Julie Owens (Parramatta, Australian Labor Party) Share this | Hansard source

I am pleased to support the Tax Laws Amendment (Research and Development) Bill 2010 and the associated Income Tax Rates Amendment (Research and Development) Bill 2010. Those who have known me for a while will know that I have a great passion for innovation in all areas and that I see our nation as one with great talent in this area. Innovation and R&D drives productivity growth and it drives the creation of national wealth. We are very good at it. Many Australians know that ours is a land with great wealth in its soil—both under it and within it—but we also have great talent in mines. Whether it is through science or research, as a percentage of our population we lead the world in terms of our creativity. We are very good at it. Fifteen years ago we led the world in solar technology; we do not now. But we did and the capacity is there to lead the world again in so many areas. When we look back at the period of the last government, one of the great regrets we will have as a nation is that, in the time of one of the greatest booms we have ever seen, we did not invest in that natural talent. In fact, our level of innovation as a percentage of GDP dropped. We dropped further and further down the OECD table until we sat well and truly at the bottom in terms of innovation between our universities and businesses at the end of the last government’s term.

We did not invest in our talent for innovation and, as a nation, we were let down as a result of that. We were one of the few developed countries in a parallel area that reduced expenditure on education as a percentage against GDP. There can be no doubt that, in the modern world of global competition, innovation must be at the core of any strategic plan that a nation has for its future. We must continue to improve the way that governments encourage business to invest in innovation because it does drive productivity and growth and it drives the wealth of the nation.

The current scheme does not get the return that we might expect for the investment that we make. Funds are increasingly going to business as usual, to projects which include parts of what we might legitimately call innovation in R&D but which go to the whole project. The consultancies that have grown up around the program have increasingly regular clients and we now find that there are only about 8,000 small businesses out of the two million out there that apply for funding. We also see a narrowing of the field of successful applicants. This is not an indication that there is bad behaviour going on. It is just an indication of a pattern that tends to happen when a grant program exists for a long period of time and consultancies get involved.

I know this because I fulfilled that role for a while before I came into parliament. I was not working in the R&D area, but I did have five grant writers that worked for me in procuring grants for small business. I know very well that over time, as a consultant, you get better and better at squeezing projects into the guidelines, extending the guidelines out a little year by year, and that your client base does tend to narrow. You get very, very good at getting grants year after year for the same businesses. There was one year when my clients received 100 per cent of the funding in one particular federal government grant category and it was well known that, if you wanted funding in that area, you had to come to me. So I do actually know how good you can get at stretching those boundaries and reducing the number of clients that receive the funding.

We are now down to a situation where, out of two million businesses, only 8,000 apply and a relatively small number of those receive the bulk of the funding. Our innovation needs to be spread across the economy and it is recognised internationally as an important driver of productivity and growth. It encompasses a wide range of activities including workforce skills, venture capital, knowledge transfer, management practices, technology uptake and, of course, R&D. In our global economy, companies must invest in R&D to improve their competitiveness and their ongoing profitability. Knowledge produced by a firm’s R&D often has benefits to other firms and to the economy as a whole—that is, the R&D can have a net positive impact beyond the benefits that accrue to the firm. However, from an individual firm’s point of view, uncertain returns from the R&D activities may mean that a firm chooses not to undertake them. Where this happens, less R&D may take place than would be desirable from a whole economy perspective. A carefully designed incentive lowers the cost of doing R&D and helps boost productivity and economic growth. To this end, this new R&D tax incentive focuses assistance on activities that are likely to deliver economy-wide benefits that would not be enjoyed in the absence of public support. It also significantly improves the incentive for smaller firms to undertake R&D.

The current scheme, as I said, does not get the return that we might expect because so much of current funds are going to what would be called business as usual. The new scheme is more generous and better targeted towards R&D that benefits Australia than the existing concession. It redistributes support importantly in favour of small and medium firms. We all know that small and medium firms are more responsive to fiscal incentives than large firms, so that is a very sensible measure. It provides cash upfront to small innovative firms, giving them the certainty they need to invest in growing business. I worked in small business for a substantial part of my career before entering parliament and I am well aware of how important that upfront cash payment is in encouraging innovation.

