Brendan O'Connor (Gorton, Australian Labor Party, Shadow Minister for Employment and Industry) Share this | Hansard source

I rise to speak to the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, but before I do that I move as a second reading amendment:

That all words after "That" be omitted with a view to substituting the following words:

"whilst not declining to give the bill a second reading, the House:

(1) notes that:

(a) research and development continues to fall in Australia and sits at 1.79 per cent of GDP;

(b) private research and development is only 0.9 per cent of GDP; and

(c) Australia is close to the bottom of the OECD ratings for collaboration between industry and researchers; and

(2) criticises the Government for its staffing cap at the CSIRO and its continued attempts to politicise science and research and development in Australia".

As we debate the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, first and foremost we need to understand the floundering economic environment we find ourselves in under the Morrison government. Undoubtedly, the devastating bushfires and the coronavirus are having a dampening effect on the Australian economy, but the Prime Minister and the Treasurer should not be using the fires and that virus as excuses for their longstanding failures on the economy.

The most recent labour force figures released by the Australian Bureau of Statistics are a reminder of the deep structural issues in the labour market and in our economy. There are, for example, almost two million Australians looking for work or for more work because of the economy, which is floundering on the Liberals' watch. Labor has been highlighting the issue of underemployment and calling on the government to take action for more than five years. The underemployment rate at 8.3 per cent and the underutilisation rate of 13.4 per cent for the month of December are far too high. Under the Morrison Liberal government serious structural issues in the labour market continue to generate insecure work and historically low wages growth.

Labor, and particularly my colleagues the Labor leader and shadow Treasurer, have consistently been calling on the government to heed the warnings of the Reserve Bank and the warnings of business and economists about the floundering economy, an economy that was struggling before the bushfires fully hit and the coronavirus became a health emergency. As they've noted, the most recent growth figures were quite lacklustre. Annual growth was well below trend in the budget forecasts. The midyear budget update said unemployment would rise and downgraded growth and wages. It said consumption was at its slowest pace since the global financial crisis and the private domestic economy had already gone backwards for two quarters.

Wages are growing at a fraction of company profits: just one-fifth of the pace of profits. This is a result of the marketing based approach of the Prime Minister, whose strategy is to buy an election but who has no plans for economic growth except slogans. The lack of an economic plan certainly extends to the issues before us in this bill. This is a government with no plan for science, no plan for research and development and no plans for innovation.

Research and development are fundamental components for growth, particularly in Australia's developed, knowledge-based and high-skills economy. The jobs of the present and the jobs of the future depend on both public and private research and development. Research and development is particularly important for the capital formation and capital deepening of companies operating in the country. In general terms, this means businesses are investing in their physical and intellectual property, creating jobs in the process. In the Productivity Commission's annual Productivity Bulletin published in May 2019 they note that although capital growth hovered around 1.9 per cent for the last few years, this was well below the historical average of four per cent from 1974-75 to 2017-18. In its words:

This is troubling because investment typically embodies new technologies, which complement people’s skill development and innovation. This is especially so for investment in research and development, where capital stocks are now falling.

And even more so new investment. Growth in R&D capital formation is even more subdued than capital formation generally, so that R&D investment share of total investment has also fallen. What confidence can Australian researchers—our best and brightest—have as R&D continues to be smashed under this government's watch?

The latest gross expenditure in research and development as a proportion of GDP decreased from 1.88 per cent to 1.79 per cent according to the latest data from the ABS. The total human resources devoted to business R&D are still well below what was devoted when the government took office. In 2013-14 the total person years of effort had fallen almost five per cent. Business R&D spend has hit 0.9 per cent of GDP, falling below one per cent of GDP in the previous data. This is a continuation of an overall downward trend in research and development under this government's watch, and one that stakeholders suspect could be exacerbated by this bill. I will return to this point later as I outline why this bill requires further scrutiny.

As a recent Australian Institute of Company Directors report detailed, Australia's total gross domestic spending on research and development is currently ranked 21st within the OECD, and, while the global trend is for national business expenditure on R&D to grow, Australia's has fallen. As such, investment levels are below countries such as South Korea, Israel, Sweden, Denmark, Finland, Iceland, Norway and Singapore, and many, many more. Australia is close to the bottom of the OECD ratings for collaboration between industry and researchers. According to the OECD index of research and development investment by government, Australia is falling. This is a trend that must be reversed if we want to support jobs, support economic growth and remain globally competitive.

