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

I rise to speak on the Tax Laws Amendment (Research and Development) Bill 2010 and related bill. This legislation contains a number of significant changes to the eligibility criteria and requirements for government support for research and development. These changes, as we know, have attracted substantial criticism from a wide range of industry groups—the very groups that need to be taking advantage of the research and development support. There is great uncertainty and there is great concern.

Following a review of the National Innovation System administered by the newly elected government, Labor announced in its 2009-10 budget that it would replace the four current tax incentives for business R&D with a new R&D tax credit. The main components of the Labor government’s new R&D tax credit packages are restrictions to the categories and types of eligible activities, a 45 per cent refundable credit for firms with an annual turnover of less than $20 million and 40 per cent non-refundable credit for firms with a turnover of more than $20 million. The new tax credit actually imposes restrictive barriers on firms rather than offering encouragement for research and innovation. No-one should underestimate the need for research and innovation as a proven driver of continuous and evolving economic growth, productivity, competitiveness and profitability. That is why the coalition has serious concerns over the government’s changes to the R&D tax concession.

The changes to the eligibility requirements are quite broad. Less emphasis appears to apply to development and it is a real issue. It threatens to significantly erode financial support for R&D investment in Australia—an unintended consequence, I would hope, but one that is very real. The eligible R&D activities under the legislation to qualify for the tax incentives are categorised as either ‘core’ or ‘supporting’. There is a stricter test on the definition of ‘supporting’ R&D in this bill. What I would not want to see is any reduction in innovation as a result of this restrictive part of this particular bill. It may disqualify assistance from many forms of R&D currently undertaken by Australian businesses—the drivers of innovation, productivity and profitability.

The proposed definitions of R&D will cause significant uncertainty—they are already. They are extremely complex and, for practical purposes, will impose unnecessary administrative and compliance costs on many firms, particularly small to medium enterprises. When you read through the definitions in the legislation, it becomes clear and apparent where the complexity and uncertainty is arising and will continue to arise.

The concern has been echoed by Business Strategies International, which has said that it is likely that protracted and expensive legal challenges will be initiated in some cases. That is something businesses do not need and should not have to afford. It could well lead to a reduction, as I said, in investment in R&D as a result. Interestingly, in their submission to the Senate Economics Legislation Committee inquiry, the Corporate Tax Association detailed concerns they have regarding this legislation, largely about the proposed new definition of R&D. Their submission stated:

From what members have said to us, many corporates expect to see their claims reduced significantly, mainly as a result of the proposed dominant purpose test for supporting R&D activities in a production environment. In some cases, corporates may form the view that the compliance costs involved in working up a claim are not warranted, and will not register projects they might have under the existing rules.

That certainly will not be of benefit to this nation. Coincidentally, in the current political environment of the resource super profits tax, in both the explanatory memorandum and in oral briefings from Treasury and the Department of Innovation, Industry, Science and Research, the examples of offending behaviour were dominated by those in the mining sector, one after another. I am afraid that this is just another attack on Australia’s mining and resource sector. The legislation is seeking to change not only the new resource tax but also R&D in the mining industry. The Minerals Council of Australia, in its submission to the consultation paper, described this legislation with the heading ‘A shift in the wrong direction’. The submission also stated that the exposure draft was ‘likely to have extensive adverse effects on the minerals industry’. The MCA further stated:

… the second exposure draft fundamentally alters the nature of the R&D tax benefit by the replacement of long standing and well understood concepts …

They are two very important issues for those engaged in R&D, and they certainly are longstanding and well-understood concepts. Similarly, an article in the Australian Journal of Mining from September-October 2009 stated:

Based on the recommendations contained in the Cutler review, tightening of the definition of eligible R&D activities may focus on preventing what are referred to as ‘whole of mine’ claims.

The article continued:

Companies with increasing levels of R&D expenditure may also wish to bring R&D spending forward to take advantage of the … concession before it ends on July 1st, 2010.

As I mentioned, the changes contained in this legislation have attracted substantial criticism from a wide range of industry groups. In an article in the Australian newspaper on 2 June 2010, the Advanced Manufacturing Coalition was quoted as saying:

… the new system could “increase the time, cost and risk of undertaking R&D in Australia”.

I am certainly very concerned about that. This indicates that the scheme could threaten some manufacturing firms’ international competitiveness during the next decade, and we should be seriously concerned about that. In their submission to the Senate inquiry, the Advanced Manufacturing Coalition raised concerns that this legislation increases the risk that some manufacturers will defer or cancel R&D or simply take it offshore, a move that would be highly detrimental to the Australian manufacturing industry, researchers and workers.

KPMG Australia has expressed concerns that the changes will restrict the access of all companies, irrespective of size—not just small- and medium-sized enterprises—to the R&D system. That may be the intent of this legislation, but it is not a sound intent. The petroleum industry also provided a submission and participated in the public hearings. During the Sydney public hearing, Caltex’s Manager for Government Affairs and Media, Mr Topham, stated:

We have a long history of investment in R&D, averaging approximately $15 million per annum. Our concern is that the current drafting of the legislation could leave a substantial amount of our R&D expenditure ineligible for tax credits. … We believe the eligibility rules are flawed and that the implementation timetable is unreasonable and impractical.

This has been a repeated complaint. The Minerals Council of Australia submission also highlighted their concern:

… the Bill fundamentally alters the nature of the R&D tax benefit by the replacement of—

as I said earlier—

long standing and well understood concepts with new and … completely unheralded concepts.

I note, on the examples in the biotech and surgical industries being quoted by those opposite, that those industries may not be affected by the changes in this legislation.

I believe that research and development is a vital component of this nation and of any industry, whether it is health, mining, petroleum, natural resource or environmental management, agriculture or any other. I do see, as does the coalition, immense benefit in R&D programs. The fact that this legislation seeks to remove an incentive that is integral to assisting and encouraging a diversity of companies to improve their business operations has to be of concern to everyone in this House, on all sides, and the need for clear, concise guidelines for R&D for small to medium enterprises is very important. As stated in the dissenting report by coalition senators to the Senate Economics Legislation Committee inquiry report:

The Coalition supports increased business investment in research and development (R&D)—

as we should—

and appropriate reforms to legislation to help achieve this outcome.

That should be the desired outcome of any legislation of this type: to support increased business investment in research and development. However, we cannot support legislation that has shortcomings that include the failure to have appropriate consultation, the substantial alterations of those definitions of ‘core’ and ‘supporting’ R&D, the government’s changes to the eligibility criteria, the object clause contained in the legislation and the intellectual property issues.

The new regime is due to start on 1 July, but there is very serious confusion and uncertainty out there, right across the board, and I note that the education campaign to inform companies of various sizes will not come into effect until after the legislation is passed. The education campaign needs to happen prior to the legislation changing. As I have said, the changes proposed by the Labor government have attracted substantial criticism from a variety of stakeholders, for very, very good reasons. Unfortunately, and it is typical of this government, this legislation is seriously flawed.

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