The new system is also substantially simpler and accompanied by improved administrative arrangements. It is also very important that we reduce the burden on businesses applying for this concession. The new incentive replaces the existing R&D tax concession for all income years starting on or after 1 July. There are two core components of the new incentive—a 45 per cent refundable R&D tax offset for eligible entities with a turnover of less than $20 million and a non-refundable 40 per cent tax offset for all other eligible entities. This effectively doubles the base rate of existing support for small to medium enterprises and raises the base rate for larger firms by a third. So, for small businesses, instead of receiving 7.5c for every dollar they will receive 15c for every dollar and larger firms will receive 10c for every dollar. The new refundable tax offset provision also makes upfront cash support available to many more small- and medium-sized companies. The new tax offset is available to corporations with a turnover under $20 million. The current law sets the cap at companies with an annual group turnover of less than $5 million, so there is a substantial improvement for small- to medium-sized enterprises there. The government also aims to lift R&D performance through increasing the number of businesses undertaking R&D up from that relatively small 8,000 businesses that apply now. The government has a responsibility to deliver value for money for taxpayers through the better targeting of the scheme and I believe that the new legislation achieves that through a more focused definition of eligible R&D.

The new definition is simpler than the old one. Core R&D activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience but can only be determined by applying a systematic progression of work that is based on principles of established science and proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions and is conducted for the purpose of acquiring new knowledge, including knowledge or information concerning the creation of new or improved materials, products, devices, processes or services.

The new definition of core R&D activities still covers both the research and the development activities. The government has undertaken an extensive consultation process on this, including inviting public submissions on a consultation paper and two exposure drafts of legislation. That the member for Tangney could see that as a lack of consultation defies belief because there has, as I said, been extensive consultation over two exposure drafts and prior consultation. The government received over 380 submissions during these three rounds of consultation and held public hearings which were attended by 550 people—again, considerable consultation in this area. There have also been extensive discussions with key industry representatives and advisers over almost a year.

The government have made some significant changes where stakeholders have made constructive suggestions for improvement, as we should. In particular, we have simplified the R&D definition—and I have read that out—and the dominant purpose test for supporting R&D has been limited to production activities and activities on the exclusion list—again, simplifications requested by the sector itself. The government still plan for the new R&D tax incentive to start on 1 July 2010. We acknowledge that some industry groups have called for its introduction to be delayed for a year but a delay would mean that Australian companies do not get the very substantial benefits that the new scheme offers, which is a doubling of benefits and cash upfront to smaller firms.

Introducing the new incentive is critical to Australia’s future—to enhancing productivity, to making us more competitive and to creating new wealth and jobs. I have to say I am quite shocked to hear that the opposition will not be supporting these amendments. Stakeholders in the biotechnology and pharmaceutical industries have been supportive of the new incentive and are keen to see the new R&D tax incentive enacted as soon as possible. The information technology industry has also welcomed the revised approach to software R&D. I am also pleased that the new scheme will reduce compliance costs—that is very important for small business. The measure provides a tax benefit above the normal corporate income tax benchmark and the benefit is voluntary, so all associated compliance costs are also voluntary but we still must work towards keeping them to a minimum. The draft R&D provisions are shorter, clearer and simpler than the existing R&D provisions, mainly because we have avoided the four different benefits available under the existing law and replaced them with a single entitlement to a tax offset. They are important simplifications.

There will be compliance costs associated with the change from the former arrangements during the early stages of the new incentive but these will reduce as taxpayers become accustomed to the new scheme and adjust their practices. We have also provided $38 million in the 2009-10 budget to ensure that AusIndustry and the ATO are equipped to assist taxpayers in adjusting to the new scheme. AusIndustry will provide guidance and educational material to industry, including specific information on those industry sectors in which there is most concern, including manufacturing and mining.

These are very sensible reforms to an incredibly important area of government incentives, namely research and development. As I said, research and development and innovation, particularly in the modern world, drive growth and wealth creation and are fundamental to any nation seeking to position itself as a strong economy in the future. I commend these bills to the House.

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