Richard Colbeck (Tasmania, Liberal Party, Shadow Parliamentary Secretary for Fisheries and Forestry) Share this | Link to this | Hansard source

I note that my colleague Senator Birmingham made a statement at the com­mencement of debate on the Carbon Farming Initiative legislation about how disorganised the government was in the development of that bill. These next pieces of legislation are again symbolic of the shambles that the government's industry policy is under Minister Carr. We have seen the absolutely devastating figures that were reflected today with the announcement by BlueScope Steel that it is going to shut down one of its blast furnaces at Port Kembla, with 1,000 job losses. This comes on top of the announce­ment last week of 400 job losses at OneSteel. You can understand the uncertainty that exists within industry given the complete mess that the government has got itself into with this legislation. When this legislation was first brought up we were told that it was a legislative priority. It was in fact supposed to commence operations from 1 July 2010, and here we are in the second half of 2011 just starting to debate the legislation in the Senate for the first time.

Right from the start, the consultation guidelines and the consultation process that Minister Carr undertook were being criticised. They were, as I said, an indication of the complete shambles that industry policy is under Minister Carr. This is a statement from the dissenting report by coalition senators on these bills:

Consultation timelines have been highly condensed. The second exposure draft was released by Treasury on 31 March, with submissions from stakeholders due by 19 April, a total of only 10 working days. This is not sufficient time to digest 134 pages of legislation and provide substantive comments, particularly given that the second exposure draft incorporated a number of new concepts, including a completely new definition for core R&D. In addition, the tight timeframes meant that Treasury had not completed its redrafting in time for the 31 March release. As a result, the second exposure draft did not include redrafted feedstock provisions, and instead merely stated that “a feedstock adjustment rule is under consideration.”

That comes from page 21 of the dissenting report. It goes on to say:

Stakeholders were not provided with an opportunity to comment on this aspect of the legislation until after it was introduced into Parliament …

So here we have the government rushing to get through a piece of legislation, rushing to start a process, and yet it clearly was not ready itself. The initial consultation process had quite obviously gone very badly and there were some changes that had to be made before the second draft came out. Even they were not completed before the rushed process was required to commence. It was interesting that it came out during estimates that the minister himself had not even looked at the modelling for this piece of legislation. While we were trying to ascertain the impacts of this through the estimates process, the minister himself had not even taken the time to acquaint himself with what was going on.

All through this process we have been given examples of how this measure will restrict access to R&D. In fact, the government has said that this is about providing greater access to R&D. The suspicion of the opposition is that this will be a cost-saving measure for the government dressed up as a way to redistribute opportunities down through the system so that smaller operations can get more access. I do not believe that any business that is involved in research and development would genuinely not be claiming its entitlements now.

There are some provisions within this legislation, particularly the tax credits process, that we are quite happy to see go ahead, but there are a number of significant concerns that industry and the opposition continue to maintain. The first is around the definition. When they came into the hearings, witnesses were absolutely definite that the definition of core R&D was inappropriate. There were real concerns held that it would lead to additional red tape. We stated that in our report. Mr Ian Ross-Gowan, manager of Michael Johnson Associates Pty Ltd, said in part of his evidence:

It splits off the development of new knowledge from the development of new or improved product processes, devices, materials and services. If you have a manufacturing process where you are trying to develop a new process, under the current scheme you will have a project that might be a certain size. The first 30 per cent of that might be the creation of new knowledge, and the remaining 70 per cent would be the development of the new process, which by this definition is R&D. It is that 70 per cent that will get lopped off by this legislation.

All through the inquiry process, we have heard this concern about the definition of R&D. The government tried to tell us that the R&D definition was in accordance with the Frascati model. It actually transpires that it refers to only a part of it because it omits the second and critical element of Frascati. If we go to the Frascati definition, it says:

… creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of humanity, culture and society, and the use of this stock of knowledge to devise new applications.

But the government's definition, as I said, omits the second critical element of the Frascati model about the use of this knowledge to devise new applications. I think the government may have backed away from its claim that it is currently using that definition. There is no question that industry continues to have concerns about the definitions that are being proposed by the government under this process.

A significant number of submissions expressed concern about the dominant purpose test. That was a major concern for industry. Again, there is the concern that it will be a large impost on industry. I go to KPMG, who said in part of their submission:

The overwhelming feedback from our diverse client base indicates that a “dominant purpose” test will exclude a large proportion of production trial activity that is a necessary and legitimate part of the research and development cycle.

We have seen in the last couple of days significant job losses in the manufacturing sector. We have seen the loss of more than 105,000 manufacturing jobs since this minister has been in the portfolio. We have also seen the worst manufacturing employment figures since ABS records were first collected. So you really have to wonder why the government wants to push ahead with this process that industry express so much concern about. And yet the govern­ment claims to be a supporter and a friend of manufacturing. It is the manufacturing sector that, in my view, will be most negatively impacted by this piece of legislation.

I come back to the dominant purpose test. A number of submissions talked about providing alternative models. Industry was out there as a part of this process looking to provide alternatives for perhaps legitimate government concerns. They looked at things such as a 'purpose directly related to' test, substantial purpose, an apportionment of expenditure, some dollar capping around extended production trials, specific provisions for specific excesses and time limits for trials and pre-approvals for projects with certain values.

I think industry has been quite willing to work with the government on these particular measures and it is quite disappointing that the government, as it appears to do on a fairly regular basis, continues to ignore industry and ignore suggestions. We saw it with the last piece of legislation. They are not prepared to work with anybody else.

Sitting suspended from 18:30 to 19:30

Before the dinner break I was discussing the unwillingness of the government to listen to some very sensible perspectives that have been put to it, particularly by industry, through this debate. The government has ended up having to wait until it was able to do a deal with the Greens to get this legislation passed. As I said earlier, the government's objective was for this legislation to commence operation on 1 July 2010. Its unwillingness to listen to industry and the opposition, particularly in relation to the definitions within the bill, including on the dominant purpose test, has left it in the situation where it cannot get support for the legislation. I think I said during one of the estimates hearings that we supported some elements of this legislation, but were not prepared to compromise on bad definitions.

We heard the minister say today in question time that he is a friend of industry—a friend of manufacturing—despite the fact that, under his watch, 105,000-plus manufacturing jobs have disappeared from the scene completely. He said that he would stand beside industry. I am not sure what it achieves to have the minister standing beside industry while it is busily and madly shedding jobs. He said that he would stand beside the employees, and now he is going to spend $100 million, of a $300 million scheme that has not even been legislated, to support BlueScope. The govern­ment is prepared to spend that money even though the legislation has not been passed and the mechanisms for the allocation of that funding have not been designed yet. One wonders how the government can claim any credibility on economic policy and economic management. That has also been a feature of this debate.

