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

I speak in support of the Tax Laws Amendment (Research and Development) Bill 2010 together with the supporting bill, the Income Tax Rates Amendment (Research and Development) Bill 2010. These introduce a new research and development tax incentive to replace the outdated and complex R&D tax concession.

Expanding research and development in our business is a central requirement of building an innovative and productive country. Increasing research and development that is conducted in Australia by businesses and companies is important; indeed, it is vital to our country’s future. If we look at where R&D tax concessions came from, we go all the way back to the 1980s when it was introduced by the Hawke government, with the tax concession originally set at 150 per cent. But, as we have seen over the years, there was a problem with that—that is, companies could not claim the tax concession until they turned a profit. I see that as a bit of a chicken-and-egg problem when it applies to small and innovative start-up companies who are spending money on R&D but, as in many cases, not making a profit so there is nothing to claim. The 2008 Cutler report also highlighted that issue.

The House of Representatives Standing Committee on Industry, Science and Innovation examined national research and development funding as a part of its 2008 report entitled Building Australia’s research capacity. At that time, the committee—of which I am a member—heard evidence from Universities Australia that, in Australia, gross expenditure on research and development as a percentage of GDP stood at 1.76 per cent in 2007-08. But that was in comparison to the OECD average, where that same measure of gross expenditure on research and development was 2.26 per cent. In dollar terms that gap was estimated to be $5 billion.

Research and development comes from two main sources, of course—public institutions such as universities, CSIRO, research institutes and government organisations; and the private sector. I think it has been a challenge for everyone in this parliament over the years to increase that private sector research and development expenditure. In 2001 Australia ranked 15th out of 21 nations of the OECD for private expenditure on R&D, and yet ranked third at that time for government expenditure on research and development. In 2001 Australian private sector R&D was 0.76 per cent of GDP. But this compared to Sweden investing 2.84 per cent of GDP in private R&D, Finland investing 2.39 per cent and Japan investing 2.11 per cent. In the figures from 2007-08 Australia’s private R&D has increased so that 1.27 per cent of GDP is invested by the private sector in R&D. However, we still remain 14th in the OECD ranking for that.

Any sustained rise in private R&D leads to the development of better products and innovations that generate more economic growth, create jobs and help keep Australia at the leading edge of technological advances. As an example of the benefits that can be derived from successful developments from R&D we need look no further than the CSIRO patent on Wi-Fi technology. It has been in the news quite a lot lately through various legal cases. CSIRO first applied for its Wi-Fi patent in 1992, and of course we now all use it. Every day, anywhere you take a portable device, you are more than likely—whether it is a portable computer, an iPad, a PDA of any sort, or one of a whole heap of other gadgets—to have a Wi-Fi connection. That is one of the things that we now take for granted in the 21st century. When it was first invented it was unprecedented, of course. People did not do that sort of thing in those years, and they were not that long ago. It is estimated that this patent alone could deliver $1 billion to the CSIRO in years to come as this patent is applied and enforced—and of course actions are still going on worldwide to apply that patent to make sure that CSIRO and, ultimately, the Australian people benefit from that discovery.

In 2007-08 Australian businesses invested over $14 billion in R&D. We can do much better, and that is why the Rudd government is introducing this new R&D tax incentive. The new R&D tax incentive provides benefits more generous benefits for eligible research and development activities. It provides more than the existing concession and is better targeted towards research and development that benefits Australia. It is also substantially simpler and accompanied by improved administrative arrangements. The new R&D tax incentive will replace the existing research and development tax concession for all income years starting on or after 1 July 2010.

These bills provide for increased assistance for genuine R&D and redistribute support in favour of small- and medium-sized enterprises with annual turnovers of less than $20 million. R&D activities contribute to innovation by creating new knowledge and technologies, and by increasing productivity, jobs and economic growth it allows Australia to respond to present and future challenges. These bills will expand the number of businesses that can access government support for their R&D expenditure and investments. There are more than two million businesses in Australia but at present only around 8,000 of these businesses benefit from the current R&D tax concession.