By investing in R&D, governments provide the resources for universities and research institutions to produce results that inspire innovation, private investment and further research and development. Strong investment in R&D allows all Australians to share in the benefits of new industries, new products, good jobs and a higher standard of living. In this context, it is concerning that the current government has reintroduced this controversial bill amending the research and development tax incentive. In the last parliament, when the government first sought to cut around $2 billion from R&D, it slipped the measure into a bill entitled 'Making Sure Multinationals Pay Their Fair Share of Tax in Australia'—a misnomer if there ever was one, given that a large number of firms affected are Australian start-ups and small and medium enterprises.

Labor supports the intent of measures to maintain public confidence in the integrity and financial sustainability of the research and development tax incentive as per the Senate economics committee's report. The government, however, is yet to properly explain how the minor tweaks to the bill before parliament have heeded the concerns—and I make the point: the bipartisan concerns—of the Senate committee. That Senate committee unequivocally stated that the research and development measure 'should be re-examined in order that Australian businesses are not fully disadvantaged.'

Labor is proud of creating the R&D tax incentive, the single largest investment the Commonwealth makes in supporting science, the research industry and innovation in our economy. I contend that only Labor has sought to address the decline in R&D spending in Australia. Labor continues to consult widely on the impact of the R&D tax incentive measure and fight for researchers against the government's anti-science agenda. But I would say again: it is clear the government's lack of an economic agenda, coupled with the anti-science backbench, poses a serious threat to our economy, our industries and present and future workforces. Just take, for example, the recent call for an oversight of research in this country. Indeed, the government's arbitrary staffing cap has seen jobs cut at the CSIRO while others are placed on insecure contracts and conditions. We never hear a peep from this government about supporting those scientists. We have a situation where one of our most remarkable and iconic institutions is being undermined by the insecure work and the lack of security for those researchers. The government is doing that wilfully—not by neglect—by making sure that there is no secure employment for many researchers, and that is of course leading to major problems of morale and proper research. It has consequential effects upon the research and the work undertaken by that remarkable institute.

The anti-science mob in the Queensland LNP also passed a motion at the Nationals' Federal Council, calling for a national science watchdog to oversee scientific papers. Now, that is a blatant attempt by members of the government to undermine the integrity of peer review with political intervention. Can you imagine the member for Dawson oversighting the work of scientists to see whether they're getting it right? Can you imagine those members who are involved in supporting that motion of the Nationals' Federal Council interfering with the work of scientists? But that's the sort of rubbish we're hearing from government members and their intent to subvert proper research and interfere with the work of eminent scientists and researchers.

After months without meeting scientists after the election, the minister met with Australian scientists, including the CSIRO and the Bushfire Cooperative Research Centre in response to the bushfire crisis. The question remains: what real action will result from that meeting? Minister Andrews, who's at the table now, comments that debating the existence of climate change is a waste of time. Indeed, she says it is a concern. For that reason, Labor urges the minister to defend Australian scientists who have consistently warned of the effects of climate change on natural disasters. We've just been privy to firefighters coming out and talking about the change in the nature of fighting fires. They've been telling us what has happened. We've had that. But of course, in 2008 we had the Garnaut report and review that already made that clear—and scientists told us what would happen. We need to encourage scientists to speak openly, without fear or favour, on the facts. And we need a minister and a government to support that good work. We would argue that is not happening and, in fact, that they're being dissuaded from speaking out on such important matters.

The government should take the opportunity to, firstly, provide funding certainty to the bushfire cooperative research centre; funding is set to expire at the end of June 2021. The centre is building disaster resilient communities across the country by bringing together all of Australia and New Zealand's fire and emergency service authorities with leading experts across the range of scientific fields; hence the warning of CSIRO scientists on climate change. As The Australian reported earlier this month, at a meeting of the Australian Disaster and Climate Change Resilience Reference Group in late 2018, CSIRO senior climate scientist Dr Pep Canadell warned senior mandarins from two dozen government departments and agencies that a warming planet will trigger a rising likelihood of angry summer events associated with severe heatwaves, power blackouts and fierce bushfires. Indeed, we would also ask the government to take an opportunity, and indeed the minister, to confirm that they have listened to the CSIRO scientists. We need to make sure that that has occurred and that there's no further obfuscation about these issues.

