Jacinta Collins (Victoria, Australian Labor Party, Shadow Cabinet Secretary) Share this | Hansard source

I rise to speak on the Tax and Superannuation Laws Amendment (2015 Measures No.3) Bill 2015. This bill contains two measures that Labor opposed when they were included in a previous tax laws amendment bill. The measures, which cut the rate of the research and development, or R&D, tax incentive and repeal the seafarer tax offset, were removed from that bill by the Senate in March this year. Now the government has reintroduced them in a separate bill, but nothing has happened in the interim to diminish Labor's opposition to the measures. We oppose this new bill in its entirety.

If passed, the bill would further degrade the R&D tax incentive, which, as Senator Carr reminded the Senate during the debate on the previous bill, is the most important mechanism in the taxation system for fostering innovation. The incentive has already been undermined by the Tax Laws Amendment (Research and Development) Bill, which was passed in February 2015 and sees the removal of the R&D tax incentive from all firms on expenditure of over $100 million. The bill would also remove a refundable tax offset that assists Australian shippers to compete with their international rivals, a measure which Labor also opposes and which my colleague Senator Conroy will speak on in more detail.

The government has failed to present coherent arguments in justification of these changes, especially with regard to the R&D tax incentive. This bill, like its predecessor, seeks to cut the incentive by 1.5 per cent. The measure reduces the rate of the refundable tax offset from 45 per cent to 43.5 per cent and the rate of the non-refundable offset from 40 per cent to 38.5 per cent. When the 1.5 per cent cut was first proposed, it was purportedly to preserve the value of the incentive relative to the company tax rate. That justification has already unravelled, because the government has dropped its plan to cut the company tax rate.

The truth is that the arguments the government has marshalled in defence of these changes obfuscate the real motive, which is to scrounge savings. Linking the incentive to the corporate tax rate was never more than a desperate distraction on the government's part. When Labor was in government, the national innovation agenda set out in Powering Ideas explained the relationship of the R&D tax incentive to the wider tax system. Powering Ideas stated that the replacement of the former R&D tax concession, which had been introduced in the 1980s, by the R&D tax incentive was to increase certainty by uncoupling the level of R&D support from the corporate tax rate.

The rationale for the change proposed in this bill and its predecessor undermines that uncoupling, even though the promised uniform cut in the corporate tax rate has been abandoned. The change risks creating an expectation that when there is a change in the corporate tax rate the incentive will be adjusted accordingly, but no-one would bother trying to understanding how cutting the R&D tax incentive can be rational innovation policy, because the reality is that this bill has nothing to do with innovation policy. When speaking on this bill in the House of Representatives, the Assistant Treasurer finally began to come clean. He said that cutting the incentive by 1.5 per cent would deliver savings of $810 million over the forward estimates, which would:

… contribute significantly to the government's task of repairing the budget …

In other words, short-term cash grabs at the expense of longer term growth continue to be the defining characteristic of this economically myopic government.

The government likes to preach about the need to reduce the deficit. Yet not only has the deficit doubled on the Abbott government's watch; but, with the measures contained in this bill, the government is pursuing a course that will impede growth and, along with it, the revenue streams Australia requires. The fact is that neither of the measures proposed in this bill will deliver savings that outweigh the cost to the economy of implementing them—the cost of impeding growth.

The government may think it has hoodwinked Australian businesses with its contorted arguments for cutting the incentive, but no-one has been fooled. I refer to a report by Joanna Mather, published in the Australian Financial Review on 10 June this year, in which she quotes Mr Damian Smyth of Swanson Reed, a firm that provides tax advice on research and development. He says:

The legislation from last year's budget was introduced on the basis that there would be a uniform reduction in the corporate rate to 28.5 per cent.

The corporate tax rate reduction is now only proposed to apply to very small companies with turnover less than $2 million. This means companies with turnover greater than $2 million will be subject to a drop in the value of their R&D claims.

This is a sneaky cut and any sort of tinkering is going to reduce the willingness of companies to invest in Australia.

In the same report, a statement on the R&D cut issued by the pharmaceuticals manufacturer CSL declares:

The rate reductions and cap are themselves unfortunate, but so too are the continual changes in R&D support arrangements, which increase the risk of long-term investment in R&D.

In CSL's view, these are retrograde measures. They make Australia a less attractive location for R&D and, because R&D is an essential complement to advanced manufacturing, detract from rather than enhance the prospects for advanced manufacturing in Australia.·

The reactions of Swanson Reed and CSL are entirely consistent with those of other companies and experts involved in R&D in Australia. In July, at a public hearing in Brisbane of the Senate Economics References Committee inquiry into Australia's innovation system, Dr Ian Nisbet, the deputy director at the Australian Institute for Bioengineering and Nanotechnology at the University of Queensland, described the R&D tax incentive as:

… the single best thing that has happened in innovation in Australia in the last 20, 30 or 40 years … It is exceptionally well known around the world …

At the innovation inquiry's public hearing in Melbourne, Dr Anna Lavelle from AusBiotech said that:

The R&D tax incentive is now seen by our members … as the No. 1 public policy issue for our sector that requires protection. The desire of government to reduce the benefit from 45 to 43.5 per cent is not welcome. It is a disadvantage more keenly felt by small companies …

These experts all understand what Tony Abbott and his cabinet ministers either fail to understand or recklessly choose to ignore: in advanced industrial economies, innovation is the chief driver of increases in productivity and enhancements in growth. Without a strong innovation system, Australia cannot build a more diverse economy. Without a more diverse economic base, future growth will be unreliable, fluctuating with booms and declines in commodity exports.