One of the arguments for reform in this sector that the minister has used is rorting. Apparently, claims are being made that should not be made and claims are being made that are not justified. When we actually interrogated that at estimates we found that something of the order of 24, 28—somewhere in that range—cases over 10 years were not justified and that those cases were all being investigated. They were all being pursued in some way by the department. There is plenty of evidence to say that the cases that the minister was suggesting did not fit within the guidelines and should not have been made actually did fit within the guidelines as they stood at the time. The coalition's perspective is that we are supporting a system that has been in place for 24 years and that is well understood by industry—and the industry is happy both to work with this system and to see some changes made to the taxation regime—but we are not trying to invent some new definitions under a new act.

The claims being made by the minister were not justified. Far from being a friend of manufacturing and far from being prepared to stand beside industry, and particularly manufacturing, he is prepared to lob grenades over the barricades when it suits him and he is prepared to use the circum­stances he claimed were a reason to change the legislation. He is happy to do all that. But then it comes to the crunch and we see an unfortunate situation, such as we saw today, where 1,000 people might lose their jobs through the circumstances that BlueScope Steel have found themselves in, in addition to the 400 at OneSteel last week. You really have to wonder whether the minister is a friend of industry and manufacturing. Industry group after industry group, even the unions, came in to talk to us during our inquiry into this legislation, and they were concerned about the definitions—particularly about the new definitions and the claims being made about them by the minister.

It really does not stack up that the government can be the friend of industry that it claims to be when we see the continued rollout of bad news from the manufacturing sector. In my home patch, on the north-west coast of Tasmania, we feel it as badly as anybody. We have not had a OneSteel or a BlueScope, I know, but we have had the Tascot Templeton carpet factory close with the loss of a significant number of jobs. It was the last carpet factory of its type in the country. It was an absolute tragedy to see a business of that nature close down. We have also seen McCain move its vegetable processing offshore to New Zealand.

Tasmania is synonymous with the manufacture of paper. We have seen two paper mills, one at Burnie and one at Devonport, close down. All of that has been on the watch of the minister. The perform­ance of the minister over the closure of the paper mills is nothing short of dismal. He set up a consultative group but did not even get the terms of reference designed before the decision was made to close down the mills. His statement was that the process was to work hand in hand with the decision-making process of the company, yet the company had given up and made its decision to close down the mills before the minister had even drafted the terms of reference for the pulp and paper consultative group. This minister cannot claim to be a friend of industry. He has presided over the loss of more than 105,000 jobs from the manufacturing sector in his time in the portfolio. In the words of the AWU national secretary, Australian manufacturing is in 'one of its worst periods since the Great Depression'. That is a significant indictment of both the minister and his manufacturing policy. He has been sitting in this chair for four years now. We are at the anniversary of the re-election of the government and we continue to see the bleeding of jobs out of the manufacturing sector. We also see the worst manufacturing employment figures since ABS records were first collected and the worst contractions in this sector for more than two years.

The opposition will not be supporting this legislation. We know that the government have waited until they have been able to do a deal with the Greens. Unfortunately, we know that when the government deal with the Greens the outcomes are not good for industry. All I can say is that things do not bode well for the future in the manufacturing sector. There are significant concerns, as I have indicated on a number of occasions, around the definitions. It is a pity that the government are not prepared, as we talked about in the last piece of legislation, to work with industry. They claim to be a friend of industry but obviously they are not. This particular minister's record is abysmal. We keep on hearing of historic and generational change in industry policy. Unfortunately, the record for this minister is that those historic and generational changes in industry policy have been for the worst and not for the benefit of industry. With this piece of legislation we see that process continuing.

Christine Milne (Tasmania, Australian Greens) Share this | Link to this | Hansard source

I rise tonight to support the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. This represents a key step forward for the economy in Australia. We know that imagination is the resource of this century. Tragically, in Australia the focus on physical resources such as iron ore and coal has distracted people from the fact that we have seen a hollowing out of the manufacturing sector under the Howard government and subsequent to that.

It is the digging up of physical resources that has got us into the situation where we now have a two-speed economy, where we now have the high Australian dollar and where we are seeing a further loss of manufacturing jobs. But manufacturing jobs started to go offshore to low-wage econ­omies more than 20 years ago. The reality is that Australia could not compete with low-wage economies. Yet economies like Germany, which is not a low-wage economy, built for themselves competitive advantages in certain sections of manufacturing. They did it by thinking through: what are the trends of the 21st century, what do we as a nation have to do to build manufacturing, what is our industry policy, what do we imagine the future to be that can give Germany competitive advantage? So they chose to go for the highest end of the low-carbon economy market. They wanted, for example, to build luxury cars, but the most fuel efficient cars in the world. They combined excellence with a low-carbon economy. They did it with the energy sector as well, in particular the solar sector, by bringing in a feed-in tariff. It was an industry policy that said: 'Germany will set itself a high target to reduce emissions; it will build competitive advantage globally in renewable energy.'

We must understand that innovation and creativity, driven by imagination, are critical to rebuilding manufacturing in Australia, creating jobs and building a competitive advantage as we move into this century. When I meet with renewable energy companies and they talk about building manufacturing facilities in Australia, I say to them, 'Other people have built those facilities in China and India, they argue there that they have critical mass, and they have a low-wage economy, so why would they want to build those facilities in Australia?' The answer is: the more sophisticated the economy the more it needs a sophisticated and reliable workforce. They recognise that Australia is a secure environment in which to build a manufacturing industry that is based on 21st century technologies. But they need a guaranteed market to warrant the investment in the first place. That is why they want to see industry policy in the low-carbon economy matched to their kind of tech­nology. That is why the feed-in tariffs have worked so well in Europe and why the OECD has just brought out a report saying, 'If you want to get transference to the low-carbon economies through renewables, feed-in tariffs are the best way to go.' They are not just about renewable energy for reducing greenhouse gas emissions; they are about creating a market for the technologies at a scale that enables manufacturing to have a foothold in the country in which it is attractive to invest.

