House debates

Monday, 22 November 2010

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

Second Reading

Debate resumed from 30 September, on motion by Mr Shorten:

That this bill be now read a second time.

12:02 pm

Photo of Sophie MirabellaSophie Mirabella (Indi, Liberal Party, Shadow Minister for Innovation, Industry and Science) Share this | | Hansard source

I rise to speak on the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. I do so sharing in the great disappointment and frustration of the many industry leaders and businesses out there who are trying to do the right thing, be innovative and get out there ahead of the pack, but are being frustrated by this government’s very flawed and quite amateurish processes. I say that because a debate like this should have been a positive one. It should have given us a chance to concentrate on sensible improvements and to focus on an optimistic vision for the future of business R&D in Australia. Instead, the nature of the government’s approach to this issue means this will be a debate in which we will be required to devote much of our attention to the misguided, arrogant and confrontational attitude of the Assistant Treasurer and the government, which has followed his lead, and to the range of mistakes, shortcomings and missed opportunities that have arisen as a result.

As it campaigned for office in 2007, Labor made a lot of grand statements about R&D and many false assertions about the Howard government’s record. It committed in its election policy to encouraging sustained growth in R&D activity and facilitating higher R&D intensity. As has been the tale on so many fronts under the former Labor Prime Minister, Mr Rudd, and the current one, Ms Gillard, this has proven to be hollow rhetoric. Far from growing and intensifying government support for R&D, the bill now before the House, if passed, will actually do the opposite. This is one of so many contradictions that have underpinned the government’s actions over the last year and it is difficult to know where to begin. Labor has proclaimed its new R&D concession scheme will be more generous, saying it is increasing the rates of financial assistance to recipients. What it has repeatedly and cynically failed to mention is that it is so drastically restricting eligibility criteria that far fewer businesses and activities will actually qualify for assistance in the first instance. It argues that its changes will be revenue neutral, but everyone out there in the real world knows full well that this is a revenue-raising measure.

This is the same Labor Party that all but hyperventilated on the subject of costings during the last election campaign. As with the NBN, it has not and can not produce a single piece of modelling that proves its claims about the impact of its R&D tax changes. It seized on figures that show marked improvements in business expenditure on R&D over recent years, but it has not made the obvious connection that this is happening under the current policy settings—settings it is attempting to radically change. It has talked about the importance of R&D to high-performing Australian companies but has shifted the balance in this legislation so markedly that it actually punishes firms that secure successful R&D outcomes and gives greater rewards to those whose R&D activities end in failure.

Labor stressed that its legislation will facilitate a more predictable and simple system but it has instead sparked uncertainty, because it has been unwilling and unable to explain how many of the aspects of its proposed new regime will work. It surreptitiously inserted into the legislation wording that will cut off government support for R&D in the building industry, yet the man behind those words, Senator Carr, is the very same minister who frequently tours marginal electorates to wax lyrical about what he pretends is Labor’s deep and abiding interest in the future of the building industry. It has said that a key aim of these changes is to limit government spending on big claims by big companies for R&D. Meanwhile, in the last few months alone, it has reached into the top drawer, pulled out Senator Carr’s chequebook and offered $20 million to the bio-pharmaceutical giant CSL and $22 million to the global IT powerhouse IBM for R&D without even blinking an eyelid at its double standards.

It has asserted that it does not believe in the principle of giving government support to activities that companies would have been likely to pursue even without their assistance. But this is the very same party that in the very same portfolio has already allocated $90 million to a program called the Green Building Fund, which operates almost entirely on that basis. And it is now about to enlarge that program and embark on more of that kind of spending.

It has repeatedly cited a report by KPMG to pretend that its new legislation is world’s best, but it has not even had the decency to confess that it misappropriated that report or that KPMG immediately repudiated Labor’s remarks and pointed out the opposite to be true. Indeed, such is Senator Carr’s audacity and desperation on this issue that he cites KPMG as a highly respected and credible authority on occasions when he thinks it would suit him to wrongly quote from this report—and he draws in a number of his colleagues in perpetuating these myths about the report as well—yet at other times he subjects KPMG and other professional businesses to withering criticism for daring to be among a very large number of expert advisory firms that oppose this bill.

This is a government that has made a big play of supposedly compromising on its regressive mining tax but now presents to the parliament another piece of legislation that will whack the mining industry straight between the eyes. It has professed to be interested in manufacturing and has said that it does not want to govern a country that does not make things. But this bill will punish manufacturers at exactly the same time as they are being pounded by rising interest rates, a high dollar and the loss of more than 73,000 jobs over the last three years.

Just contemplate for a moment how draconian and how destructive a piece of Labor legislation must be for even the AMWU to be moved to tell the Labor Party in no uncertain terms to go back to the drawing board! It has also pontificated about how consultative it has been towards R&D stakeholders, but in reality we know that it has been the exact opposite. It has barely feigned an interest in the constructive criticism and opinions of others. The two key times at which it sought feedback on its plans were over the Christmas and Easter holidays, when most of the affected businesses were not even open.

The minister himself has spent much of the past year lashing out at people who have dared to suggest changes to his proposals. He is prepared to publicly label people of goodwill as ‘well-organised campaigners with vested interests’ and ‘losers who squeal like stuck pigs’. I would hate to think how he describes some of his enemies behind closed doors, or in fact some of his factional opponents.

Possibly worst of all in this process is that Senator Carr has set up a full review of innovation policy in Australia. He did that when he first became minister. He appointed Terry Cutler to head the review. Whenever challenged during his first year or more as minister he gave a stock-standard answer that every conceivable problem known to man would be solved by the Cutler review. This was as true for R&D policy as for most other issues in his portfolio.

But, as those of us with a genuine interest in innovation know, it turned out that Senator Carr immediately turned his back on that review. Like his leader and his frontbench colleagues he has shown a complete distaste for, and disinterest in, necessary and sensible reform. So much so that, in the same spirit as the likes of John Mendoza and Ross Garnaut before him, Dr Cutler has now been moved to publicly voice a series of concerns and criticisms of this rudderless government and express his acutely felt disappointment at the way in which his advice has been disregarded. But we on this side of the House are not surprised.

On R&D policy in particular Dr Cutler’s criticisms are damning. He has stated that Senator Carr has taken what was a good idea and ‘strangled it with even more red tape and a hostile narrowing of eligibility criteria’. Then, just to top it all off, Labor seeks somehow to blame the coalition for the incompetence and the ad hoc nature that has characterised the government’s entire carriage of this issue.

Among Senator Carr’s repeated slurs, one of the best was his attempt to convince the media that the coalition had supposedly filibustered on this legislation in the Senate back in June. The reality for anyone who has followed this debate is that there could hardly have been any filibustering of this legislation because it was not even in the chamber for debate. He is also fond of saying that the coalition wants to oppose this legislation sight unseen. Quite apart from the fact that the argument is completely wrong, let it be remembered that this is the same minister who, when he has not been insulting them, has consistently turned a blind eye to the views of those who have had any constructive criticism to make.

