts, particularly where uncertainty exists.
The submission goes on to say:
The use of the term ‘directly related’ is ambiguous, and potentially creates an extensive nexus. Much of the (successful) R&D undertaken in the dairy industry will eventually lead to a viable commercial outcome, most likely in the form of a new or improved dairy product, or production process/technique that leads to improved dairy products, at some stage. Often this will not be readily discernable at the time of early stage R&D activities, (i.e. the results and/or likely success is not yet known). How direct the connection with the ultimate production needs to be is unclear and requires more clarity.
That is an example of the uncertainty. An industry such as the dairy industry cannot decipher how this would apply. They understand the existing rules and they have worked with the existing rules. I put their concerns on the record. The Minerals Council of Australia wrote in its submission to Treasury on the exposure draft:
Some innovations are revolutionary; others are marked shifts in what has gone before …
Yet the government is dismissing that reality. The legislation significantly alters the definitions of ‘core’ and ‘supporting’ R&D. With its narrow definition of what constitutes genuine R&D, this bill will disqualify from assistance many forms of R&D undertaken by Australian businesses.
I would like to give an example of a small business based in Dalby, in my electorate of Maranoa, which has voiced concerns about how the change to the legislation will affect its R&D projects. Dingo Australia is a privately owned manufacturer that has designed a very impressive mini-digger, the Dingo, that is sold not only in Australia but in many markets around the world, from the Middle East to North America. It is a product that has been developed through R&D in the town of Dalby. In its submission to Treasury on the first exposure draft of the legislation, Dingo used an example of a specific R&D project for putting tracks on the Dingo machine that would have qualified for the tax concession under the current legislation. The project involves innovative design amendments and testing to ensure that the product can perform in different conditions. It is important to be able to test a product before it is put onto the market—but even before you get to the test stage you have to do the R&D to see whether the innovation will work on the product in a practical sense. However, because it is not really considered ‘novel’ or ‘new’, it may be excluded from the assistance. The Dingo company has been in operation for 20 years and has produced over 7½ thousand machines in various forms. The machine has progressed over the years. Dingo has refined and developed it using R&D to create a safer and more efficient product that is very widely sought.
But they have not stopped at that. It is just like the modern motor car. Manufacturers have not stopped developing the piston driven engine. Look at Toyota. It received R&D money from this federal government to produce a hybrid Camry here in Australia. I think the technology was developed in Japan, so the money went to Japan. The car may be manufactured here, but the R&D work was done offshore in another country. Dingo Australia, in Dalby, employ 90 people. When you consider the multiplier effect of 90 people, you have another 500 or 600 people who are employed because of those initial 90 jobs. Dingo have relied on investment in R&D. They spend something like 2½ per cent of their annual turnover on R&D.
The other point they raised with me was that, with a turnover of $28 million, they regard themselves as an SME—a small and medium enterprise. The limit of $20 million on a small- and medium-sized enterprise they say is a joke and should be increased to at least $40 million. As I said, they are a small company that employs 90 people. There should be a distinction between a publicly listed company and privately owned companies with a turnover of less than $40 million. That is a classic example in a rural community of people with an idea putting it into a product and employing local people. They have been successful for 20 years. They are genuine in their concern about this legislation. It does require more time for consultation with key stakeholders.
That is just one example, quite apart from the dairy industry’s concerns—and we all know just how the dairy industry has been under a lot of pressure from imports, particularly from New Zealand. Let’s make sure we keep our dairy industry at the forefront of new R&D and make sure that we in Australia, through our dairy farmers, are at the cutting edge of research and leading that research to make sure we stay in front of the game.
So I put it to the minister: this legislation does not need to be rammed through before 1 July this year. Many of us on this side of the House see it as nothing more than a revenue grab. We should be making sure that industry has time to consult and put their points to the government. It is, after all, the businesses that take the risks. Let us make sure we encourage innovation and let us make sure we encourage Australian companies to be the innovators. Let us ensure that the benefits of this tax concession go to these Australian companies that are going to do that research right here in Australia so that we own the research and those companies are able to make sure that the products they make are not only competitive and more innovative and meeting a market need in Australia but also have the potential to be exported and be at the cutting edge always against our competitors who would want some of the markets that our exporters have been so successful over many years in getting a foothold into.
In conclusion, I will be supporting my colleagues on this side of the House calling for more time and more consultation with the industry and key stakeholders. As it is drafted, I cannot support this legislation and I will be voting against it when it comes up for a vote today.