The Greens came to the R&D bill saying, 'Australia is currently suffering from underinvestment in education and training; underinvestment in our schools and universities; the hollowing out of the manufacturing sector because it went overseas to low-carbon economies; an over­dependence on resource based industries, of digging it up and cutting it down; and a failure to invest in the brain space, particularly of small companies.' It is the small- to medium-sized companies that are likely to have the greatest imagination, the greatest innovation, the greatest capacity for R&D, but the least amount of monetary capacity for R&D. These are the people we need to support in Australia. They are the brains base, if you like, from which we can develop manufacturing industry. We approach this bill with that in mind. But of course we recognise that there are people arguing strongly against the bill, and I will get to that a little bit later. I have to say we found this an incredibly difficult piece of legislation to work through because there were such passionate views on both sides of the argument, each of which was based on a reasonable degree of rational argument.

The proposed new R&D incentive replaces the existing incentive and comprises two main components: firstly, a 45 per cent refundable tax credit for eligible entities with a turnover of less than $20 million; and, secondly, a 40 per cent non-refundable tax credit for all other eligible entities. The incentive is available for expenditure on eligible research activities or for the decline in value of depreciating assets used for eligible research activities. The 45 per cent refundable tax credit is equivalent to a 150 per cent tax deduction and doubles the current base incentive for small entities to expend money on R&D. The doubling of that current base incentive for small entities is a very attractive part of this legislation because it does go directly to those companies which have imagination—the new brains base—but do not have the capital, as it turns out. Because the 45 per cent credit is refundable, eligible entities can access the incentive as a cash refund when submitting their tax returns.

The government anticipates that 5,500 small firms could benefit from the incentive and, as I said, that is a particularly attractive part of it as far as the Greens are concerned. The 40 per cent non-refundable tax credit is equivalent to a 133 per cent tax deduction and raises the current base incentive for larger entities by one-third.

The proposed new incentive distinguishes between core and supporting R&D. Eligible expenditure under both categories qualifies for a tax credit under the proposed new incentive. The bill sets out several definitions and tests—mostly distinct from those in existing concessions—to determine whether a given activity qualifies for the incentive. The purpose of these tests is to ensure that the incentive is directed towards scientific research and away from such activities as industrial development with an element of novelty. That is really important, because the Greens were certainly of the view that there has been rorting of the existing R&D tax concessions. I say that because there is a big difference between scientific research and activities which are business as usual but have an element of novelty, and a lot of people were basically claiming an entire development, even though only a small part of it had novelty associated with it. That was, in my view, a diversion of money that should have gone to research and development. That was something that we were very keen to address. The proposed new incentive is intended to stimulate more companies, particularly smaller companies, sometimes described as small to medium enterprises, to undertake R&D activities. The Greens, having thought about all of this, having met with people on both sides of the argument and having formed the view that there has been rorting of the R&D tax concession for quite some time, have come down in favour of the bill.

Few debated the findings of the 2007 Productivity Commission report Public support for science and innovation, which found that the criteria for the basic 125 per cent tax concession do not screen out R&D—which would have happened anyway—and that the benefits of the existing incentive were not large and could in fact be negative and that the net pay-off from the concession could be substantially improved by maintaining the access to the concession for small entities only. A subsequent review commissioned by the government in 2008, known as the Cutler review, released a report, Venturous Australia—building strength in innovation, which reached similar conclusions and made a series of recom­mendations, many of which are reflected in the bill. So the bill has not come out of nowhere; it has come out of quite a serious review.

In 2009-10 the R&D tax incentive was estimated to cost approximately $1.5 billion, and unfortunately we have had something of a delay. That is unfortunate but at least we have got to it now. While 8,000 companies registered for the scheme, the top 100 firms currently take 60 per cent of the total funds from the scheme. I am going to say that again because this is one of the key statistics that got me thinking that this is not an effective spend on R&D. The top 100 firms currently take 60 per cent of the total funds for the scheme. If you have got 8,000 companies registered for the scheme and 100 are taking 60 per cent of the total funds then we are not actually spreading this money around the sector as I think the community would expect. Those 100 companies tend to be some of the largest companies in Australia and about one-third of them, at least, are the large mining companies. So in effect we are spending a large percentage of our R&D spend on business as usual in the mining industry in a sector which is making massive profits, and it is not going to those small, innovative sectors which potentially could make such a big difference.

In 2007-08, 37 of the top 100 firms—that is, over a third—were from the mining sector, and between them these 37 firms took 17 per cent of the total funds from the R&D scheme. That is 37 out of a total of almost 8,000 companies. Something has got to be wrong when we have got that situation. The Greens believe that large firms in particular have been essentially complementing or getting money for business-as-usual activities by claiming a small part of innovation in that whole business and that essentially it has been a rort. As an example of a claim that has a large proportion of supporting activities in relation to core R&D in the mining sector, a mining company registers an R&D project for the tax concession which is concerned with improving extraction techniques. The cost of this core R&D is, say, $20 million. Nonetheless, given the current weaknesses in the definition around supporting activities, it claims $500 million, the bulk of which is for normal mine operations and mineral extraction, to test the R&D. That just shows you how it has been rorted to date. The case that we need change is clear. This, as I said, has been a highly unusual bill in that we found it very difficult to work out, from both sides of the argument, the best way to move forward. There are many people and organisations supporting the bill—including Medicines Australia, the Australian Informa­tion Industry Association, AusBiotech, Australasian Industrial Research Group, the Australian Private Equity and Venture Capital Association, TGR BioSciences, Game Developers' Association of Australia, Lateral Economics and Australian Tech­nology Network of Universities—but there are also many firms and industry associations that do not support it. I have to note that those opposed to the changes included several large accounting firms, the AMWU and the Australian Industry Group, who all argued very passionately that this bill would undermine research and development and not be in the national interest.

We ended up in a situation where I thought that the best thing to do would be to get them all in the one room and have some of them put their case and have it contested in a moderated way. I thank Minister Carr for agreeing to this and enabling it to happen. In the room we had people from the minister's office and from unions and accountants of some of the major people opposing the bill, as well as companies in favour of it. We had a meeting for just over an hour. One of the people there, Anna Lavelle from AusBiotech—I am sure she will not mind me naming her—said at the end of the meeting that they had achieved more in that hour than they had achieved in 10 years trying to negotiate the changes to this. We also had Treasury in the room contesting these ideas.