We believe that it's critical for government to do those things and send the right message to scientists and others that they're on their side. We need to make sure that the government's listening while also making a determination on the impact of climate change and developing a plan to deal with the ramifications. We would also need the government to clarify that it agrees with CSIRO scientists who state unequivocally that 'recent warming can only be explained by human influence'. Before anyone opposite argues this is a segue, the minister for science herself noted after meeting these scientists that the government bushfire response would focus on the factors contributing to the extent and severity of the fires as well as new technology and citizen science to aid 'medium and longer term solutions'.

Labor is concerned, and I mentioned this earlier, that the Morrison government's cap on public sector staffing numbers is hurting the CSIRO and undermining its role in advancing science and innovation. The CSIRO staff association recently made a submission to the Senate Standing Committees on Legal and Constitutional Affairs inquiry outlining the impact of a 5,193 person cap on permanent staff on Australia's scientific capability. The submission highlights reports of increased use of external contractors, which is putting a number of major projects at risk and is sidestepping secure local jobs. Reports have revealed that staff recruitment has been placed on hold and outsourcing has increased to avoid the cap. This is the institution that invented Wi-Fi, plastic bank notes, Aerogard—just to name a few. Research and innovation like this are under threat, we would contend, by the government's approach and the way it treats this body. We would say that the government has no regard or little regard for scientists, and this staffing cap is another example of simply a continuation of its war on science.

In the big scheme of things, the government appears to be if not at war then ambivalent about Australia's modern and innovative manufacturers. Stakeholders have indicated the significant reductions in research and development. Support that's outlined in this bill dwarfs the Morrison government's announcement of funding to support local Australian manufacturers. Fifty million dollars is an insult to the industry while it is slashing $2 billion in research and development tax incentives. The government's recent announcement of $160 million of a Manufacturing Modernisation Fund only contains $50 million of government funding, with the majority investment onus put back onto industry. Research and development is key to the future of Australian industry, particularly the future of manufacturing in Australia. The advanced manufacturing research centre competitiveness plan calls on the government to improve government support for business-led R&D and encourage industry research and collaboration.

We would argue that if the government were serious about helping manufacturers to grow, to become more competitive globally and to develop technologies, they would be investing in research and development either directly or indirectly. So let's look at the research and development tax incentive in more detail. R&D incentives have been a feature of the tax system since the 1980s, but the current research and development tax incentive was introduced in 2011 by the previous Labor government. The incentive is the principal mechanism used by the Australian government to stimulate industry investment in research and development by providing a tax offset for eligible R&D activities and is considered to encourage such activities that might not otherwise be conducted and recognises that the new knowledge gained is likely to have a wider Australian economic benefit. The two core components of the incentive are a refundable tax offset at the rate of 43.5 per cent for certain eligible entities whose aggregate turnover is less than $20 million a year and a non-refundable tax offset of 38.5 per cent for all those other eligible entities that may be used to reduce an entity's income tax liability for an income year with excess carried forward to be applied in future income years. The incentive is currently subject to a $100 expenditure threshold. This and some associated provisions are currently legislated to sunset on 1 July 2024.

According to Treasury, approximately 13,000 companies are registered in the R&D tax incentive scheme, which is jointly administered by the Australian Tax Office and the Board of Innovation and Science. Of these, approximately 10,000 companies claim the refundable tax offset and the remaining 3,000 companies claim the non-refundable tax offset. In late 2015—just to give some context to this bill—the then Prime Minister Malcolm Turnbull commissioned a review of the incentive. The review panel was chaired by the then chair of the Board of Innovation and Science, Mr Bill Ferris AC. Along with him, there was Australia's Chief Scientist, Dr Alan Finkel, and the then Treasury Secretary, Mr John Fraser. It is now known colloquially as 'the three Fs review'. The review panel found that the program fell short of meeting its stated objectives of additionality and spill overs, and made six recommendations to be considered as a package of measures to improve the overall effectiveness and integrity of the program while encouraging additional research and development.

This bill is a partial implementation of some of those recommendations. Following an announcement in the 2018-19 budget, Treasury conducted a consultation process on proposed changes to the incentive—from 29 June to 26 July 2018. In a telling sign of the government's aversion to scrutiny and transparency, submissions to the consultation were only made public, and publicly available, in late January 2020 after a freedom of information request from my office. I won't go into those submissions at length; no doubt, there are other occasions on which we will speak to those, and I can assure this place that I will be engaging with the authors of those submissions. But those submissions raised a number of concerns about the proposed changes to the incentive scheme. Labor will consult closely with those stakeholders and scrutinise their concerns through the Senate committee process, which will have a bearing on the outcome of this bill.