If the implications were not so serious, all of these problems and contradictions would be comical. But they are actually frightening, because the government not only fails to acknowledge any of them but shows no interest in rectifying them. When challenged, it only digs its heels in further and aggressively blames anyone but itself for a mess that is entirely of its own making. Sadly, what is really at the heart of this matter is a wilful misunderstanding by Labor of the crucial importance of business R&D, and far from bringing the kind of substance to an important debate that should be expected from a national government it has tried to silence and intimidate people who have a different point of view. I am disappointed. I would expect something more from a minister who has spent the last 17 years as a senator in the Australian parliament and who has reached the ripe age of 55. You would expect greater wisdom and a greater willingness to act in the interests of Australians and Australian businesses, particularly in manufacturing, but all we have seen is a lack of direction, vision and leadership.

That is why the coalition will move a second reading amendment to this bill, a point to which I will return very soon. We do not have a problem with changes such as the proposed shift from concessions to credits, the relaxation of foreign ownership rules in relation to IP, the idea of encouraging more blue-sky exploratory research or giving increased support to SMEs. Each of those objectives is perfectly reasonable and the coalition have never had an issue with them, despite the government’s serial attempts to misrepresent our position and assert otherwise.

Naturally, it is also absolutely fundamental to ensure value for money for the taxpayer, but this legislation goes way beyond all of that. Among its many ill-conceived effects, it will restrict the range of activities that qualify for support; introduce regressive new definitions of ‘core’ and ‘supporting’ R? alter the eligibility criteria so that supporting R&D will only be funded if it satisfies a confusing and very complex dominant purpose test; increase the barriers for assistance under new feedstock provisions; make the role of Innovation Australia and AusIndustry more discretionary and less accountable; lift the compliance and administrative complexities for firms because of increasingly onerous provisions on them to prove their eligibility; and reduce support for spillover and additionality benefits.

All of this comes before we even get to the issue of the government’s extraordinary decision to make this legislation retrospective. Quite simply, this is an absolutely ludicrous proposal and something that plainly defies common sense. We are talking about taxation arrangements here. I do not know whether the Labor Party are aware of this—I am guessing not—but no government should ever take lightly a decision to backdate amendments to tax law. In fact, whether a government should ever do that raises the quite serious question of fair, accountable and just government.

Of course, anyone who has closely followed this debate knows that Labor’s use of the threat of retrospectivity was primarily a political tool—an ambit claim, if you like. By putting this spectre into play and then indicating behind closed doors that they were prepared to give some ground on it, they were able to make it look to observers as though they were somehow making some generous concession. This tactic has also helped them to shift the focus away from many of the other retrograde elements of the bill. That Labor have chosen to take us and industry for fools, to try to dupe us and to elevate this kind of party political strategy and expediency ahead of certainty for thousands of Australian businesses is nothing short of a disgrace. But, sadly, this is not a surprise coming as it does from a weak government and a weak minister—a minister who never had a way, let alone lost his way.

In the end, I suspect that what lies behind this whole sorry saga is Senator Carr’s desperate need to find savings and to start offsetting the billions of taxpayers’ dollars that he has been wastefully splurging in his portfolio. Another likely motivation is that the Minister for Innovation, Industry, Science and Research is trying to mop up the unholy mess he made in 2008 by scrapping the highly successful Commercial Ready program and, with it, commercialisation support that represented a lifeline to so many Australian innovators. Some of the businesses worst affected by that decision were in the IT, biotechnology and pharmaceutical sectors—and, hey presto, as if by magic, these are the industries that generally stand to lose the least from the R&D tax credit legislation. Of course, that is a relative statement because, although many may not realise or appreciate it, many firms in those sectors will also be adversely affected by the new arrangements in the legislation. Unfortunately, far from putting an end to the mayhem, Senator Carr is now compounding his original error by cutting off support to myriad other industries as well.

What kind of regime is it that would be likely to penalise a manufacturer for inventing a new product and successfully taking it to market? Sadly, that is what will happen with this bill because, once the government deems that product to be commercially successful, which can often be years down the track, it is going to claw back its support—so much for encouraging innovation. And what kind of legislator would seriously let a mining company that built access roads and tunnels receive support for them if they were temporary and unsafe but not if they were permanent, designed for the long-term benefit of the area and helped facilitate even more R&D in the future? More to the point, why on earth would you award support to a company for its R&D activity carried out in a disused mine when you would not support exactly the same activity performed by exactly the same company if the only difference was that it was carried out in one of its existing mines?

I can only guess at how it is deemed logical for firms that create new products to now need to laboriously categorise all of the different individual costs associated with their work. Madly enough, instead of devoting all of their energy to continuing to develop and enhance those products, they will now have to waste an enormous amount of time on forensically itemising every one of their costs—all for the purpose of subtracting many of them for consideration under Labor’s system.

We all shake our heads at the absurdity which says that, if a meat-processing company disposes of all the waste from failed production trials to landfill, it will be eligible to claim because the waste material has no value, but if that same company makes a smart business decision to maximise the use of waste material to produce, say, compost or tallow, it will not qualify for support. I am almost inclined to give up completely on the Labor Party when I see wording in a bill that will ensure support is awarded to building activity only where it occurs away from a building!

Remarkably, what this set of rank amateurs in government is trying to legislate is that, once you include any of the results of building and construction R&D in a house or office or in any other kind of structure for that matter, you will lose all entitlements to government tax incentives. I am not sure whether this is a deliberate mistake or sheer incompetence but, either way, it is utterly absurd. In Australia, construction sector claims under the scheme currently amount to around $400 million annually—and the considerable activity that goes with it will all but evaporate if this bill is passed into law. This will be a devastating blow to an industry that is a leader in the field of innovation in Australia. In short, the coalition believes that there are a series of fundamental problems with the bill. I therefore wish to foreshadow that, at the end of my contribution, I will be moving a second reading amendment that will specifically aim to address these shortcomings.

What this amendment will confirm again for all to see is that the coalition has a very considered and simple approach to R&D policy and a better approach, a better way, than a penny-pinching government that is doing the bidding of Treasury rather than listening to industry. After all, this is a bill that we know originated out of the bottom drawer of Treasury—something that was a try-on. They tried it on with the previous coalition government. They did not succeed. They have tried it on again. Their only concern in Treasury is to claw back some more funding. They are not interested in providing incentives for research and development and Senator Carr, the Minister for Innovation, Industry, Science and Research, is the bunny who is sitting there doing their bidding.

Indeed, businesses across the length and breadth of this country can rest assured that the coalition will continue to stand up for them and for our continued economic progress and growth and, importantly, economic reform. Unlike those opposite—whose actions in 2010 stand in complete contrast to their words of 2007—we will continue to honour our promises on R&D policy. We said during the recent election campaign that we would seek to reverse Labor’s attempts to limit access to R&D incentives. We said we would reject its heavy-handed changes. We said that we would see to it that, under the coalition, revisions to the system would not be introduced before 1 July 2011.