That prospect has been brought starkly home to Australians by the June quarter national accounts. The accounts figures show that the post mining boom economy is not faring well. Annual growth is below trend, at two per cent. For the first time in 20 years, more than 800,000 Australians are out of work. The unemployment rate has risen from 5.7 per cent to 6.3 per cent. Consumer sentiment is 10 per cent below where it was at the last election. The budget deficit has doubled in 12 months. To break out of this cycle, we must broaden the economic. We cannot do this without a robust national innovation system that increases our capacity for value-adding, rather than this government's plan of sticking with a plan that is not working.

Senators will recall that, during the debate on the government's previous attempt to cut the incentive, Senator Carr urged the government to heed the advice of the Australian Industry Group in its 2015 budget submission. That advice remains pertinent today. The Australian Industry Group argued:

… the Budget will only see a sustainable improvement when revenues improve, and for this to occur, we must see strengthening in industries across the economy from the anaemic pace of growth in recent years. Only when businesses lift their sales and profits and grow their workforces will there be a sustained pickup in revenues.

Consequently, Ai Group believes the Federal Government should continue with sensible programs of investment in infrastructure and skills and training as well as targeted programs to lift the rate of innovation among Australian businesses and encourage businesses to develop export opportunities.

Nonetheless, the government continues to do the exact opposite, in spite of the abundant evidence for the case that Ai Group has made.

As a report produced by the Department of Industry and Science called the Australian innovation system report has noted:

… innovation almost doubles the likelihood of productivity growth in Australian businesses … innovative Australian businesses are 78% more likely to report increases in productivity over the previous year.

The report also notes that firms that collaborate with research organisations and universities are almost 2½ times more likely to report increases in productivity.

In relation to the need for certainty, multinational companies, in particular, often need to make large, periodic investments in R&D capability if they are to undertake R&D in Australia. To attract those investment decisions, Australia must provide an investment environment that offers certainty, transparency and international comparability. But Australia is going backwards, and reducing the incentive runs counter to the international trend. The UK, Hong Kong, Singapore, Italy and France have all increased their R&D incentives in recent years.

The cut proposed in this bill can only erode certainty. The consequences of that perverse stance are clear to everyone except the government.    If the bill passes, the effect will be that which CSL predicted in the statement I cited earlier: the cut will discourage R&D investment in Australia. This will also be the case for small and medium sized enterprises. Small firms rely on the existence of a permanent and stable tax incentive to invest in R&D. Small companies are frequently starved of development funds. Many survive on seed funding, which all too often is difficult to obtain in Australia. For companies in this position, the R&D tax incentive is commonly the difference between whether or not a project proceeds. Because of the incentive, many projects have gone on to achieve commercial success, generating jobs, profits and export income. This government is evidently willing to see such projects fail, and jobs and future economic growth along with them.

As Mr Neville Mitchell, Chief Financial Officer of Cochlear Ltd, stated in regard to the previous attempt to cut the incentive:

Ultimately a reduction in the level of R&D undertaken in Australia will result in reduced employment and reduced corporate and individual income taxes.

Cochlear, as senators will know, is an Australian company at the forefront of manufacturing advanced medical technology. More than 250,000 people around the world benefit from Cochlear's implantable hearing devices. The vast majority of Cochlear's R&D activities are conducted in Australia, where more than 300 scientists and engineers are engaged in this work.    This company understands very well what tampering with the incentive means: declining investment, declining employment and in consequence declining revenue from corporate and personal taxation. That would clearly be a tragedy for Australia—and a perverse irony for the government. It is somewhat ironic that this debate is occurring at this moment, with what else is occurring in the parliament. Perhaps a change of leader will shift a change in government approach.

I turn now to the seafarer tax offset, which began in July 2012 as part of the then Labor government's maritime reform agenda, Stronger Shipping for a Stronger Economy. The measure provided a rebate to employers of Australian seafarers for part of the income tax withheld while they were on international voyages. The aim was to help Australian based shippers to become more competitive. We wanted to encourage the employment of Australian seafarers on ships and to increase the involvement of Australians in the global shipping industry. This goal was implemented through two tax changes: a zero rate of taxation for Australian ships on the Australian International Shipping Register and an effective zero rate for Australian seafarers working on those ships. The measure in this bill repeals the latter change. In other words, the government is intent on scrapping the incentive to employ Australian workers.    The government sees their employment merely as an addition to the cost of bringing goods into the country. Yet again, the economic myopia of the Abbott government prevails.

In conclusion, the measures in this bill are testament to the continued damage the Abbott government is intent on doing to Australia's capacity for growth.    The government likes to boast about its economic credentials, but degrading the R&D tax incentive and trashing the innovation system reveal that those credentials are worthless. The Abbott government is persisting with a campaign of economic vandalism that began with the cuts to industry programs announced in last year's budget and still includes the attack on Australian workers in shipping. This is an agenda that will leave all Australians worse off and will ultimately fail to achieve the government's stated goal of restoring the budget to surplus.