It was Anna Lavelle who suggested one of the things that would make it easier for small companies, which was quarterly payments. She said that the bill was really good for small companies but if you leave it until the end of the year there are cashflow problems for them. So being able to get the payment on a quarterly basis would enable small businesses to maximise their engagement. She put that forward and we took it back to Treasury. There was not wild enthusiasm, I have to say, for implementing it but, nevertheless, the government had a look at it and found it was possible, and now the government is moving quarterly payments as an amendment. In terms of moving the debate forward, getting an outcome, contesting the arguments and coming up with something that business thought would be very useful, the roundtable worked very effectively. I think for everybody concerned, including the Greens, it was an excellent way to move forward.

I also want to note that in the course of all this we did support Tony Windsor's sensible amendment for a review of the new laws after two years to make sure that everything that has been put forward, which we have believed to be the case, is actually the case. I think it is regrettable that it has taken so long to get this measure through the Senate. It was in the national interest for legislation to come into effect from July last year, but the with the Senate make-up then, that was not possible. Nevertheless, we are now moving into what I think is a very positive area for R&D.

One area which I was concerned about—and the Greens seem to be the only party concerned—is the change to make the R&D concession open to international firms that hold relevant intellectual property offshore. I am not going to move an amendment on this because I recognise that the Greens are the only party to be concerned about it, but the logic for the previous position—that only firms which held the IP domestically would be eligible for the concession—obviously meant that the ongoing benefits of research would reside primarily in Australia. I note that the Productivity Commission report recommended that, while there should be some relaxation of the rules which prevent subsidiaries of foreign owned companies from accessing the existing tax concession, they should not be relaxed for the existing basic 125 per cent tax concession or the existing refundable R&D tax offset for small companies.

The approach taken in this bill goes further than the Productivity Commission recommendation. The argument that the government has put forward for making this change is that there are national benefits from having large local investments in R&D by multinational enterprises. These include the likelihood that these investments will anchor local R&D activities and attract further R&D investment by other multi­national enterprises, that multinational R&D investments increase the flow of global expertise into the country, that they provide the conduit for global commercialisation of local discoveries and that they facilitate exports by local suppliers. I am interested to see what actually happens on this front. I am still wary about it but the people in many of the business sectors we talked to are confident that this change is in the national interest. We will see as it plays out over time whether that actually turns out to be the case.

In conclusion, I want to reiterate that the challenge for Australia is to rebuild a manufacturing sector that has competitive advantage in a 21st century moving to a low-carbon economy. That means we need to diversify the economy to build resilience by building a diverse sector and get away from such dependence on digging up, cutting down and shipping away. Whilst there is a boom, that is fine, but when the boom collapses you are left with holes in the ground and you have failed to invest in the intellectual capacity of the country. A knowledge based economy needs a massive investment in education and in research and development because, if you take it—as I do—that imagination is the resource of this century, we need to make sure that we maximise that through making sure the money in research and development goes to the best brains, which is often in those small enterprises, and I think the bill achieves this.

Catryna Bilyk (Tasmania, Australian Labor Party) Share this | Link to this | Hansard source

I also stand tonight to speak in support of the Tax Laws Amendment (Research and Development) Bill 2010. This bill, in combination with the Income Tax Rates Amendment (Research and Development) Bill 2010, introduces a new research and development tax incentive to take the place of the outdated and complex R&D tax concession. This reform is the biggest to happen to the R&D landscape in a decade. It is designed to boost investment in R&D, support Australian companies and create jobs. It will increase assistance for genuine R&D and will redistribute support in favour of small and medium-sized enterprises—the majority of businesses and the lifeblood of our economy. It is neither sustainable nor in the national interest for 60 per cent of government investment in business R&D to be received by 100 firms when Australia has two million enterprises. The previous speaker, Senator Milne, also spoke about that.

The government's intention is to lift Australia's R&D performance by encouraging businesses to take advantage of the scheme and in so doing ensure Australia's place as a clever country. The revised definition of R&D is about simplification and clarification. It replaces ambiguities and overlapping tests with a clearer statement of what core R&D activities are. The key elements are the need for an experiment and the generation of new knowledge. These concepts are in common use in the R&D community, which understands what an experiment is in the R&D context. The revised definition is designed to bring out the key elements of the previous definition of R&D in a more easily understood way. In particular, it removes references to considerable novelty and high levels of technical risk by focusing on the character of experimental activities. More targeted eligibility criteria will ensure that the scheme promotes activities that will benefit the economy as a whole.

R&D activities create new knowledge and technologies and as a result increase productivity, jobs and therefore economic growth. We expect many more firms to participate in the scheme because of the higher base rates, wide availability of cash refunds and the redistribution of assistance in favour of small and medium enterprises, which are more responsive to fiscal incentives. There will be no reduction in the amount of support available for business R? it will simply be delivered more evenly and more effectively.

Australia must be prepared to face the challenges that come its way both now and in the future and must move with the times. The incentive provided by this bill has two key components. The first is a 45 per cent refundable tax offset for companies with a turnover of less than $20 million. Companies with a turnover greater than $20 million will receive an offset of 40 per cent. The 45 per cent offset doubles the present base rate available to SMEs, and the 40 per cent offset increases the rate by one-third for larger companies. The offsets will be calculated on the basis of expenditure on eligible R&D activities and the declining value of depreciating assets used for eligible R&D activities.

Small, innovative firms will be the big winners as a result of this new incentive, with greater access to cash refunds and the increasing rate of assistance provided. For example, a company with a turnover of $10 million spends $1 million on eligible R&D activities in an income year and is in a tax loss position. Under the new incentive that company will be entitled to a cash refund of $450,000. Under the existing R&D tax concession, the company will only receive a tax deduction worth $375,000, and there is a zero benefit until the company starts to turn a profit. So the new incentive will support small, innovative businesses when they need it the most.

The new incentive focuses more support towards genuine R&D activities. The key elements of this approach are a clearer definition, a robust test for supporting activities and better administration of the incentive. This new system will see companies rewarded for genuine R&D, not for business-as-usual activities. The new incentive will also ensure that most software R&D is treated consistently with that occurring in other sectors, and this is particularly important given the all-encompassing nature of information technology.

There has also been a substantial rationalisation of activities excluded from core R&D activities in order to further improve this incentive. This bill will also make it possible for foreign corporations that have a base in Australia to access the incentive. It will mean that the incentive will be accessible to companies that carry out R&D activities in Australia, even if the intellectual property is held overseas.

The government will introduce quarterly payments for small and medium businesses from 1 January 2014. These firms will get their credit sooner, significantly improving their cash flow and incentive to invest in R&D. The lowering to 28 per cent of the tax rate for small businesses from the 2012-13 income year will not affect the 45 per cent refundable tax offset for companies with a turnover under $20 million.

