Kim Carr (Victoria, Australian Labor Party, Shadow Minister for Industry) Share this | Hansard source

Yes, that is indeed the case, Senator Conroy. We finally get to see these measures. As my colleague Senator Sherry has already stated in foreshadowing the moving of his second reading amendment, Labor do not believe the scheme will be as good as it could be. We are suggesting that the government make some further changes to ensure that the scheme is feasible and that it provides maximum benefit in terms of boosting Australia’s venture capital performance. I will come back to that in a moment.

I now take this opportunity to discuss schedule 3. Schedule 3 of the bill makes amendments to the tax law relating to the 175 per cent premium research and development taxation concession and the tax offset for small companies. The bill makes 10 technical amendments to clarify the law, to remove unintended consequences and to seek to ensure that the law accurately reflects the original policy intent of the research and development taxation changes introduced in 2001. There are three main tax concessions that companies that incur expenditure on research and development may claim. They may claim the accelerated R&D deduction—that is, the 125 per cent concession. There is the premium incremental concession, at a rate of 175 per cent for research and development expenditure above the average R&D expenditure over the preceding three years. Then there is a refundable tax offset for small companies which provides the equivalent to the value of the R&D deduction as an offset where companies are not liable to pay tax.

This bill amends arrangements for the premium concession and the offset. There is no need to repeat the full range of the long list of amendments as they are fairly non-controversial. They seek to fix problems that the government’s legislation actually put in place in 2001, so you would have to ask yourself why it has taken so long to identify some of these problems and why we are only now finally moving to address those concerns.

The government has recently announced that it will be making further and more substantial changes to the premium R&D tax concession. It will be opening up eligibility for this concession to multinational companies which conduct R&D in Australia but hold the intellectual property offshore. This involves the so-called ‘beneficial ownership test’. This reflects the changes that have been asked for by numerous parliamentary committees, and of course these are matters that the Labor Party has been pursuing for some time. Personally, I have been seeking to push these changes since I returned to this portfolio late last year.

Given the experience of this bill, however, I cannot help but wonder how long it will be before we will see legislation giving effect to the other particular changes. Presumably, we have to wait until after the election, with the prospect of a new government, to actually pursue these changes. More importantly, while Labor supports the removal of the beneficial ownership test for the premium concession, the fact is that this policy reflects a half-hearted approach by this Howard government—as does the whole industry statement that gave rise to it. There are other fairly basic issues that neither the government’s announcement nor the bill that is before us today has sought to address. Firstly, there is the concern that the premium concession has become an administrative nightmare and the government’s industry statement has done nothing to change that situation. Secondly, every man and woman and his or her dog—including the Productivity Commission, I might say—realises that the eligibility criteria for the tax offset provides perverse incentives for small high-tech businesses to actually limit their research and development spending. But the government has made no move to amend those threshold arrangements. You can only presume that, as the government has not done that in the industry statement and has missed that opportunity, clearly it has no intention of fixing this problem. Beyond that there is serious potential to improve the R&D tax concession arrangements overall. More broadly, there is a serious need to improve Australia’s business research and development performance.

I will take this opportunity to draw attention to the fact that Australia’s research and development performance under this government is nowhere near what is actually required for Australians as a collective to actually keep their heads above water. Australia invests only 1.8 per cent of GDP in research and development, well below the OECD average of 2.3 per cent. Business spending on research and development since 1996 has grown at half the rate it grew at over the previous decade. It has actually plummeted from 11.4 per cent to only 5.1 per cent.

If we turn to manufacturing, we see that the story is even grimmer, with the average annual growth rate slipping from 10.6 per cent to only 1.9 per cent. This contrasts with the performance of our competitors, and we can see just how much of a gap is now opening up between Australia and them. Let us look at China. China has committed itself to lifting its research and development expenditure as a proportion of its GDP to 2.5 per cent by 2020. That is up from 1.2 per cent in 2002 and 0.6 per cent in 1995. China is doubling its expenditure on research and development every seven years. We now have the situation of China, as a matter of deliberate policy, increasingly moving from low-end manufacturing to high-end manufacturing. We have the situation of the Chinese government spending extraordinary sums of money on its research infrastructure to the point where it is very likely that we will see their researchers being paid more than ours and they will have an opportunity to pursue research on equipment far superior to what is available in Australian universities. I take the view that it is only a matter of time before we are finding that Australia’s best researchers are actually working in Beijing.

In 2006, China overtook Japan as the second largest spender on research and development behind the United States, with spending growth of 20 per cent over the previous year. The Chinese are already the second largest in the world in terms of their expenditure on R&D. Every other developed economy is responding to this challenge with a sense of urgency, but not the Howard government. Its apathy has been made abundantly clear through its industry statement and through the last budget. This is not a government with a long-term agenda. It is not a government that is committed to a sense of urgency in providing Australians with the tools necessary to maintain their productivity and competitiveness.

Back in 1996, despite committing to improve our international ranking in terms of expenditure on business R&D as a share of GDP—that was the election commitment the Howard government made in 1996—the Howard government’s main policy after it was elected was to cut research and development, and in particular cut research and development taxation concessions from 150 per cent to 125 per cent. This was not something they went to the election with, of course; this was not the policy they put to the Australian people, but it was the policy they put to this parliament after the election. This has been a consistent pattern of this government throughout the last 11 years: they say one thing before an election and do exactly the opposite after an election.