We are following through with all of those promises to the Australian people and Australian industry. We will not vote for legislation that is worse than the current regime. We will not vote for the bill as it currently stands because we cannot stand by and see this government decimate one of the very best tools in the armoury of government to foster innovation. Those opposite have already destroyed other vital innovation support mechanisms and now they are at it again.

They have recklessly wasted billions of dollars on programs like the BER, the home insulation debacle and large handouts to multinational companies, and now they are setting out on the path again with their gigantic $43 billion white elephant called the NBN. Yet they see Australian innovators as expendable and happily deprive them of hundreds of millions of dollars, even though innovation is so critical to our productivity and to continued economic growth into the future.

Make no mistake: in its current form, this legislation will do untold damage to the Australian economy and Australian innovation. That is why I am passionate about opposing this bill and that is why I will continue to oppose any measure by this government to inflict greater pain on the great entrepreneurs that exist in our small businesses and in our large enterprises that are the backbone of continued economic growth in this nation.

The existing R&D tax concession system has not only been in place for a quarter of a century but also delivered excellent results. Serious analysis of the figures will show you that it has played a critical role in fostering increased business investment on R&D. Business R&D expenditure in Australia rose to $16.9 billion in the 2008-09 year on the basis of the latest available figures released by the ABS in September this year. I would hope that it continues to increase into the future. These statistics point to a continuing tale of very impressive increases in R&D spending, particularly during the past decade and especially in areas of the economy that have been vital to Australia and will continue to be important, such as mining and manufacturing.

There is no doubt the ongoing growth in these numbers and the availability of the R&D tax concession has been far more than just a passing coincidence. As my colleague the member for Wentworth observed in the House in June, the concession has almost certainly been vital in kick-starting business investment in innovation from very low levels in the mid-1980s, in driving the strong subsequent growth and in making R&D less costly for firms which invest in eligible activities. When it comes to R&D, we do not believe the government should be trying to destroy the current regime. We think it should be aiming to strike a logical balance between safeguarding those past gains and sensibly stimulating future increases. We also want to ensure that Australia continues to take advantage of the myriad spillover benefits that resourceful and enterprising businesses inevitably create for our nation.

Innovation is essential to Australia’s future success. To maintain our competitiveness internationally, we must continue to expand our innovation capacity and capabilities and embrace opportunities to bring new approaches to many of the country’s existing problems. It will always be a priority for the coalition to create and foster conditions in Australia that lift productivity, encourage enterprise and stimulate discovery and innovation. Of course, we hope the government sees these goals as important too. Everything it has done so far, unfortunately, has indicated the opposite. Now is the time for it to set aside its spin and falsehoods, abandon a misguided agenda and join the opposition in trying to achieve genuine reform. Some might even be tempted to call for Labor to embrace a ‘new paradigm’ when it comes to its attitude on R&D.

The coalition believes that increased innovation is crucial to Australia’s economic development. The way in which Labor responds to the coalition’s second reading amendment will offer a profound insight into the extent of its own commitment to a more innovative future. It is not too late for the government to relent, to finally come to the table and to put an end to its multitude of inconsistencies and contradictions. From the ashes of a process that has not served anybody well, it can retrieve the situation and show that it is prepared finally—at long last—to work with industry, importantly, and the coalition to secure a practical, workable and positive outcome. In that vein, I move:

That all the words after “That” be omitted with a view to substituting the following words: “the House:

reaffirms its commitment to providing continued high levels of support for Australian businesses that invest in research and development (R&D) activities;
notes that this bill weakens the current system, and recognises that the bill has significant limitations in relation to the following:
the proposed start date of 1 July 2010;
the establishment of a ‘dominant purpose’ test;
the application of feedstock provisions to a wide range of activities and results;
the reduction of support for R&D in the building industry;
the disqualification of many small and medium-sized businesses from support because of new rules in respect of their ownership structures and turnover;
the requirement for costs to be documented and attributed to ‘core’ and ‘supporting’ activities;
the new provisions relating to third-party investors in firms’ R? and
the proposed application of new rules relating to the disposal of R&D results to actions taken prior to the commencement of this legislation; and
urges the Government to release full modelling demonstrating the impact of its proposed changes, and reconsider its approach in order to ensure that encouragement of business R&D activity is not substantially reduced.”

Photo of Kelvin ThomsonKelvin Thomson (Wills, Australian Labor Party) Share this | | Hansard source

Is the amendment seconded?

Photo of Don RandallDon Randall (Canning, Liberal Party, Shadow Parliamentary Secretary for Local Government) Share this | | Hansard source

I second the amendment and reserve my right to speak.

12:31 pm

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Small companies will be the big winners from the research and development tax incentive, with access to cash refunds on R&D expenditure if they do not make a profit and higher base rates of assistance being provided through the new 45 per cent refundable tax offset. Larger companies can invest, knowing that they can claim a non-refundable tax offset of 40 per cent of their expenditure on eligible R&D activities.

The research and development tax credit will continue to deliver $1.6 billion of benefit annually for business R&D in Australia. There is no reduction in the amount available for research and development support. However, the aim of these bills is to deliver more effective stimulation of research and development by more companies with the same expenditure of funds as from the previous budget. It is the intention of the government that the research and development tax credit will be available for income years starting on or after 1 July 2010, as was put forward to the House in the lapsed bills of the last parliament. I commend these bills to the House.

12:43 pm

Photo of Paul FletcherPaul Fletcher (Bradfield, Liberal Party) Share this | | Hansard source

The Tax Laws Amendment (Research and Development) Bill 2010 is a bill which fundamentally changes the existing system of supporting research and development expenditure through tax expenditure and tax deductions. It seeks to identify some research and development as better than other research and development, and particularly seems to prefer research to development. Yet we have been given no clear explanation as to why this is. It seeks to suggest that research and development conducted by small companies is somehow better than that conducted by big companies. And again, we have been given no clear explanation as to why this is.

This bill claims to offer greater support for research and development but in fact narrows the circumstances in which companies can obtain tax benefits for research and development expenditure. We have heard the claim from the member who has just spoken that this bill will allow small companies to achieve greater success in securing support for their research and development activities. It is quite unclear from this bill how that will actually happen, because the very same mechanisms in this bill which will constrain the capacity of large companies to secure tax support for their research and development activities will similarly constrain the capacity of small companies. The provisions in the bill are the same. There is not one set of provisions which applies to large companies and another which applies to small companies. As a matter of basic logic, if the provisions in this bill tighten up the circumstances in which companies can secure tax deductions or tax credits for their research and development expenditure, that tightening up will apply to small companies just as much as it does to large companies.