Australia's R&D spending in 2007-08 amounted to 1.3 per cent of our gross domestic product. This compared with an OECD average of 1.6 per cent and with a rate in some countries—such as Japan, Korea and Sweden—of as high as 2.7 per cent. We must lift our R&D expenditure for our economy to remain internationally compet­itive. Dr Brendan Shaw, Chief Executive of Medicines Australia, states:

…we know that [Australia] has world-class research infrastructure, a stable socioeconomic environment, a strong intellectual property system and an efficient regulatory system … but these factors alone are no longer sufficient to stimulate investment growth.

There are several reasons for this. The most important among them is the rapid transformation of developing nations in Asia, South America and Eastern Europe as viable destinations for long-term investment in research and development.

Dr Shaw goes on to state:

... we should also be worried about the impact this has on Australia, and be particularly worried, because, while Australia remains an attractive location for R & D investment for our industry, other countries are now looking even more attractive.

It is expected that this tax incentive will be budget neutral over the first four years of implementation. The 2009-10 budget provi­d­ed an additional $38 million over four years for administrative agencies to ensure a smooth transition. In order to improve certainty for taxpayers, AusIndustry will provide improved guidance material as well as introduce a new system of private binding rulings, called 'advance findings'. There are many ways to grow an economy, but the key to long-term sustainable growth of the economy of any country—and Australia is no exception—is productivity. Productivity has three main drivers: infrastructure, a skilled workforce and innovation.

For 12 years prior to Labor forming government we had a federal government that failed to invest in infrastructure, failed to invest in education and training and failed on innovation as well. That is why productivity fell under the Howard government. The Gillard Labor government is making up for the failures of those opposite in all three areas. We now have record investment in infrastructure, such as roads, rail, ports and the National Broadband Network. We have made record investment in education and training, such as trade training centres, new school facilities through the Building the Education Revolution program and additional university and TAFE places.

And this bill is an example of how we are encouraging private investment in innovation in addition to our public innovation agenda. This is why we want to better target R&D investment—to enhance innovation in Australia to drive productivity and grow a modern economy. The objects clause clearly states that the tax incentive will be provided for industry to undertake experimental activities for the purpose of generating new knowledge or information in either a general or applied form. The 'development' aspect of R&D is captured by the application of knowledge—that is, applied form. These development activities can be undertaken in a production environment. The government has clarified the objects clause, which states that development activities are covered by the clause. The amendment clarifies that 'new knowledge' includes new knowledge in the form of new or improved materials, products, devices, processes or services. The term 'improved' covers development activities.

The R&D tax credit is about new knowledge created through experimentation, and this is consistent with the approach of the Frascati Manual and international best practice. The Frascati Manual explains that the basic criterion for R&D activities is an appreciable element of novelty and the resolution of scientific and/or technological uncertainty.

This bill is significant in simplifying taxation law. The new provisions are not only drafted in plain English but are less than one-third of the length of the provisions they are replacing. If enacted, this bill will deliver much-needed reform to public support for business innovation. It will offer an increa­s­ed incentive for companies to undertake R&D activities in Australia. It also recog­nises that the innovation dividend for the economy will come from changing the focus to genuine R&D instead of normal business activities. I commend the bill to the Senate.

Christopher Back (WA, Liberal Party) Share this | Link to this | Hansard source

I rise this evening to also address the Tax Laws Amendment (Research and Development) Bill 2010. Regrettably, it is another example of legislation being drafted and presented by people with little or no understanding of the business environment in which we exist in Australia, particularly the challenges that confront us. These will be, regrettably, the outcomes of this particular bill once it passes this place. It will preclude the achievement of enabling small and medium-sized businesses undertaking R&D activities to more readily access and benefit from the proposed R&D tax credits, and a direct result of that will be inhibiting or radically reducing investment in the SME sector.

Secondly, it will result in a drain of expertise and investment by small and medium-sized businesses, which Senator Bilyk herself has addressed in the last few minutes, away from Australia, at the very time we need to be protecting and preserving this most. And of course it will discourage major companies who participate in R&D activities from participating in the R&D scheme. The end result of this, whether by accident or by intent, may be a radical reduction in the government's cash contribution to industry, at a time when this cash-starved government needs to grab back every dollar it can.

What in fact is the scope of what we are speaking about? The fact sheet presented by the government in October last year, under the Business Expenditure on Research and Development, known as BERD, indicates that in 08-09 there was $16.8 billion invested by companies that would apply under the R&D scheme. Of this, $1.6 billion would be what government says it forgoes in tax concessions. So this is the size and scale of the operation we are speaking about. For example, industry, manufacturing and mining contribute $8.5 billion of R&D, and that constitutes 51 per cent of that $16.8 billion; the professions, scientific and technical companies contribute $2.5 billion, constituting around 15 per cent; and the financial and insurance services sector about $2 billion, or 12 per cent. By company size, those with staff numbers exceeding 200 account for 71 per cent of that figure, being $12 billion; those with staff numbers of 20 to 199 contribute $3 billion, or 17 per cent; and those with fewer than 20 staff contribute, in R&D terms, about $2 billion, or 12 per cent.

So, what is the impact of all this, and what are we moving from and what are we moving to? Since 1985 the R&D tax concession has operated in such a way that companies have been able to register, claim and cost their R&D activities on a project-by-project basis. Of course, this makes perfect sense. Technical people think in terms of projects, accountants do their costing in terms of projects, and that is the way logically you would think we would continue to operate—but, no, we are moving to what are known as activity based credits with this particular R&D legislation change.

What, for example, is the impact of this? Let me give it to you in simple terms, in a company that I can relate to myself, having been chief executive of an IT services company in WA through much of the last decade. Under the concession, or the existing project based R&D situation, the company must describe all of its activities under a project heading. If, for example, eight people in a small or medium-sized enterprise are working on the project, they can capture their eligible time and submit a claim with the cost of the eight people involved and identified. We can all assume that we can identify with that.