I rise to speak in support of the bills before us today—the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. I understand that several speakers on the other side have raised, as the member for Maranoa did, issues around their desire to see more time for consultation. In the detail of my speech I will go through the quiet extensive process that has been put in place to reach this point. I just make the observation that it seems to be a consistent theme from the other side these days to say that we need more time for consultation when really they just do not want to support reform.
There is a clear indication, and the government strongly believes, that innovation is the primary driver of sustainable growth as well social wellbeing and therefore should be a priority for any government, as it is for this government. The bills before us are an important component of the government’s broader innovation agenda. The first schedule of the Tax Laws Amendment (Research and Development) Bill implements a more generous research and development tax incentive benefit for eligible activities, and it is better targeted towards research and development that benefits Australia than the existing tax concession system.
Importantly, it should also be noted that the new scheme is also substantially simpler and is supported by improved administrative arrangements to make it more efficient. At the heart of the new incentives are two core components: the first is a 45 per cent refundable research and development tax offset for eligible entities with a turnover of less than $20 million; and the second is a non-refundable 40 per cent research and development tax offset for all other eligible entities. These changed rates are supported by a delivery mechanism that is clearer and by a better targeted definition of the eligible research and development activities. That will ensure that the incentive is available in the circumstances, consistent with the underlying rationale for government intervention, and that it delivers value for money for taxpayers.
It is the intention of the government that the new research and development incentive will start on 1 July 2010 so that the benefits can be delivered as soon as possible. To this end the government has provided $38 million in the 2009-10 budget to ensure that AusIndustry and the ATO are equipped to assist taxpayers in adjusting to the new scheme as it comes into force. These new incentives are targeted at stimulating productivity growth and innovation throughout the Australian economy with the aim of building prosperity and competitiveness for the long term. The new 45 per cent refundable tax credit is equivalent to a 150 per cent tax deduction and is therefore a doubling of the current base incentive for smaller entities to expend money on research and development. This is important, as in so many parts of the country, including my own in the Illawarra, smaller and medium-sized businesses are often the driving force for growth in jobs and opportunities in our regions.
The Treasurer and the Minister for Innovation, Industry, Science and Research indicated in announcing the reforms that approximately 5,500 small business firms could benefit from the incentive. The 40 per cent non-refundable tax credit is equivalent to a 133 per cent tax deduction and therefore raises the current base incentive for larger entities by one-third. These bills are based on extensive inquiries, as I indicated at the beginning of my comments, into building an effective incentive scheme to appropriately support research and development activities across the economy.
In 2007—nearly three years ago now—the Productivity Commission released a research report entitled Public support for science and innovation. This report identified some issues with the existing scheme that hampered its effectiveness. Prior to that time, in the previous government, when I was a member of the House Economics Committee we took evidence from across industry about concerns they had about the effectiveness of the scheme as it existed. The Productivity Commission report identified that the criteria for the basic 125 per cent tax concession was not successful in screening out research and development that would have happened anyway, that the benefits of the existing incentive were not large and could in effect be negative, and that the net payoff from the concession could be substantially improved by maintaining access to the concession for small entities only.
This report was followed in 2008 by the Cutler review. On 22 January 2008, Minister Carr announced a review of Australia’s innovation system and appointed Dr Terry Cutler to undertake the review. The report was released in August 2008 and was titled Venturous Australia: building strength in innovation. The Cutler review made several findings, including that the existing incentive should be changed from a tax deduction to a tax credit, that a 40 per cent tax credit should be available to larger entities and a refundable 50 per cent tax credit to smaller entities, that all research and development undertaken in Australia that meets the relevant definitions be eligible for tax credit and that research and development expenditure undertaken in Australia by foreign owned entities be eligible for the tax credit.
On 12 May 2009 the government released its response to the Cutler review. The response outlined the government’s long-term innovation policy agenda and was titled Powering ideas: an innovation agenda for the 21st century. The government broadly accepted the intentions of the findings of the Cutler review and consequently announced the proposed new incentive, which was included as a budget measure in the 2010-11 budget. In announcing the government’s response the Minister for Innovation, Industry, Science and Research, Kim Carr, outlined that the government’s support for innovation and for competitiveness in our industries and companies was even more significant and important through the period of international instability that was the global financial crisis.