This bill has been imposed on Australian industry in the face of overwhelming concerns expressed by many sectors of industry through a poorly managed consultation process and in a way which raises real suspicion that the true rationale for this bill is to reduce the aggregate amount of tax expenditure on research and development. Let me quote from a letter I received from Tracey Murray, a partner specialising in this area at the leading accounting firm BDO:

The proposed R&D Tax Credit program appears, in the first instance, very attractive, in that it offers companies with a turnover of under $20 million a 45% refundable tax credit. This is a huge advantage over the current program, however, scrutiny of the details as to who can access this increased funding and the expenditure eligible for this credit confirms that very few innovative Australian businesses will be able to access this elevated level of support unless their R&D fails or they have failed to commercialise the results of their R&D activities, the result of which penalises successful R&D activities.

It is clear that there are many matters which should concern us about the Tax Laws Amendment (Research and Development) Bill 2010, and I want to address three things in my remarks: firstly, the background and history for the bill being brought forward and the claimed basis on which the changes in this bill are being made; secondly, the key provisions in the bill and some of the problems with them; and, thirdly, the question in summing it all up—what is the Labor government really up to with this piece of legislation?

Today the existing R&D arrangements consist of four components: 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 stated intent of the Gillard government with this bill is to make R&D tax support arrangements simpler, more predictable and more generous. Nobody could quibble with that as a set of aims. Unfortunately, it is very hard to see how these aims have been achieved in this bill.

One of the fundamental problems bedevilling this legislation is that it draws on two separate reports which approach this issue from fundamentally different philosophical premises. In 2007, the Productivity Commission released a report on this issue which recommended a narrowing of the criteria for eligibility for R&D tax concessions. Then, in 2008, a panel headed by Dr Terry Cutler recommended what some have described as the polar opposite of the Productivity Commission report—an increase in the base concession and, with a greater concession available for smaller entities, a closure of the incremental provisions. It also, importantly, recommended a change from a tax deduction to a tax credit. The government’s 2009 statement Powering ideas: an innovation agenda for the 21st century, on the face of it, gave support to the recommendations in Dr Cutler’s review. Subsequently we have seen a Treasury consultation paper and two exposure drafts of the legislation. The legislation as it has emerged, while adopting the recommendation of moving to tax credits, seems to have reverted to the Productivity Commission approach of substantially tightening eligibility criteria. It does raise the question: to what extent is this exercise a revenue-raising measure more than anything else? Certainly there appears to be a fundamental tension between the approach recommended by the Productivity Commission and the approach recommended by the Cutler review, and that tension appears in many ways unreconciled in the legislation as it has finally emerged.

Let me turn to the second area I want to address: the key provisions in this legislation and some of the problems of them. The key provisions of 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. At the same time and very concerningly, this bill establishes a new and more restrictive regime which determines eligible research and development activity by creating two key categories: core research and development activity and supporting research and development activity. The response of industry to this new framework has been overwhelmingly negative.

It is important to understand that for many decades research and development has been understood in terms of the so-called ‘Frascati definition’: creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of humanity, culture and society, and the use of this stock of knowledge to devise new applications. Very importantly, for many decades research and development has been understood to encompass both creating new knowledge and using existing knowledge to create new applications. The problem with the approach in this bill is that it limits, in both its objects and its specific provisions, the availability of the credit to activities that are undertaken for the purpose of acquiring new knowledge or information. In other words, a key aspect of what has traditionally been understood to be encompassed within research and development, so-called ‘experimental development’, has been removed. Under the bill, novelty becomes a prerequisite.

It might be argued that the second category of so-called supporting research and development activity addresses this problem, but the definitions required to qualify as ‘supporting R&D activity’ are so limited that it makes it very difficult indeed to meet these requirements. The activity must have a direct, close and relatively immediate relationship with the core research and development activity. In addition, we have a dominant purpose test which is an overarching requirement in the legislation and this effectively operates to kill off any application of the credit to experimental development. Many in industry argue that it is difficult to envisage a situation where a supporting activity would not fall within one of the range of exemptions that are set out in the act and therefore make those activities ineligible to receive the credit.

One member of the Australian Industry Group had this to say:

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 to compete against imports.

Another member of the Australian Industry Group estimated that 60 per cent of their activities would not be eligible under the proposed definition. We face in this bill the prospect of Australia moving from having a regime designed to induce research and development to a regime which is designed solely to induce research. In the view of a great many people who have commented on this bill, that does not make sense.

It provokes the third question that I want to turn to: what is the Labor Party really up to? One has to be very sceptical about this government’s motivations and whether in particular, given the very heavy involvement of Treasury in the convoluted process through which this bill emerged, the overriding motivation is that the bill is designed to reduce tax expenditure in this area. For example, KPMG has estimated that the current approach will slash the current $1.4 billion tax expenditure on R&D by 50 per cent.

Our very reasonable concerns on this issue might be ameliorated if this government were to release modelling to support its claim that this measure is revenue neutral, but in a response which is sadly all too typical of the approach of this government to pressing public policy issues there has been a complete refusal to release modelling. There has been a complete refusal to allow parliament the information that it needs to carry out appropriately and properly the scrutiny which is part of the duty of parliamentarians and part of the proper function of a parliament. We can merely return to our suspicion, with that suspicion only increased by the persistent failure of this government and this minister to release modelling substantiating its claim that this measure is revenue neutral. Until we see that modelling we are forced to rely upon the very persuasive evidence put forward by a number of the large accounting firms, which suggests that in substance this measure will not be revenue neutral but will lead to a material reduction in the tax expenditure on supporting research and development, a very curious outcome indeed for a measure which is supposedly designed to support research and development.

This bill will also materially increase compliance costs for Australian businesses, which will be required to separate their activities into core R&D, directly related supporting R&D, and supporting R&D activities subject to the new dominant purpose test. A further objection to this wholly unsatisfactory, cobbled together collection of measures is the proposed retrospectivity—the proposed start date of 1 July 2010, which is obviously several months in the past. This is a highly unsatisfactory way for the government to treat industry. It is a highly unsatisfactory way to treat taxpayers, to treat businesses, which are seeking to make a decision about the extent to which they engage in research and development expenditure and face enormous uncertainty about the rules that are going to apply. It is sadly a consequence of the frankly atrocious consultation process which has been conducted by this government in the course of bringing forward this legislation. There were two rounds of consultation: one over the Christmas holidays and one over the Easter break. It is not the finest work of the Australian Public Service and of this government when they release exposure drafts and expect industry to comment in a very short time that extends over a period when many people are on holiday.