As a result of this policy and other changes that have occurred in terms of the corporate taxation rates, the value of the base research and development concession has fallen under this government from 18c in the dollar in 1996 to 7.5c today. There was some hope that the government’s recently released industry policy statement—which, I might say, took 11 months to put together—might attempt to remedy the neglect of the national innovation system. I am too kind to say to Minister McFarlane that he has failed, because I do not think he tried. I do not think there was a serious attempt to address those fundamental failings of Australia’s national innovation system through this policy instrument. In fact, it is instructive that this government announced its industry statement the week before the budget. It was such a low priority for the Treasurer that it was not even worth a mention in the budget speech. We all know that the arrangements made by that statement were fundamentally changed on the weekend prior to the announcement where the government sought to double the period of forward commitments that were announced in that industry statement. We also now know that the finance department gave a cursory glance to those costings. They were simply flat line assumptions that took out any commitments from the four-year basis on which the program was planned through to the 10 years of the announcement in the statement one week before the budget.

When we look at the details and we see what progress has been made, we see there are a number of problems this country has to face up to, yet this industry statement failed to deal with those questions. For example, benchmarked against the United States economy, Australia’s labour productivity has fallen from a peak of 85 per cent in 1998 to just 79 per cent in 2005. We have almost lost the gains that were made in the 1990s; labour productivity growth has fallen from 3.2 per cent in 1998-99 to 2.2 per cent in 2003-04. The government’s own budget papers indicated that officials expect zero productivity growth this year; and growth in export volumes has been slower over the last decade than it has been at any time since World War II. Over the past five years manufactured exports have recorded a growth of just 0.4 per cent a year compared to the 16 per cent record achieved under Labor. When it comes to innovation, Australia has now slipped to 24th on the World Competitiveness Index and is about to be overtaken by India. Out of 125 countries, Australia is ranked 25th on university-industry research collaboration, 28th on company spending on research and development, and 30th on the government procurement of technological products based on technical performance and innovation rather than simply price. Australia is ranked 35th in capacity for innovation, which measures whether companies conduct formal research or pioneer new products and processes, and we are placed 35th in the availability of scientists and engineers. At the World Economic Forum these measures were all identified as ‘notable competitive disadvantages’. I say that Australia is facing these acute challenges and we have the opportunity to do something about it. But, rather than lifting our performance in global terms, we are falling behind.

The Treasurer said he would try to explain how we were to invest in the future. We talked about what the options were in terms of innovation or the better use of technology—these things did not occur to him; they did not appear in the Treasurer’s statement explaining the government’s budget. It is not surprising to some of those concerned in this chamber that the OECD says:

Most of the rise in material standards of living since the industrial revolution has been the consequence of innovation.

It says innovation has long been the main motor of economic growth. It is not just the OECD that makes this claim. Alan Greenspan, who has a world-class reputation as an economist, made this point in February 2004:

Over the past half century, the increase in the value of raw materials has accounted for only a fraction of the overall growth of US gross domestic product. The rest of that growth reflects the embodiment of ideas in products and in services that consumers value. This shift of emphasis from physical material to ideas is the core of value creation appears to have accelerated in recent decades ... ideas are at the centre of productivity growth.

By completely ignoring the issue of innovation and productivity, I think the Treasurer has shown that this government has no credibility when it comes to understanding the drivers of economic growth. It has no credibility when it comes to securing Australia’s economic future beyond the mining boom.

There is no comparison between what the government is arguing in terms of innovation and what the Labor Party are putting forward. Labor understand that in this country we have a complex innovation system. It has many elements to it—there are many moving parts. But it needs to be understood as a whole and thought about in a strategic sense. That is why, on 24 April, Mr Rudd released Labor’s new directions in innovation paper. This shows that there is a need for a much bigger picture in the approach that the Commonwealth should take on the question of innovation. The first thing to make clear is that a Rudd Labor government would actually take responsibility and show national leadership on innovation. That is why we argue in our 10-point plan for innovation how important it is that the Commonwealth front up to its responsibilities. Labor’s innovation plan has been very well received—and I am sure that Senator Brandis will appreciate this point. Our willingness to show national leadership and to bring together the disparate parts of our innovation system has been widely praised. A recent Business Review Weekly editorial described Labor’s proposal to bring responsibility for industry innovation, science and research back into a single ministry as ‘fundamentally important’. It said that it addresses a ‘core issue that has guided or misguided national innovation policy in the past decade’.

Coming back to the thrust of this bill, and particularly schedule 3, Labor support all of these administrative amendments for improving the operation of the taxation scheme—particularly the concession scheme. But we wait with bated breath to see how long it will take for the Howard government to introduce legislation removing the beneficial ownership test from the premium concession, given that it has taken them a year to get this particular measure before this chamber. We certainly will not be holding our breath for any further enhancement to the research and development taxation concession. That ship has clearly sailed under this government.

On behalf of Senator Sherry and the opposition, I move:

At the end of the motion, add “b ut the Senate:

(a)

condemns the Government for its failure to promote the venture capital industry; and

(b)

calls on the Government to:

(i)

increase to $500 million the value of assets of an entity invested in by an Early Stage Venture Capital Limited Partnership (ESVCLP) beyond which an ESVCLP must divest itself of an interest in the entity,

(ii)

increase the time allowed for a partnership to divest an investment from 9 months to 12 months, and

(iii)

increase the value of assets target investees of an ESVCLP can have, to $500 million”.