We now move to what will be contemplated in this legislation. For example, under the credit program of activities, based on if the project has 10 activities, still with the same eight people involved, we may potentially have 80 pieces of cost information. This is eight people working on R&D and all of a sudden we have 80 pieces of information that we must track, record and report on, and upon which there must be audit. A quotation given to me by a practitioner in the field I think summed it up perfectly. She said, 'One should never design a system to better target the minority that misuse it at the expense of the responsible majority and the overall program objectives.' We heard Senator Milne address this question of abuse. We must always be conscious of those who would abuse a system. We do not want to see waste in this particular way. But when we throw the baby out with the bathwater, when we get to the stage where the responsible majority are significantly disadvantaged, we are in trouble. That is where I point us to.

Some of the points relevant to the legislation as it is presented are these. First there is administration and compliance, which I mentioned in the last few moments. Registration requirements which mandate that explicit written identification of core activities and those of other activities that support core activities are onerous. What is interesting is that to this moment it is my understanding that there are no business processes in place or software available for the SME sector that can actually configure, capture and store the sort of data about which we are speaking. This will be further exacerbated by the application of different standards to each supporting activity. You can see the web into which we are building ourselves here: a small business with up to eight people doing some work and all of a sudden there is no software and there are no supporting activities. So, unless a claimant can provide the information of the detail about which I speak, in a written format, they will be precluded from even registering and will therefore be unable to access the proposed tax credits.

What then defines these core activities as opposed to supporting activities? This is very interesting. It is referred to as the 'purpose test'. I will define it from the explanatory memorandum in the legislation:

The need to employ the scientific method also reflects the degree of novelty in the ideas being tested. That is, the knowledge being sought must go beyond validating a simple progression from what is already known and beyond merely implementing existing knowledge in a different context or location.

Let me give you an example of an agri­cultural nature. A specific question was asked of me by one of my constituents who was seeking to assist clients developing an agricultural machine capable of identifying one green plant from another at speeds up to 20 kilometres per hour. My colleague Senator Macdonald might be interested in this because the technology would be deployed in the sugar cane industry, amongst other places, in Queensland. What would it do? First of all, by being able to identify a specific plant upon which a chemical can be placed to kill it, you then improve weed control, you reduce herbicide use and you reduce the runoff of chemicals and other nasties into the Great Barrier Reef marine reserve. You would think how absolutely brilliant this is. The catch here in this constraint lies, according to the legislation, in the field of multiple technologies, because what we actually find is that this is the application of none other than ink jet printer spray technology, but with its adaptation to agricultural contexts, with all of the advantages about which I spoke. We then go to the legislation. Does this activity of developing this precision spray knowledge for agricultural application qualify or not qualify as original design, because indeed it is modifying an existing ink jet printer nozzle technology to a new context. You might ask if this is relevant; it is very much key to this whole activity.

I then go to the treatment of cash received under the proposed R&D incentive. We heard Senator Bilyk telling us what a wonderful benefit this is going to be for the small business sector. But, unfortunately, there is considerable confusion surrounding this whole question. And there is a wide discrepancy between the benefits for larger companies and those of smaller and medium-sized companies, despite the much heralded incentives and benefits as outlined in the second reading speech. In that second reading speech, as we heard from Senator Bilyk, it is claimed that a new incentive is there as a 45 per cent refundable tax offset on companies with a turnover of less than $20 million. Doesn't it sound fantastic. But we should read on. In his second reading speech the minister made the statement that this 45 per cent refundable tax offset doubles the current base rate available to SMEs and the tax offsets are calculated on the basis of expenditure on eligible R&D activities and the declining value of depreciating assets. He claimed that small innovative firms are big winners from the new R&D tax incentive, with great access to tax refunds for the R&D expenditure. However, the truth is somewhat different to the statement. Currently, for example, the R&D tax offset returns 37½ per cent on moneys expended on the activity by claimants whose turnover is less than $5 million. So you would say that this is wonderful: 45 per cent versus 37½ per cent; isn't that good. But this money is received as a refund of tax and creates in accounting terms a 'permanent difference'. It is received much as an individual receives their tax refund cheque, with no further strings attached other than the normal compliance costs and requirements that we would expect.

We now turn to the proposed legislation. This is the 45 per cent refundable tax credit. Here, the claimant receives 45 per cent of the moneys expended on R&D but, unfortunat­ely, the receipt of that tax credit will impact on their franking account and limit or prevent the claimant from paying a franked dividend to any shareholder until such time as the claimant has paid enough income tax to equal the tax benefit. In other words, all of the moneys received by way of the proposed refundable R&D tax credit must be returned to the government through future payment of income tax before a claimant can reward their shareholders by the payment of a franked dividend.

Putting it another way: the R&D tax offset currently creates an enduring financial benefit. However, under the proposal, we see that it is more akin to a loan. It has a short-term cash benefit, as Senator Bilyk has said, but it must be fully repaid in the longer term. Therefore, to a small business, it has very little benefit, particularly when trying to attract investment. We all know that the current climate, with the uncertainty in the world economy, with the uncertainty of a carbon tax and with all the problems associated with productivity—and we know that Australian productivity is falling way behind that of our competitors—is not a climate in which an SME, in particular, is going to invest in R&D.

So how can this change in policy be seen as a positive move? It proposes a change from a situation where companies receive cash with no strings attached to one where companies gets the cash today but must fully repay it before they can reward any of their shareholders—generally, in the case of many small businesses, including the financier as well.

Time does not permit me to go through the cash element of this, but I could show that it is a severe cash disincentive—worst of all inhibiting investment. Industry repre­sentatives have already put to me that clients in Western Australia see this as inhibiting their capacity to attract investment, particularly into companies which involve themselves in R&D activities. It is risky from a technological point of view because the investor knows full well that no reward will flow to them unless or until the company has fully repaid all moneys received from government. This is not a great new push into encouraging investment.

For me, the tragedy is that I know of three small companies in WA which have already moved offshore. Two have moved to Singapore with their R&D activities; the third has moved to Scandinavia. So what have we lost? We have lost the intellectual property from this country and we have lost the expertise of the people who have moved. Australia has lost the wealth benefit not only of the current activities of those companies but, in the event that their R&D activities yield fruit and become commercial, of the opportunity from another innovation—the sort of opportunity with which we could turn ourselves into the smart country.

I come to the question of retrospective application. This is a concern which has been amplified by this legislation—it has retrospective application, with the proposed starting date going back to July 2010. It is not yet obvious to me where we sit with this new legislation and a company with R&D activities going back to when this legislation was first proposed. As we all know, this will impose a significant burden on both small businesses and larger ones, but especially on those SMEs who will need greater time and investment to modify their internal processes and policies to capture the information required to be in a position to even attempt registration.