This bill purports to achieve sensible and desirable objectives, and certainly some aspects of it are worth supporting. The fundamental notion of moving to a tax credit approach is quite widely supported. But sadly the substance of this bill is deeply problematic. At base, the problem with this bill is that it does not deliver on the claims that have been made for it. It will, in fact, make it harder for many Australian businesses to seek and obtain support for research and development activity and therefore, in policy terms, this is a bill which is going in the wrong direction. Rather than supporting research and development it will, sadly, make it more difficult. (Time expired)

12:58 pm

Photo of Bernie RipollBernie Ripoll (Oxley, Australian Labor Party) Share this | | Hansard source

It is a pleasure for me to speak on the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. These are important bills and highlight the continued effort and commitment that the Australian Labor Party and this government have to all of the business enterprises in this country—large, medium and small—particularly for their research and development expenditure. It is a fact that over a period of time, while coalition governments reduced funding and reduced the capacity of people to access this funding, it was Labor governments that increased that funding in dollar terms, not only in the quantum but also in the quality of the schemes that are put forward.

The changes that we are debating today are exactly that—good, quality changes that are well supported. Contrary to what we have heard in this place, the changes are supported by many senior and eminent people in business and in industry, people who have the experience and the knowledge to comment on these issues. The changes have been supported by people like Mr Ian Birks, the CEO of the Australian Information Industry Association; Dr Anna Lavelle, CEO of AusBiotech; Mr Antony Reed, CEO of the Games Developers Association of Australia; and a whole host of others, including TGR Biosciences, the Australian Coal Association Research Program, the Australian Industrial Research Group, the CEO of Medicines Australia, the tax council of the Institute of Chartered Accountants, the CEO of the Australian Private Equity and Venture Capital Association and a range of other people. It is actually quite a widely supported amendment.

This bill does many good things. There have been some critics and there always will be. We ought to expect that. No-one should ever expect that changes such as these, in whatever form they come, will suit everybody absolutely or exactly. That means that, sometimes in these processes, there are people who find they sit in a slightly different position to where they might have sat in the past. But that is exactly the point of change; that is exactly why we are here today—to make those changes.

This government is trying to ensure that more businesses are eligible for the available $1.6 billion pool of funds. We want to make sure that it goes to a larger group of people and that those funds are absolutely fully expended, but we also want to make sure that they are expended in the best possible manner—that the expenditure is targeted and makes sense. We want to make sure that taxpayer funding is supporting the type of research and development that should take place in this country.

So we ought to be very careful about the sort of debate we have in this place, especially about the presumption that this is all about reducing funding. There is no funding reduction. The same pool of funds is available—$1.6 billion. Similarly, there have been assertions that the changes will be, in some way, detrimental to manufacturing or to manufacturing R&D. It is clear that that is not the case. The manufacturing sector will have as much eligibility as any other sector. The same rules will apply across the board.

Another area where there has been a range of comments is consultation, but there has been quite a substantial amount of consultation and a substantial period of time for people to absorb the changes. In general—and I even hear it from the opposition—people say that it is good change. They say that it is a good set of amendments and that it is good change. It tightens up the rules and tightens up the way in which the R&D tax incentives operate.

The proposed R&D tax credit is a tax incentive. It is there to encourage companies to undertake genuine research and development. That is what it ought to do and that is what we are making sure it does. The tax credit is a major element of this government’s policy to increase research and innovation. We are making sure that more enterprises in this country have access to this type of assistance and funding. We are doing that to make sure those enterprises can continue to be innovative.

These reforms are in line with the report Powering ideas: an innovation agenda for the 21st century and are the biggest reforms to business innovation support for more than a decade. Like many other things that we are introducing into this place, they are the biggest reforms in more than a decade and they are positive reforms. They involve better funding or more funding, a tightening of the rules, better eligibility and assurance that we are looking after industry in the area of innovation.

What we are putting forward has, in fact, been rated as world’s best practice by no less than KPMG in a recent report comparing government incentives internationally to support business R&D. So there you have it. We heard before about some tax firms that are not happy with certain elements, or certain parts, of the changes, but KPMG have found that the two big changes—the actual size of the incentive, increased in this legislation, particularly in the refundable category for small and medium enterprises, and the way it is targeted and structured—are in line with world’s best practice. Everyone needs to benchmark what they are doing. We should not sit outside of what is regarded, across the globe, as the best way to do things, and KPMG are saying that what we are doing is rated as part of world’s best practice. I think that boosts the government’s argument.

There are around two million businesses in Australia, but the startling figure is that only about 8,000 of these businesses benefit from the current R&D tax concession. This government wants to increase that number. Eight thousand is too few; it is too small as a number and too small as a percentage. The reality is that more businesses should benefit from this very good incentive.

There are two key components to this R&D tax credit and they are quite simple. Small and medium enterprises—companies which have an aggregated turnover of less than $20 million—will receive a 45 per cent refundable credit. What ‘refundable’ means is that, where an enterprise has a tax loss for the year in which the R&D is performed, that enterprise can receive a cash refund. This is a massive incentive to invest, to innovate and to move forward. This has been well supported by everybody including, I assume, the opposition, even though they complain. Larger firms—companies with an aggregated turnover of $20 million or more—will receive a 40 per cent non-refundable tax credit. It is non-refundable, but any of the unused portion can be carried forward to reduce future tax liabilities.

The 45 per cent refundable tax credit doubles the base rate available to SMEs under the existing R&D tax concession from 7½c in the dollar to 15c in the dollar. The 40 per cent non-refundable tax credit raises the base rate of R&D tax incentive for larger firms by a third, from 7.5c in the dollar to 10c in the dollar. These are significant changes, they are good changes and they will have the right impact. They will have the exact impact they are intended to have, which is to encourage people to invest in research and development. The intention of the government is clear: the R&D tax credit will be available from the income year starting 1 July this year, giving businesses and enterprises an opportunity to do their R&D and claim those incentives immediately.

We will continue, as I said in my opening remarks, to fully fund the $1.6 billion in research and development incentives available to enterprises annually. There will be no reduction in the amount. I know there will be scare campaigns from the other side. I know they will be going out there and saying to people, ‘You will have less,’ but it is just not the reality. It is not fact and it is not the intention. The intention of these amendments is to provide a better rate, a more generous rate, and it is to encourage genuine research and development.

The new tax incentive will greatly assist firms as it will be better targeted, and that has to be a key. It is more generous, it is more predictable and it takes away some of the complexity. It provides increased financial support. It also gives support to companies that are in a tax loss position by providing cash refunds, and that will bring more companies into the scheme. I cannot see how anyone would want to deny having access for more firms. If we can spread the pool to a larger number of companies, we will also spread the pool of innovation. That should be a key component and something that is supported by everybody. It will be a redistribution of support in favour of small and medium enterprise. If we are all to be genuine in this place, if we say that small business is the backbone of the economy then we ought to support that. We want to improve that support through this very targeted and generous R&D tax concession.

We also want to make sure that we increase certainty by decoupling the incentive from the company tax rate, making sure that they are separate. The tax credit will provide business with a measure that is simple, predictable and adopts international best practice and is something that should be well and truly supported by the opposition. The new scheme is a broad- and entitlement-based scheme. It expands access to foreign owned companies and to companies that hold their intellectual property offshore but are doing work and innovation here. The support that will be available to these firms will not stop there.