As part of the overall innovation changes that this government has put in place, we have started an annual Australian innovation system report, which is intended to be an ongoing annual series providing information on the state of innovation in Australia. The first report has been published—for the 2010 year. The report makes the very important point about the integration of the innovation system in Australia. This bill goes to the issues around private companies investing in innovation and development supported through, appropriately, government programs. The report indicates the great importance of integration between the public and private sectors and also collaboration between them. I think it is worth repeating a comment made in the report under the heading ‘Research capacity and skill base’:
Australia’s innovation performance is underpinned by its research capacity and skills base. Research in the public and private sectors creates new ideas which fuel innovation, while skilled workers drive innovation by turning ideas into new products, services and processes for the benefit of the economy and society.
Indeed, these bills sit within that overall structure. I want to highlight in my contribution to this debate some real-life examples of that in my own area of the Illawarra. I am pleased to see in here Parliamentary Secretary Marles, who has played a significant role in the announcement of some of these. I have been very pleased to welcome him to the Illawarra.
I will first outline for the House a program that is a tremendous example of the collaborative model, and that is the Cooperative Research Centres Program. The parliamentary secretary recently attended the Innovation Campus at the University of Wollongong with me and members not only of the university but also of industry to launch the Energy Pipelines CRC. This is a particularly exciting initiative. At that launching we had people from industry not only from across Australia but from industry internationally. This particular CRC will be located at the University of Wollongong. It is important to note that the CRC will receive $17.48 million over the 10 years of its operation. That will be complemented by significant partner cash from the private sector of around $70.6 million—a great example of the government and the private sector working together. The CRC’s aim is to deliver long-term safety and security for Australia’s energy sector, a task that could hardly be more important as we look around the world and see nations dealing with energy security and energy efficiency issues.
Some of those from industry who were in attendance on the day said to me that—sadly—pipelines, because they generally are under the ground, out of sight, tend to be out of mind. It would be a great failing for a nation to take that view, because the reliability and security of our pipelines is so important to the provision of energy throughout the nation. In my own area, only very recently we saw an example of how disruptive a failure in the pipelines can be when we had a failure in the gas pipelines to the Southern Highlands area. The local ABC radio station had people ringing in and giving quite innovative feedback, I have to say, on how they were managing to get a shower or to make a cup of coffee. People were commenting on how much we take for granted our energy supply and how disruptive it is when it is no longer there. The cooperative research centre at the University of Wollongong will be working specifically around metals and materials development in order to provide not only cheaper, more efficient pipeline but also more reliable and secure pipeline. The development of that sort of expertise in Australia would be hugely valuable and no doubt important in placing us competitively on the international scene in this area as well.
So I was very pleased. It is no surprise that in the Illawarra we combine the great development of manufacturing knowledge and skills from our years and years of involvement in the manufacturing sector—including and epitomised by BlueScope Steel, a tremendous corporate citizen in our area—with that driving house of research and innovation, Wollongong university. Marrying those two in such an initiative seems to me a tremendous outcome and something that will indeed place us nationally very well in innovation.
The second development locally that I wanted to outline to the House was this. In March this year I participated in a groundbreaking ceremony at another facility, the Innovation Campus of the University of Wollongong. This was to establish the Australian Institute for Innovative Materials Processing and Devices Facility, funded by the federal government with a $50 million grant. That is another critically important facility contributing to innovating and working closely with industry in order to well position the country on innovation and commercialisation. Currently there are no facilities available in Australia to produce multifunctional materials at the scale and quantity required to bridge what the university describes as ‘the valley of death’ to commercialisation. The new facility that my colleague Jennie George and I turned the sod for at the Innovation Campus of the Wollongong university is due to be completed by March 2011. I would like to indicate that the Deputy Vice-Chancellor (Research), Professor Judy Raper, has been quoted as saying about this facility:
Australia now has the opportunity to transform multifunctional materials research and be the world leader in this research and also in its commercialisation.
The piece went on:
Multifunctional materials (such as electromaterials that generate and/or transfer electric charge—an area where UOW is a recognised international leader—have the potential to solve many of the world’s health and technology problems.
However, many such advanced multifunctional materials cannot be processed using conventional methods.
Professor Raper said the challenge now—
for the university—
was to take these materials from fundamental research, through the proof of concept stage and into real world applications, novel fabrication, processing and to develop manufacturing methods.
This is a truly fantastic initiative and I think it epitomises the intention of not only the university but the broader Wollongong community for the Innovation Campus and, indeed, for Wollongong to be a city of innovation. It is a really important outcome for our region but also for the nation as it builds upon those partnerships of meaningful research and engaging with industry.