There will be an even greater, and as yet undefined, commitment to invest in software programs to capture the necessary data, with attendant capital costs associated with purchase and ongoing annual maintenance. For small and medium-sized enterprises, the software packages to capture the data required by the proposed legislation are simply not there as yet. The advice to me, and I would be very pleased to be corrected, is that practitioners have to date been unable to identify any off-the-shelf computer applications which will, without significant customisation, generate the necessary level of detail. The software needs to interlink those specific core and supporting activities, about which I spoke, whilst applying a dual standard to supporting activities, the applicable standard depending on which one of two areas those activities fall into—that is, the production or the non-production environment. This legislation seems to require that information from a company merely for it to obtain the registration number which is the key to the R&D tax initiative.

In my final few moments, I will go to this concept of core and supporting R&D activities. The legislation has specific criteria defining core and supporting R&D activities respectively. Each needs to be mapped at the registration phase—not at the application but the registration phase—and there is concern from companies, large and small, that business systems simply will not be able to do this.

I now turn to the burden of company directors and their fiduciary responsibilities, and indeed their legal responsibilities under corporations law. What responsible director, chairman or chief financial officer will sign registration forms and therefore find themselves possibly in default under corporations law or find themselves in a circumstance in which, at some time in the future, they may be subject to a retrospective tax audit? They would be exposed not only to withdrawal of funds that have been paid to them under the R&D scheme but to severe penalties. And, if they are loath to sign the registration forms, this will reduce registration numbers and the number of claimants for R&D support.

As we read the proposed legislation, core R&D activity must always precede any supporting R&D activity. But in the real commercial world that is not how it works. I know from my own experience that quite often you arrive, if you like, at a pre-creation research phase. This is required in order to determine the particular characteristics of a proposed new product before you define it as a core business. For example, does the market require the product as an oxide or as a carbonate? What level of purity is required for the product to be marketable? These are the sorts of things that you often do not know but which, under this legislation, you will be required to declare—under the pain of audit failure. Therefore it will not be eligible if the core R&D activity is the creation of the product to meet these requirements in the market. These points have been made to the department and its advisers, but unfortunately we have seen no satisfactory result to date.

So we come to the dominant purpose test. The dominant purpose test is a directly related test which will only increase confusion and only has the one outcome in mind.

Where does this leave us with this legislation? First of all, investment will dry up, particularly in the small and medium business sector. Secondly, businesses will find it too hard to operate in Australia, they will leave the shells of their companies here in Australia while they move overseas and, regrettably, many larger companies will find it too difficult to comply. The end result will be that the $1.6 billion will not be spent by government.

David Bushby (Tasmania, Liberal Party) Share this | Link to this | Hansard source

I too rise to contribute to the debate on the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. The coalition has always been strongly supportive of increased business investment in research and development, or R&D, and has therefore considered it highly appropriate to have in place a taxation regime that provides strong incentives for Australian businesses to invest their hard-earned dollars to help achieve this outcome.

We also accept the general principle that the current law, as with all laws, may potentially benefit, in terms of achieving increased R&D investment, through a timely revision of its operation and that this could conceivably be achieved through a higher R&D rate for a greater number of Australian businesses. However, sadly, the changes to the R&D taxation regime presented to this place by the government today, in these bills, fails dismally in terms of achieving these desirable investment outcomes. This is because there are many shortcomings in the bills that need to be addressed before investment is likely to follow.

I was fortunate enough to have participated in the Senate Economics Legislation Committee inquiry into these bills—which occurred well over a year and a quarter ago—and the evidence was overwhelming at those hearings that these bills are flawed and should be rejected. Indeed, when a group jointly appears representing all of unions, academia and business, telling the committee that the government has got it wrong, I believe it is time to sit up and take a look, because, when groups of such divergent interests come together to fight something, they may well have a point.

So let me take the opportunity to have a look at some of the issues raised. I think there was universal condemnation of the degree of and quality of the consultation associated with the legislation. Consultation time lines were highly condensed by the government, rendering it difficult for affected stakeholders to fully understand the impact and consequences of the proposed changes, which are complex, before the then final versions of the bills were introduced in the first half of last year. The second exposure draft was released by Treasury on 31 March last year, with submissions from stakeholders due by 19 April last year, a total of only 10 working days. This was not sufficient time to digest 134 pages of legislation and provide substantive com­ments, particularly given that the second exposure draft incorporated a number of entirely new concepts, including a completely new definition for core R&D.

Let me repeat that, because it was a major matter of concern by affected stakeholders. We are talking about what constitutes core R&D, a matter completely central to the whole purpose of taxation deductions for R&D activity, and a completely new and substantially different definition was first posed in the second exposure draft with only 10 working days provided to allow those affected to consider this and many other changes. In addition, the tight time frames meant that Treasury had not completed its redrafting in time for the 31 March release. As a result, the second exposure draft did not include redrafted feedstock provisions, and instead merely stated that 'a feedstock adjustment rule is under consideration'. Stakeholders were not provided with an opportunity to comment on this aspect of the legislation until after it was introduced into parliament, which is an unfortunate and disappointing outcome.

So the government gave itself an absurdly short timetable for community consultation and examination by the parliament of what is a fundamentally new approach to the definition of eligible expenditure. Of course, despite its claims then of high priority, the government has failed to bring these bills on for debate for more than 12 months. Incredibly, it has failed to use this time to further consult and fix the problems inherent in them. The bills before us today are almost completely the same product of that very poor consultation process that occurred last year.

The Gillard government has been hell-bent on commencing this legislation retrospectively, first of all on 1 July 2010 and now, under great duress, on 1 July 2011. This has caused huge confusion for industry and business, who for the last 18 months have been unsure as to how they should undertake R&D activity and, accordingly and logically, have done less than they would have. In other words, R&D has been scaled back. Over and above the consultation issues, which are something that seems, certainly in respect of the bills that come before the Economics Legislation Com­mittee, a common trait with this government, there are a number of issues in relation to the provisions in the bills themselves, issues which might well have been sorted out if consultation had been properly conducted in a realistic and timely manner or if the government had taken advantage of the past 15 or 16 months to listen. These issues are of such importance that many of the submitters, including Michael Johnson Associates, a specialist R&D firm that works solely in the space of assisting businesses with their R&D activities and the taxable nature of them, argued that the package is in such poor shape that it should not proceed to law in its proposed form. This was widely reflected in the committee hearings with, again, just about all submitters calling for a delay in its implementation or its rejection outright.