The intention of these bills is for the higher rates of reward under the new incentive to attract more firms to the program. The two core components of this program are: a 45 per cent refundable R&D tax offset for eligible entities with a turnover of less than $20 million, as I have mentioned, and a nonrefundable 40 per cent R&D tax offset for all other eligible entities. With this change of rates and delivery mechanism there is a clearer and better-targeted definition of ‘eligible R&D activities’ that ensures that the incentive is available in circumstances consistent with the underlying rationale for government intervention and, what is more, that taxpayers get real value from it.

These bills double the base rate of existing R&D support for small to medium enterprises and raise the base rate for larger firms by a third. Instead of receiving 7.5c for every dollar in R&D, small to medium enterprises will receive 15c and larger firms will receive 10c. Small, innovative firms are big winners from the new R&D tax incentive, with greater access to cash refunds for their R&D expenditure and better rates of assistance. To give an example, suppose a company with a turnover of $10 million spends $1 million on eligible R&D activities in an income year and that they are in a tax loss position. Under the new R&D tax incentive that company would be entitled to a cash refund of $450,000. Under the existing R&D tax concession the company would only receive a tax deduction worth $375,000. Of course, there would be zero benefit if the company was not running at a profit. Profit can be many years away, and many start-up firms may never get to access it. They may actually not survive that start-up process. So small to medium enterprises will be encouraged to take the risks on R&D through the government substantially increasing the overall concessions and, for the first time, introducing payments for companies that are yet to make a profit because they have invested in R&D.

This new scheme will really help small start-ups and encourage innovation in Australian industry. The new R&D tax incentive will better target government support towards genuine R&D activities. The key elements of an approach such as this are to establish a clearer definition of ‘core R&D activities and to introduce a test for supporting R&D activities and stronger administration of the incentive. These changes will ensure that the new R&D tax incentive rewards a company’s genuine R&D, not their business-as-usual activities. The existing scheme is allowing some companies to use taxpayer dollars to subsidise business-as-usual activities rather than genuine research and development activities.

This new legislation provides a more focused definition of eligible R&D activities. The new definition of core R&D activities still covers both research and development activities but it is focused at a project level. It recognises that the innovation dividend for the economy will come from refocusing public support on genuine R&D, not on routine business activities as has been previously commentated on in many sources of the media and, indeed, in this place. Obviously, these changes will cause current recipients of research and development incentives to examine the impact of the definitional changes, and I would hope that they would then apply it to genuine R&D that does benefit the country as a whole. Business-as-usual support is not what is needed when we are talking about innovation. We want new ideas. We want support to chase those ideas so that Australia benefits.

Recognising the importance of information technology in a modern economy, the new R&D tax incentive will ensure most software R&D is treated consistently with R&D occurring in other sectors. Importantly, these bills further open up the new R&D tax incentive to foreign corporations that are resident in Australia and those that carry on R&D activities through a permanent establishment in Australia. The bills also ensure a new incentive will be available for expenditure on eligible R&D activities conducted in Australia, regardless of where the resulting intellectual property is held. That strengthens the case for foreign companies to conduct R&D activities locally.

On an underlying cash basis, the new R&D tax incentive is expected to be budget neutral over its first four years of operation. Small companies are the winners from the R&D tax incentive, with access to cash refunds on R&D expenditure if they do not make a profit and higher base rates of assistance being provided through the new 45 per cent refundable tax offset. Larger companies can invest, knowing that they can claim a non-refundable tax offset of 40 per cent of their expenditure on eligible R&D activities. The new R&D tax incentive better focuses public support on activities likely to produce economy-wide benefits. This will ensure that the new R&D tax incentive rewards a company’s genuine R&D, not business-as-usual activities.

Finally, the new R&D tax incentive is an important part of the government’s plan to encourage knowledge-creating and knowledge-using industries to boost productivity and activity in all sectors of the economy. I commend the bills to the House.

See this speech in context