Richard Marles (Corio, Australian Labor Party, Parliamentary Secretary for Innovation and Industry) Share this | Hansard source

Can I start by thanking the members who have contributed to the debate on the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. In summing up, I would like to start by saying that in the innovation and research and development space we need to look at what the Rudd government inherited after 11½ years of the Howard government. At the end of the Howard government, what we found in this country was a level of public expenditure on research and development that was simply inadequate and that was growing slowly. We had seen the private spend on research and development hit significantly by the reduction in the tax concession that was introduced at the outset of the Howard government, which meant that for the first few years of the Howard government we actually saw the private spend on R&D decline in Australia. Whilst it started to grow again in the latter part of the Howard government, by the time of its end we still found that the private spend on R&D in Australia was less than the OECD average.

When you look at collaboration, which is regarded as the key driver of innovation, at the end of the Howard government we had a collaboration situation in Australia that was simply pathetic. Throughout the period from 2004 to 2006 Australia ranked stone motherless last within the OECD in terms of the level of collaboration between the private sector and the public research institutions. When you look at the spend on national knowledge, which is a statistic kept by the OECD, at the end of the Howard government Australia was spending about 3.9 per cent of GDP against the OECD average of 4.9 per cent. Again, between 1998 and 2003 that spend grew by a much smaller rate than what was occurring in the rest of the OECD.

All of this was painting a picture of Australia being a cut-price, low-tech economy, which was driving wages down and taking Australia away from being a modern developed economy. On coming to government the very first thing that the Rudd government did in this area, as has been mentioned by a number of speakers in this debate, was to implement the Cutler review of Australia’s innovation system. That led to the policy statement of the government last year entitled Powering Ideas, which set forth a 10-year strategy on innovation within Australia. That was backed up by a significant increase in our spend in this area during the 2009-10 budget. We saw a 25 per cent increase in the spend on innovation, industry, science and research in Australia—the single largest increase in expenditure that this area has ever seen. We saw the raw figures go from a spend of $6.88 billion to $8.58 billion in that budget.

When you look at the levels of public research, we see in the 2009-10 budget $1.2 billion more being spent than was spent in the 2007-08 budget. We see areas of activity to try to promote collaboration. For example, the Researchers in Business program, which forms part of Enterprise Connect, places in businesses young researchers at the cutting edge of technology so that collaboration and that sharing can occur.

When you look at trying to improve the private spend on R&D, we have this raft of legislation, which deals with R&D tax credits. This is a critical plank in the strategy to improve the private spend on research and development in Australia. The very first aspect of this bill will cut out the wasteful expenditure which is going on in the current R&D tax concession program, which was implemented by the Howard government. A lot of what is being funded under that program is actually business-as-usual activities. It is not R&D in the sense of creating new knowledge or developing new products; it is just expenditure that would have occurred if there were no tax incentive at all. Take for example the customising of an existing software platform for your business. On purchasing the software program you would do that even if there were no R&D tax incentive. Clearly, that is not an efficient way to spend public money. What we seek to do through the R&D tax credits is make sure the expenditure is clearly focused on genuine R&D activities and not on business-as-usual activities.

There have been assertions made from the other side that in tightening that definition the new scheme will not adequately cover development as opposed to research activities. That is simply not true. The object clause includes both research and development activities and refers to activities undertaken for the purpose of generating new knowledge in either a general or applied form. The development aspect of R&D is captured by the term ‘applied’, which is consistent with the approach taken in the Frascati Manual. The definition of ‘core R&D activities’ includes experimental activities ‘conducted for the purpose of generating new knowledge (including about the creation of new or improved materials, products, devices, processes or services)’. The expression ‘improved’ within ‘new or improved’ means experimental developmental activities.

There has also been some comment on the dominant purpose test. The dominant purpose test is a well-defined concept that is commonly used in tax law. The explanatory memorandum states that ‘dominant purpose’ means ‘the prevailing or most influential purpose’. It is consistent with the terms used throughout tax law. Following the passage of this bill AusIndustry will produce an abundance of guidance material to assist firms to prepare their registration, including guidance on how the application of the dominant purpose test applies.

In tightening this definition we have provided a much closer connection between core R&D research and this policy that supports that R&D activity so that at the end of the day what is being supported is genuine research and development. With the savings that come from that tightening of the definition we will be able to increase the base rate provided to those companies which are engaging in R&D activities in a very significant way. It will be 45 per cent for small businesses—businesses that have a turnover of less than $20 million—effectively doubling the rate of assistance from 7½c to 15c, and 40 per cent for other companies, which increases by a third, from 7½c to 10c, the effective rate of government assistance.

It has been said by those opposite that in effect what is going on here is a revenue-raising measure. It has been asserted by the shadow Assistant Treasurer. That is patently ridiculous. The Treasury has costed the changes to the R&D tax credit and made clear that this is a proposal which is revenue neutral. Indeed, that was confirmed in the Senate Economics Legislation Committee’s report on this bill. That report absolutely took into account each of the key aspects of this bill: the increase in the base rates and the estimated change in the take-up of the R&D tax credit, as well as the abolition of the 175 per cent incremental tax concession and the tightening of the eligibility criteria.

The R&D tax credit has a particular focus on small business by having the small business threshold. Under the old R&D tax concession scheme we had a situation where there were two million businesses that could potentially have availed themselves of a form of R&D and yet only 8,000 were doing so. We need to see more R&D conducted in small businesses, hence the focus on small business. We have also made sure that this is an R&D tax credit, that there is a credit nature to this proposal, which means that those businesses in a tax loss situation will still be able to get a credit in respect of the R&D activity they are undertaking. That is really important because quite often the R&D activity is taken at the beginning of the development of a product, when a profit may not necessarily be turned.

Again, there have been assertions from the opposition in relation to the level of consultation around the R&D tax credit legislation. That is simply unfounded. The changes to the existing R&D tax concession were first canvassed in the independent review of the National Innovation System back in 2008. There has been an extensive program of consultation over the last 12 months. Industry has had numerous opportunities, including three rounds of public consultation and a Senate committee process, to participate. The government received over 380 submissions during these three rounds of consultation and held public hearings attended by 550 people. The government has made some significant changes where stakeholders have been able to make constructive suggestions for improvement.

The coalition has also referred to drafting errors as a reason for delaying the passage of the bill. The Senate committee report did not identify any legislative drafting errors. A number of minor referencing errors in the explanatory memorandum were identified, and these have already been addressed in a correction to the explanatory memorandum tabled in this chamber back on 2 June.

I will conclude in summing up by referring to a recent report by KPMG which ranked Australia as No. 1 in the world for incentives which foster R&D activity. The report states:

This change is a result of Australia adopting a new R&D tax credit as of July 1st, 2010 …

It goes on to state:

For many R&D operations, such as spin-offs from larger firms or university research projects, the potentially refundable nature of these tax credits will represent a powerful incentive to structure within the defined revenue limits.

The same report ranks Melbourne and Sydney as, respectively, the No. 1 and No. 3 cities in the world for their R&D tax competitiveness. In doing so, it places them ahead of places such as London and New York.

This is a clear point of difference between the government and the opposition. We see the role of innovation as utterly critical to improving productivity within the workplace in Australia. Indeed, if you look at the history of productivity growth in Australia, which has inevitably been driven by Labor policies, this is the new frontier. Having a vibrant innovation space is what will see the next leap in productivity within this country. That is something that we are committed to; that is something that the Howard government utterly ignored and that the opposition are continuing to ignore. But it is critical for the development of our country’s economy, and a key plank in that is these bills. I commend them to the House.

Question put:

That this bill be now read a second time.

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