There are further incentives. There will be greater administrative support from AusIndustry, including the ability to seek an advanced finding on the eligibility of R&D activities. People will be able to move more quickly and with better clarity about their eligibility, and there will be comprehensive guidance materials from AusIndustry and the ATO to make it easier for small business to receive the R&D tax incentive. AusIndustry will also undertake site visits on request to demonstrate how the new R&D tax incentive will operate, and business will no longer need to submit an R&D plan at the registration stage, which will help small business firms through a reduced compliance burden.

We are back here with this bill because it lapsed as a result of the election being held earlier this year and now needs to be reintroduced. Now, though, it incorporates some minor changes that have been circulated as proposed government amendments, and those amendments came out of issues raised by the Senate Economics Legislation Committee. The two amendments in particular I am speaking of are to the Tax Laws Amendment (Research and Development) Bill 2010. Proposed amendment (1) is a clarification of the objects clause and amendment (2) is a clarification of the scope of core R&D activities. This will provide the certainty that business has been looking for.

This is a good bill. It continues a great research and development scheme, and it continues to fully fund the $1.6 billion. It does mean there is a better incentive for small and medium enterprise, and there is a doubling of the tax offset and the rebate, particularly in the refundable category. It also means that for large firms not only is there an increased amount but also there is more certainty about how it is applied. It is a good bill and, while there have been some criticisms, those criticisms I think will be found to be not justified over time and the amendments will work very well to produce the outcome the government desires, which is to have more targeting and more firms actually access the R&D grants. I commend the bill to the House.

1:11 pm

Photo of Nola MarinoNola Marino (Forrest, Liberal Party) Share this | | Hansard source

Research and development investment in Australia is a major driver of value and is vital for increasing our productivity and competitive capacity. Australia is recognised as a global leader in many industries because of its historic investment in R&D and 25 years of a successful system that has encouraged and supported this investment.

There is an economic and social benefit in R&D programs, and I am supportive of sensible changes to R&D tax incentives but not those that erode support and investment. The ABS noted business spending on R&D totalling $10.1 billion in 2005-06, and the major contributors were manufacturing, property and business services and the mining industries, with over 119,000 Australians employed full-time in R&D. Priority areas include ICT, biotechnology, manufacturing, mining and the food industry.

However, this Labor government legislation threatens to erode support for R&D investment in Australia through major changes redefining the type of R&D activities that will be eligible for support. Fewer firms may now qualify for assistance. Effectively this government is cutting tax concessions for R&D on the back of slashing spending on the Export Market Development Grants Scheme by $50 million last year. Unfortunately, in helping to cover the cost of Labor’s wasted billions of taxpayers’ funds, the government’s revenue cutback may well compromise investment in innovation. I can only imagine the frustration and commercial uncertainty in many businesses with the retrospective provisions in this tax laws amendment research and development legislation and how it affects their current and future planning.

The proposed introduction of new categories of ‘core’ and ‘supporting’ R&D and a ‘dominant purpose’ test will disadvantage many businesses and limit their R&D efforts. As we know, approximately 95 per cent of R&D activity in Australia is ‘applied’ research—it involves making refinements, improvements and innovations around existing practices rather than undertaking wholly new R&D work. This is very important, and you can see this particularly in the mining and resource sector. I am very supportive of R&D to support small business but, at the same time, we cannot afford to put at risk investment in our mining and resource sector because this sector is one of the ones that will help drive this economy. I am concerned that this may be just another Labor attack on that mining and resource sector, through the mining tax, the carbon tax and the reduction in R&D tax concessions. Conversely, the government is expecting the mining and resource sector to drive the Australian economy. Many companies will be affected. Sixty per cent of the world’s mining software has been developed by Australian companies, and we are leaders in processing technologies, mining equipment and scientific analysis technologies.

As I said, I believe that research, innovation and the pace of innovation and development are vital, whether in health, mining, petroleum, natural resource management, environmental management, agriculture or any other sector. Companies involved in R&D require clear, concise, simple and unambiguous policy settings and directions. The issues of clarity, simplicity and concise—but not retrospective—rules are extremely relevant, but unfortunately it seems that the Labor government is determined to undermine R&D by reducing the tax concessions so as to raise revenue.

Irrespective of how the government frames this, the judgment can only be that this government is not really serious about R&D. Evidence in regional areas actually proves this. Labor’s first budget stripped $1 billion out of regional programs such as the Growing Regions program and replaced them with programs of less than $200 million. The government also abolished Land and Water Australia in November 2009 and cut $63 million from CSIRO’s agricultural research, costing 100 jobs and the closure of two major research laboratories, to meet the first round of budget cuts in 2008-09. The CSIRO Staff Association warned that as many as 300 jobs in both science and research support services would be lost.

Agriculture also bore the brunt of the first $15 million round of research cuts, including the closure of Australia’s biggest livestock research laboratory at Rockhampton in North Queensland. The Rendel laboratory provided vital support for Australia’s beef industry but was closed in March 2010, less than four years after it received a $3 million upgrade to boost its research capacity. The CSIRO will also close its Merbein grape and citrus research laboratory at Mildura in northern Victoria in 2011-12. This laboratory was established in 1919 and it developed light mechanical pruning and nematode-tolerant grape rootstocks that are worth an estimated $150 million a year to the wine industry.

The CSIRO was hit in 2008 with a $23.6 million cut because of the increased efficiency dividend. Former CSIRO divisional chief Dr Max Whitten said the budget cuts showed ‘an airhead mentality’ towards science. A total of $12 million was lost to the Rural Industries Research and Development Corporation in the 2009-10 budget through cuts of $3 million over four years. There was also a funding cut of $3 million per year over four years to the Department of Agriculture, Fisheries and Forestry and its agencies.

The R&D sector, business and industry need constructive support, not Labor government funding cuts and legislative changes forced on them with very little consultation but with very direct retrospective effects. I recently raised doubts about the Productivity Commission’s draft report on the Rural Research and Development Corporations, RDCs, released in September this year, which suggested that the government should reduce its investment in rural research and reduce the input producers have in the decision-making process.

The Productivity Commission has said that producers should make up the shortfall themselves as the government pulls back on its spending and, at the same time, have less say on what the research money is being spent on. The Productivity Commission clearly did not understand the difficulties faced by the agricultural sector, with the report suggesting that $50 million each year should be removed from the Rural Research and Development Corporations in which the producers currently have a voice. The money would be directed into a new government bureaucratic organisation called Rural Research Australia—a non-industry RDC in which producers would have no say at all. The draft report also recommended slashing the remaining RDC funding by $60 million a year over the next 10 years.

I wonder how on earth this can be justified when Australian farmers are being expected to produce more food and fibre on less land with less water, less fertiliser, less energy and increased costs but fewer commercial returns—whilst at the same time the government has already cut R&D funding and clearly plans to make even more drastic cuts. I encourage all farmers to make submissions on this draft report to send a very clear message to the Labor government that this tough period of drought, poor prices, high bank interest rates and charges—with the difficulties in accessing finance and competing in a global market where subsidies of 39 per cent are common—is the worst possible time to walk away from agricultural research.