Only last Friday I again was over at the Innovation Campus to announce that $25 million had been granted by the federal government to establish a new facility. It will be titled the Retrofitting for Resilient and Sustainable Buildings facility. It is a really important initiative, where the university will be working to do research and, again, product development in partnership with Illawarra TAFE around the retrofitting of buildings for a more efficient energy future. This will be a tremendous new facility. It will develop evidence based practice in sustainable building technologies and design for Southern Hemisphere environments. This is really important in developing efficient methods for our environment rather than just taking Northern Hemisphere developed solutions, which may not always translate over particularly well. I was very pleased to attend the Innovation Campus. They assure me they still have more blocks of land available. Whilst we have had a tremendous investment over at that Innovation Campus in the 2½ years of the Rudd government, I look forward to more in the future.
I want to conclude my comments in this debate by indicating that all of this fits together into an integrated approach by this government to innovation. Our world and the future of our nation in a highly competitive global economy will be heavily reliant on capacity in the development of knowledge and technology and pressured by emerging social and environmental issues. This will require us to ensure an efficient and effective national system that fosters and supports innovation across and between the public and private sectors. In the minister’s publication referred to earlier, Powering ideas, this government identified a number of critically important initiatives to best position our nation. The Prime Minister’s Science, Engineering and Innovation Council steers a whole-of-government approach to ensure integration of policy developments. This work will be supported by the research workforce strategy, which is currently under development, and the Innovation Metrics Framework to provide an evidence base for policy and review. These bills sit, importantly, within that comprehensive framework of innovation and, after a significant number of years of consultation and development, they should be supported by this parliament as an important part of our innovation future. I commend the bills to the House.
Can I start by thanking the 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. In summing up, I would like to start by saying that in the innovation and research and development space we need to look at what the Rudd government inherited after 11½ years of the Howard government. At the end of the Howard government, what we found in this country was a level of public expenditure on research and development that was simply inadequate and that was growing slowly. We had seen the private spend on research and development hit significantly by the reduction in the tax concession that was introduced at the outset of the Howard government, which meant that for the first few years of the Howard government we actually saw the private spend on R&D decline in Australia. Whilst it started to grow again in the latter part of the Howard government, by the time of its end we still found that the private spend on R&D in Australia was less than the OECD average.
When you look at collaboration, which is regarded as the key driver of innovation, at the end of the Howard government we had a collaboration situation in Australia that was simply pathetic. Throughout the period from 2004 to 2006 Australia ranked stone motherless last within the OECD in terms of the level of collaboration between the private sector and the public research institutions. When you look at the spend on national knowledge, which is a statistic kept by the OECD, at the end of the Howard government Australia was spending about 3.9 per cent of GDP against the OECD average of 4.9 per cent. Again, between 1998 and 2003 that spend grew by a much smaller rate than what was occurring in the rest of the OECD.
All of this was painting a picture of Australia being a cut-price, low-tech economy, which was driving wages down and taking Australia away from being a modern developed economy. On coming to government the very first thing that the Rudd government did in this area, as has been mentioned by a number of speakers in this debate, was to implement the Cutler review of Australia’s innovation system. That led to the policy statement of the government last year entitled Powering Ideas, which set forth a 10-year strategy on innovation within Australia. That was backed up by a significant increase in our spend in this area during the 2009-10 budget. We saw a 25 per cent increase in the spend on innovation, industry, science and research in Australia—the single largest increase in expenditure that this area has ever seen. We saw the raw figures go from a spend of $6.88 billion to $8.58 billion in that budget.
When you look at the levels of public research, we see in the 2009-10 budget $1.2 billion more being spent than was spent in the 2007-08 budget. We see areas of activity to try to promote collaboration. For example, the Researchers in Business program, which forms part of Enterprise Connect, places in businesses young researchers at the cutting edge of technology so that collaboration and that sharing can occur.
When you look at trying to improve the private spend on R&D, we have this raft of legislation, which deals with R&D tax credits. This is a critical plank in the strategy to improve the private spend on research and development in Australia. The very first aspect of this bill will cut out the wasteful expenditure which is going on in the current R&D tax concession program, which was implemented by the Howard government. A lot of what is being funded under that program is actually business-as-usual activities. It is not R&D in the sense of creating new knowledge or developing new products; it is just expenditure that would have occurred if there were no tax incentive at all. Take for example the customising of an existing software platform for your business. On purchasing the software program you would do that even if there were no R&D tax incentive. Clearly, that is not an efficient way to spend public money. What we seek to do through the R&D tax credits is make sure the expenditure is clearly focused on genuine R&D activities and not on business-as-usual activities.
