Kim Carr (Victoria, Australian Labor Party, Minister for Innovation, Industry, Science and Research) Share this | Hansard source

I want to thank the opposition for the approach they are taking on this matter. This has been a long process of discussion but I do want to emphasise the importance of the dominant purpose test in terms of the integrity measures that the government seeks to pursue through this bill. The proposed amendments will permit some firms to claim business-as-usual expenses under the R&D tax incentive and therefore would undermine the integrity of these arrangements. It would have quite serious implications, of course, in terms of the financial implications of this bill.

The dominant purpose test for supporting activity is in fact vital to the measures in the bill, that is, to prevent leakage of the incentive to business-as-usual production activities that are mainly being conducted for reasons other than supporting core R&D activities. So the improved targeting of this incentive is a key feature of what we are trying to achieve here. If the package is to provide the increased rates of assistance, that is doubling the level of support for small enterprises and increasing it for medium-sized enterprises by one-third, there need to be opportunities to ensure that there is some integrity in these arrangements. We need to be able to ensure that the assistance with cash payments for innovation start-up firms is able to be delivered in a manner which will not blow the whole finances of the scheme. The dominant purpose test applies only to supporting activities, not to the core R&D activities. Therefore narrowing the application of the dominant purpose test will not result in any more core activities actually being undertaken. If you look to the work of Nicholas Gruen in his study The BERD in the hand, he states that the dominant purpose distinction:

… neatly excludes from the concession activities which, though directly related to the R&D project, would take place with or without the R&D project and so are therefore no part of the full incremental costs of the R&D project.

Dr Gruen in his report also states:

The dominant purpose test has been designed to remove from assistance production activity for which there is very little policy rationale for assisting. It is overwhelmingly activity which would take place in any event because it would take place without the R&D project being undertaken.

So the proposed amendments would create difficulties for firms around this whole threshold issue. In some years they would have to apply for the dominant purpose test and others they will not.

The proposed amendment will not reduce any compliance costs for the R&D tax credit. Firms will still be required to distinguish between core and supporting R&D activities when applying for the R&D tax credit. A wide range of support will be available to assist claimants, including small and medium-sized enterprises, in the transition to the new program. I made very sure of this in terms of the budgetary arrangements that underpin these measures so that we can have extensive guidance material available for administrators. There will be a hotline to advise claimants and there will be a formal advisory function of AusIndustry to provide advance findings so that there will be certainty in the arrangements entered into. And there will be additional funding of $31 million over four years which has been allocated to AusIndustry in the 2009-10 budget to increase the resources available for administration of the new program. I might also add that further protection as to the assertions that I am making, about the purpose of these changes, is guaranteed by the establishment of the review mechanisms in the legislation through the R&D board which will allow us to be able to measure the policy intent in terms of how it is actually being implemented. I am very confident that the R&D board, given the personnel that are available on that, will be able to sort the wheat from the chaff in regard to any administrative high jinks that people might claim that people get up to when it comes to administering these types of schemes. So in respect of a range of levels to protect the integrity of the scheme and to also ensure that we do meet out commitments in terms of the policy intent, I believe there are very strong guarantees built into these arrangements for this bill.