Australia simply cannot afford to restrict R&D business activities across the board. Consider the food-processing sector and the consumer demands for healthy, convenient products that are diverse, high quality and value for money. These require the development of new food-processing, separation and packaging technologies and innovations; however, under the changes to the definitions under this legislation much of the assistance for the type of research needed to deliver these outcomes will be eroded in an industry that has to compete globally.

Research and development are key success and sustainability factors. As I said earlier, Australia is recognised as a dynamic driver of biotechnology and pharmaceutical innovation, with over 470 companies focusing on therapeutics, agricultural biotechnology and diagnostics. I do not want to see any of that eroded or undermined by poor R&D legislation. The Labor government must not undermine the R&D sector with this legislation or cause a reduction in the R&D efforts of individual companies. As we know, research and development, by its very nature, is often a high-risk, high-cost field.

We are proposing amendments to this legislation which will deliver a constructive outcome. We cannot afford to compromise the integrity of Australia’s R&D system. We will support sensible and rational improvements to the existing regime. If the government is seriously interested in changes to drive better R&D outcomes in Australia, it will accept constructive amendments.

1:22 pm

Photo of Adam BandtAdam Bandt (Melbourne, Australian Greens) Share this | | Hansard source

I will very briefly indicate the Greens’ position on the Tax Laws Amendment (Research and Development) Bill 2010. The Greens are big backers of government providing strong support for research and development in this country, and nowhere is that support more needed and its usefulness more apparent than in my electorate of Melbourne, which arguably has the highest concentration of research institutes and companies engaged in research in Australia. Since being elected, I have had the benefit of meeting many of them and touring some of their facilities. We are especially keen on making sure that research and development funds find their way to small and medium enterprises, and we have engaged in some significant consultation regarding this bill and will seek to move some amendments. But in this House we will be supporting the bill with the aim of introducing amendments and engaging in further discussions in the Senate.

1:23 pm

Photo of Josh FrydenbergJosh Frydenberg (Kooyong, Liberal Party) Share this | | Hansard source

What do the wine cask, the bionic ear and the flight recorder all have in common? They are names in a long list of Australian innovations. For Australia to prosper and compete in the future this list must grow and in this place we must do all that we can to cultivate and facilitate a business culture of enterprise and innovation. However, the Labor government has not got this message and that is why I rise today to speak on the Tax Laws Amendment (Research and Development) Bill 2010. The coalition opposes this bill. Labor’s proposed changes strike at the very heart of providing business incentives to pursue research and development and will, if passed, significantly impair any industry support for business R&D in Australia.

It is extremely disappointing that the legislation before the House is flawed in its approach to encouraging businesses to invest in research and development—a point obvious to many who should know. Leading global firm KPMG have been selectively quoted by those opposite, including today by the member for Deakin and the member for Oxley, in support of this bill; rather, KPMG have sounded serious warnings about its negative impact. KPMG’s national lead partner for R&D incentives, David Gelb, said:

That report was not at all based on the first or the second exposure draft. The report was predicated on there being no change to the definition of R&D.There are some key issues that have yet to be resolved.

Cutting R&D concessions is not the right way nor is it the smart way to grow Australia’s industry and strengthen our economy over the long term. Indeed, as economists and right-minded policymakers emphasise the world over, technological progress is the critical factor that drives sustained economic growth. This bill makes such progress more difficult.

The government’s bill proposes altering the basic structure of Commonwealth government incentives for business research and development spending for the first time in more than two decades. If passed, this bill will replace the existing research and development tax concession that has been available to businesses since 1986 with a new R&D tax credit that will be retrospective from 1 July 2010. The idea of moving to a tax credit system is sound in principle, but the arrangements that underpin Labor’s legislation are not. The government’s bill was created in haste. Instead, we should ensure the present arrangements remain in place until at least 1 July 2011 so that business can have certainty and stability, and in the meantime work with industry to more comprehensively consider a more effective incentive system than that proposed here.

Given that the current legislative regime already imposes tough measures that business must satisfy to qualify for R&D assistance, this bill creates a series of new hurdles for Australian businesses to overcome in order to receive any assistance at all. Research and development are the hallmarks of innovation, and we must nurture any incentive structure and its tax environment to sustain onshore R&D through positive legislation and regulation. The bill does not achieve that. The bill does not give effect to the theme, which the Labor Party took to their 2007 election campaign, of promoting ‘national innovation’. As well, this bill is not in the spirit of Labor’s 2010 election promise of ‘a simpler, more generous R&D tax credit to encourage Australia’s two million businesses to undertake R&D’. Its substantive effect is quite at odds with what is claimed and, in fact, winds back support for research and development in Australia.

During a recent inquiry into this bill by the Senate Standing Committee on Economics, Medicines Australia expressed concerns when it highlighted the complexity of the bill’s rules relating to core and supporting R&D. Representatives from Australia’s university sector similarly suggested that any loss in R&D investment in Australia would negatively impact universities’ R&D capabilities. Both groups, instead, support more expansive definitions of eligible R&D. The government seems to have turned a deaf ear to these concerns and that of many others while hastily drafting and pushing through this bill.

The key issue before the House is whether the mechanism proposed in this legislation will be effective in encouraging research and development. We on this side of the House are clearly of the opinion that it will be entirely ineffective. If anything, to quote Sandra Mason, tax partner at PricewaterhouseCoopers, in an article that appeared in the Australian Financial Review on 1 February this year, the government’s idea of a new R&D incentive is ‘a kick in the guts for business’.

The government’s decision to pursue these changes and the way it has gone about it is incredulous, especially when, for the past 24 years, there has existed a bipartisan approach to supporting R&D in Australia. Although Commonwealth support has been repeatedly refined and amended over the years, the current system has worked and is very familiar to businesses and currently assists approximately 8,000 companies nationwide.

Under the Howard government, the current research and development tax concession was the principal instrument supporting innovation in Australia, with R&D priority areas including information and communications technology, biotechnology, manufacturing and mining, as well as sustaining the Australian food industry. The Howard government committed $380 million over 10 years, to 2011, to a centre of excellence for ICT research, research training and commercialisation. Established in 2002 as an independent, not-for-profit company the centre, known as National ICT Australia, is now one of Australia’s largest ICT research organisations and employs more than 300 research and support staff and around 260 postgraduate students.

In 2000, the Howard government launched a National Biotechnology Strategy, which was strengthened in 2004. The strategy was designed to enable government and key stakeholders to work together to ensure that developments in biotechnology were harnessed for the benefit of the entire Australian community, industry and the environment and to strengthen Australia’s competitiveness in biotechnology. The current tax concession that has made these and similar cutting-edge research and development opportunities possible has been achieved within an estimated cost to the budget of $1.5 billion in the most recent financial year.