The bill has the following proposed reforms. Schedule 1 to the bill claims to improve the targeting of the incentive through the following changes: increasing the R&D expenditure threshold from $100 million to $150 million and making the threshold a permanent feature of the law—I note that 'the three Fs review' recommended a $200 million threshold and made no recommendation about a sunset clause; linking the R&D tax offset for refundable R&D tax offset claimants to claimants' corporate tax rates; and a 13.5 per cent premium, which ensures an alignment of changes to the corporate tax rates with lower tax rates for businesses with a turnover of less than $50 million.

Another component of the bill is capping the refundability of the R&D tax offset at $4 million per annum. However, offset amounts that relate to expenditure on clinical trials do not count towards that cap. Further, the bill increases the targeting of the incentive to larger R&D entities with high levels of R&D intensity, reducing the benefits provided to certain entities undertaking R&D activities and increasing the benefits to others. Large R&D entities with aggregated turnover of $20 million or more for an income year are entitled to an R&D tax offset equal to their corporate tax rate plus one or more marginal intensity premiums—that is, rather than a flat 8.5 percentage point premium. This is based on R&D expenditure expressed as a proportion of the entity's total expenses. The intensity premiums differ from those of the three Fs review but are slightly more generous than those proposed in the previous term. So, as I say, there's a small change to the bill that was proposed in the previous term.

Schedules 2 and 3 to the bill make a number of amendments to improve the integrity, administration and transparency of the incentive. These are non-controversial.

Many stakeholders have reached out to Labor and reiterated their concerns about the intensity thresholds. Stakeholders have argued that the bill may impact upon existing business decisions and is of concern to many firms of all sizes and across many industries, including manufacturing, mining, renewable energy, pharmaceuticals, biotech and others. Of course, it's also worrying small businesses and start-ups. As the tiered intensity premium rewards those who dedicate a higher proportion of their expenditure to R&D, manufacturers are concerned that this may punish firms that manufacture domestically and thus have high non-research-and-development expenditures domestically. For example, the base premium would be 4.5 per cent compared to 8.5 per cent under the current arrangements; however, there is a higher premium, of 12.5 per cent, for those who dedicate a significant proportion of their spending to research and development. Australian manufacturers, who spend proportionately more on their domestic operations, including on workers and ongoing capital expenditure, note that it would be very difficult for them to reach the higher premium unless they were to offshore their manufacturing.

Industry is also very concerned that the government is not implementing the three Fs' second recommendation of 'a collaboration premium of up to 20 per cent for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly funded research organisations'.

Labor, we would contend, is the party of research and development. We invented this scheme; we put it together. We knew that there had to be something in place that encouraged public and private investment in research. And, of course, we have long held aspirations of increasing R&D as a percentage of GDP. Labor has publicly supported the intent of measures to maintain public confidence in the integrity and financial sustainability of the tax incentive scheme, as per the Senate Economics Legislation Committee's report.

So let's be very clear: our position at the moment is that we've got some major concerns about the way in which the government deals with these issues, including the way in which it approaches science and relying on our scientists for good public policy. We are not saying that there are not considerable issues that might beset this scheme. That's why we have an open mind on some of the issues that have been raised either by the government or by stakeholders. We're not saying the scheme is by any means perfect; you can always look to improve upon a scheme. We don't want to see taxpayers' money wasted in a deadweight loss situation where companies are accessing taxpayers' money but not providing benefit to the taxpayer or acting in the national interest. These things have to be considered, which is why we will be referring the bill to a comprehensive Senate inquiry. We want to have a very good look at this bill. We want to have real and genuine engagement with the stakeholders who are going to be impacted, adversely or otherwise, by the proposed bill if it is not defeated or amended. These are important things that need to be done. The opposition will hold the government to account. If this bill is to pass, Labor will seek to improve the bill if we get an opportunity. But, before we formalise our final position on this matter, we do need a comprehensive examination of the effects of this proposition upon companies across all sectors of our economy.

The bill, of course, is being debated at a time when public and private research and development continue to slide as a percentage of GDP. The government is yet to properly explain how measures or their minor tweaks from the last iteration of the bill before parliament have heeded the bipartisan concerns of the Senate committee that the research and development measure 'should be re-examined in order to ensure that Australian businesses are not unfairly disadvantaged'. As such, Labor believes it is imperative that we refer the bill to the Senate Economics Legislation Committee and interrogate the potential impacts of the bill, including its timing and the economic impacts of these reforms.

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