There have been assertions made from the other side that in tightening that definition the new scheme will not adequately cover development as opposed to research activities. That is simply not true. The object clause includes both research and development activities and refers 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. The definition of ‘core R&D activities’ includes experimental activities ‘conducted for the purpose of generating new knowledge (including about the creation of new or improved materials, products, devices, processes or services)’. The expression ‘improved’ within ‘new or improved’ means experimental developmental activities.
There has also been some comment on the dominant purpose test. The dominant purpose test is a well-defined concept that is commonly used in tax law. The explanatory memorandum states that ‘dominant purpose’ means ‘the prevailing or most influential purpose’. It is consistent with the terms used throughout tax law. Following the passage of this bill AusIndustry will produce an abundance of guidance material to assist firms to prepare their registration, including guidance on how the application of the dominant purpose test applies.
In tightening this definition we have provided a much closer connection between core R&D research and this policy that supports that R&D activity so that at the end of the day what is being supported is genuine research and development. With the savings that come from that tightening of the definition we will be able to increase the base rate provided to those companies which are engaging in R&D activities in a very significant way. It will be 45 per cent for small businesses—businesses that have a turnover of less than $20 million—effectively doubling the rate of assistance from 7½c to 15c, and 40 per cent for other companies, which increases by a third, from 7½c to 10c, the effective rate of government assistance.
It has been said by those opposite that in effect what is going on here is a revenue-raising measure. It has been asserted by the shadow Assistant Treasurer. That is patently ridiculous. The Treasury has costed the changes to the R&D tax credit and made clear that this is a proposal which is revenue neutral. Indeed, that was confirmed in the Senate Economics Legislation Committee’s report on this bill. That report absolutely took into account each of the key aspects of this bill: the increase in the base rates and the estimated change in the take-up of the R&D tax credit, as well as the abolition of the 175 per cent incremental tax concession and the tightening of the eligibility criteria.
The R&D tax credit has a particular focus on small business by having the small business threshold. Under the old R&D tax concession scheme we had a situation where there were two million businesses that could potentially have availed themselves of a form of R&D and yet only 8,000 were doing so. We need to see more R&D conducted in small businesses, hence the focus on small business. We have also made sure that this is an R&D tax credit, that there is a credit nature to this proposal, which means that those businesses in a tax loss situation will still be able to get a credit in respect of the R&D activity they are undertaking. That is really important because quite often the R&D activity is taken at the beginning of the development of a product, when a profit may not necessarily be turned.
Again, there have been assertions from the opposition in relation to the level of consultation around the R&D tax credit legislation. That is simply 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 a Senate committee process, to participate. The government received over 380 submissions during these three rounds of consultation and held public hearings attended by 550 people. The government has made some significant changes where stakeholders have been able to make constructive suggestions for improvement.
The coalition has also referred to drafting errors as a reason for delaying the passage of the bill. The Senate committee report did not identify any legislative drafting errors. A number of minor referencing errors in the explanatory memorandum were identified, and these have already been addressed in a correction to the explanatory memorandum tabled in this chamber back on 2 June.
I will conclude in summing up by referring to a recent report by KPMG which ranked Australia as No. 1 in the world for incentives which foster R&D activity. The report states:
This change is a result of Australia adopting a new R&D tax credit as of July 1st, 2010 …
It goes on to state:
For many R&D operations, such as spin-offs from larger firms or university research projects, the potentially refundable nature of these tax credits will represent a powerful incentive to structure within the defined revenue limits.
The same report ranks Melbourne and Sydney as, respectively, the No. 1 and No. 3 cities in the world for their R&D tax competitiveness. In doing so, it places them ahead of places such as London and New York.
This is a clear point of difference between the government and the opposition. We see the role of innovation as utterly critical to improving productivity within the workplace in Australia. Indeed, if you look at the history of productivity growth in Australia, which has inevitably been driven by Labor policies, this is the new frontier. Having a vibrant innovation space is what will see the next leap in productivity within this country. That is something that we are committed to; that is something that the Howard government utterly ignored and that the opposition are continuing to ignore. But it is critical for the development of our country’s economy, and a key plank in that is these bills. I commend them to the House.
That this bill be now read a second time.
Bill read a second time.
Message from the Governor-General recommending appropriation announced.