However, when it comes to R&D this Labor government has consistently let down the side. This new incentive scheme has been contentious from the outset, most of all among those Australian businesses most committed to investing in science and innovation. Labor’s recent inability to articulate whether or not it will provide $7.5 million to the soldier survivability program is just one illustration. The program, which is aimed at improving the protective armour and personal survival equipment used by Australian troops on the front line is an excellent example of Australian R&D, Australian ingenuity and know-how.

Under this bill the activities eligible for support have been drastically reduced by the government. Within the current system, R&D activities must be ‘innovative’ or involve a ‘high level of technical risk’ to receive support. The government’s legislation would change this requirement to ‘considerable novelty’ and ‘high technical risk’. The proposed new incentive is a significant departure from the existing incentive and should be described as an entirely new measure, as the tests for eligibility will be not only tightened but substantially changed.

I am also concerned that businesses undertaking R&D need certainty over their tax environment. I am worried that the legal questions that will be created by Labor’s sweeping changes to the eligibility rules and tests, in particular the new distinction between ‘core’ and ‘supporting’ R&D and the dominant purpose test, will be substantial. These changes will have a detrimental effect on non-scientific, industrial research activities as they will not be eligible activities under this legislation, although they are currently eligible for the existing incentive.

Growth in business investment in R&D over the past two decades has increased the cost of the concession, but it has also paid substantial dividends to local, onshore knowledge building and innovation. In the long run, a nation’s capacity to innovate determines how quickly its economy can grow, how quickly it can increase living standards and how well equipped it is to prevail over economic, social or environmental challenges.

During the life of the last parliament, the structure of the existing R&D tax concession twice came under scrutiny, firstly, by the Productivity Commission, in 2007, and then closely followed, in 2008, by a review led by Dr Terry Cutler. In both cases alterations to the existing R&D tax concession were recommended. Merit exists in some of the recommendations and both the Productivity Commission and Dr Cutler raise a series of legitimate concerns over aspects of the operation of the existing R&D tax concession, in particular, the provision of support to some R&D which provides sufficient returns to the businesses that undertake it and which would occur whether or not the tax concession was in place. The government’s response, however, has incorporated the most onerous features of both cases, while ignoring their more generous aspects.

The business case for Labor’s changes to this incentive has not been made and this is reflected in the opinions of Australian business and industry. As the Australian Private Equity and Venture Capital Association Ltd, AVCAL, in their submission on the exposure draft, stated:

… 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.

This change to the definition may unintentionally lead to the exclusion of many genuine, value-adding R&D activities that should be supported and that are currently eligible for support. This legislation will be counterproductive to the coalition’s goal of enhancing Australia’s innovation and technological future. In doing so, it threatens to limit our future economic prosperity. Labor clearly does not understand the key issues at stake. For this reason the coalition does not support the legislation.

1:36 pm

Photo of Tony SmithTony Smith (Casey, Liberal Party, Deputy Chairman , Coalition Policy Development Committee) Share this | | Hansard source

I rise to speak on the Tax Laws Amendment (Research and Development) Bill 2010 and cognate bill, following the member for Kooyong, who outlined in great detail the fundamental problem with the Labor Party’s approach to this critical area of R&D. The decisions in this key economic area directly impact the sorts of opportunities businesses and Australians will have tomorrow. As the member for Kooyong outlined, there are a series of obvious flaws within this legislation. As previous speakers on this side of the House, led by the member for Indi and followed by the member for Bradfield, have said, concerns have been outlined time and time again by experts within the industry. The member for Indi spoke in great detail about how this legislation and Labor’s approach have unfolded over the last couple of years. The member for Bradfield gave example after example of those involved in the critical area of R&D, experts from accounting firms and experts from the business sector, who have been warning this government for months and months—warnings that have unfortunately fallen on deaf ears.

On behalf of the coalition, the member for Indi outlined our approach and moved a series of amendments to try and rectify this bill to ensure it is the best it can be. If the government were not so stubborn and the Minister for Innovation, Industry, Science and Research, Senator Carr, were not taking a ‘crash or crash through’ approach, you would hope that those opposite could comprehend that they have not got this right, that their approach will damage and R&D in Australia.

Let me reiterate, as the member for Kooyong did in great detail, that there are aspects of this legislation—as the member for Indi outlined in her speech on the second reading—with which the coalition does not have a problem. These include changes to shift from concessions to credits, the relaxation of foreign ownership rules relating to IP and, as she outlined, the idea of encouraging more blue sky exploratory research and giving increased support for small- and medium-sized enterprises in Australia. As the member for Indi, the member for Bradfield and the member for Kooyong outlined, these objectives are, of course, reasonable and the coalition has never had issue with them. This is despite, unfortunately, the government’s attempts over and over again to try and misrepresent the position and assert otherwise.

The criticisms from this side of the House are many and go to what sort of system will replace the existing system and what its defects are. The member for Indi has been quite upfront and said, ‘We acknowledge, accept and support some of the key objectives.’ But it is in those areas that she and the member for Kooyong outlined where we know from the experts from the Senate inquiry and from everyone who has been working within the R&D system that the restrictions in so many other areas within this bill will be detrimental to R&D and therefore detrimental to the business sector in Australia and ultimately, of course, to our longer term economic performance.

As the member for Indi outlined in great detail in speaking to the amendments that she moved, the legislation is defective in a number of critical ways. It will restrict the range of activities that qualify for support by introducing, as she said, ‘regressive new definitions of core and supporting R&D’. The member for Kooyong outlined some of those consequences as well. It will alter eligibility criteria so that supporting R&D will only be funded if it satisfies a confusing and complex dominant-purpose test.

There are many more defects that the member for Indi has outlined. I have just picked a sample of them. These have been raised with the minister time and time again. Unfortunately, the minister’s response at every opportunity has been to attack those who try to shine a light on the deficiencies of his approach. As the member for Kooyong pointed out, there has been a bipartisan approach to this important area for 25 years. When those who are experts in the field raise criticisms, we on this side of the House say, ‘If the minister is so small-minded that he cannot accept a criticism or a suggestion from this side of the House, well, fine, listen to those outside of the House who are experts in the field.’ Unfortunately, the minister has refused to do that at every turn. Whenever he has had the opportunity he has criticised those who have deigned to point out the faults with his legislation.

Like so many policies that the Labor Party seeks to introduce, this has the classic three pillars of chaos, uncertainty and confusion. I notice my friend the member for Flinders, who has exposed them on ceiling insulation, is in the chamber. It is not too late for the government to actually listen; they should listen to the member for Indi. The amendments that she has moved on behalf of the coalition are amendments on behalf of those who know the absolute importance—

Photo of Peter SlipperPeter Slipper (Fisher, Liberal Party) Share this | | Hansard source

Order! It being 1.45 pm, the debate is interrupted in accordance with standing order 43. The debate may be resumed at a later hour and the honourable member for Casey will have leave to continue speaking when the debate is resumed.