As mentioned, the lack of consultation on major shifts in policy is a reflection of the overall approach of the current Labor government, which continues to rush legislation into parliament without due consultation and consideration. Further, the committee was not given sufficient time to consider the bills, another trademark of this government's approach to legislation and policymaking.

An additional consequence of the hasty development of the bills is numerous drafting errors, as well as inconsistencies between the then explanatory memorandum and the bills, as identified in several submissions at the time. Like the lack of consultation and rushed introduction of many of the government's bills, the regular drafting errors that keep arising in legislation under this government is becoming a worrying trend, although it is hardly a surprising outcome given there is often such limited time between drafting and introduction.

As mentioned, the bill substantially alters the definitions of 'core' and 'supporting' R&D. By narrowing the definition of what constitutes genuine R&D, the bills will disqualify from assistance many forms of R&D currently undertaken by Australian businesses for which they attract the existing concessional tax treatment. In turn, the overwhelming expectation of those groups who have lodged submissions on the exposure drafts is that the government's changes will reduce the number of firms qualified for the concession. The evidence suggests that there will be particularly grave consequences for firms focused on industrial R&D and other non-lab/whitecoat activities, including those involved in manufacturing, prototyping and process development.

The problem with the new definition of R&D is essentially that it is poorly aligned with the Frascati manual definition, as had previously been utilised by Treasury. In fact, the eligibility of R&D activities that would fall under the third limb of the Frascati definition—experimental development—is in real doubt under these bills. The bills introduce a much narrower definition of a core activity—essentially being experimental work, unknown outcomes and new knowledge—and then provide for a range of choices as to what a supporting activity might be. These provisions are strongly indicative that anything in a production environment is in danger of not being eligible for the R&D tax concession. Essentially, the provisions will render ineligible the R&D activities of a lot of companies, activities they consider to be core, particularly if a lot of what they do in R&D is in a production context. The provisions thereby knock off the development side of research and development, leaving only research as eligible.

The definition of R&D in the Frascati model, as developed under the auspices of the OECD, is:

1) Research and experimental development (R&D) comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications.

This is a highly recognised and accepted international definition. It is completely unclear why the new and vastly more problematic definitions—first included in these bills in April 2010—have been adopted.For around 25 years, our R&D tax incentive has been based on the Frascati model, which, as mentioned, was developed under the auspices of the OECD. The second part of the Frascati definition, 'the use of this stock of knowledge to devise new applications', is central to my objections to the new approach proposed by the government. The object clause of the bill states that the object is to 'encourage industry to conduct research and development activities' by:

… providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form …

Critically, this clause omits the second critical element of the Frascati approach—that is, the use of this knowledge to devise new applications. The new definition of core R&D also precludes the critical second element of the Frascati definition. As such, the new definition of core R&D will require taxpayers, in order to claim the concession, to seek new, previously unknown or undiscovered information and carry out scientific experimentation to uncover that new knowledge. Claimants will need to prove in a retrospective assessment that the knowledge did not exist anywhere else, which will create additional administrative and operational burdens. This creates an innovation system which does not encourage industry to pursue innovation and the development of processes and products. As mentioned, the approach outlined in the bill leaves little room for the majority of what business R&D is actually about—what, in the Frascati model, is called 'experimental development'. Experimental development is defined as:

… systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed.

All evidence from stakeholders supports the view that the proposed definition of core R&D is inappropriate and will add additional red tape issues. For example, the requirement that supporting R&D activities must be either directly related to or be conducted for the dominant purpose of supporting core R&D activities will add significantly to the compliance burden. This requirement splits off the development of new knowledge from the development of new or improved product processes, devices, materials and services. If you had a manufacturing process where you were trying to develop a new process, the first 30 per cent of your R&D spend might be on the creation of new knowledge but the remaining 70 per cent would be on the development of a new process incorporating that new knowledge—the development part of R&D. Unfortunately, it is that 70 per cent that will likely lose its eligibility for favourable tax treatment under this legislation. Similarly, the new definition of 'supporting' R&D is:

(1) Supporting R&D activities are activities directly related to core R&D activities.

(2) However, if an activity:

  (a) is an activity referred to in subsection 355-25(2); or

  (b) produces goods or services; or

  (c) is directly related to producing goods or services;

the activity is a supporting R&D activity only if it is undertaken for the dominant purpose of supporting core R&D activities.

This is of considerable concern to companies involved in R&D, which I remind the Senate is a desirable outcome and is ostensibly the reason parliament provides tax incentives for spending in this area in the first place. By redefining supporting activities as proposed, the incentives provided will distort spending in R&D away from industrial R&D programs to laboratory style programs.

Evidence was received from Caltex about how they conduct industrial R&D on a commercial scale, seeking to deliver continuous improvements to processes and outputs, particularly at their Australian refineries. To not do so would render them uncompetitive against their international competitors—bearing in mind that petroleum products are highly mobile. Caltex's research is, by necessity, trialled in live conditions rather than laboratory or theoretical conditions, and they hold grave concerns about the economics of conducting this research if they are unable to access the incentives. The net result would be the failure to adapt, develop and remain competitive. This would lead to less fuel refined in Australia and more imported, with consequential impacts on jobs and fuel security. The fact is that this inexplicable proposed change will fundamentally alter the whole concept of supporting and inducing additional R&D in Australia.

The Australian Industry Group pointed out two major concerns with the definition of supporting R&D. The first of these is that supporting R&D expenditure is only eligible if it is either 'directly related to' core R&D activities or if it is 'undertaken for the dominant purpose of supporting' core R&D activities. This means that businesses would have to be undertaking core R&D before any of their R&D expenditure could qualify as supporting R&D. If a business had no expenditure that qualified as core R&D, it would have no eligible R&D expenditure whatsoever.

The second main issue that AiG raised is that a lot of experimental development is neglected by the dominant purpose test in the definition of supporting R&D activities. In section 355-30 of the bill, a supporting R&D activity is defined as an activity directly related to core R&D activities except if it is an activity that is explicitly excluded, an activity that 'produces goods or services' or an activity that 'is directly related to producing goods or services'. In any of these cases the expenditure needs to be undertaken for 'the dominant purpose of supporting core R&D activities'. As was noted at the hearings:

… it is difficult to think of many supporting activities that don’t fall into one of the three dominant purpose categories given that any activity directly related to production is captured.

The reality is that there are simply too many ways that supporting R&D activities will be excluded from eligibility for the proposed new R&D incentive for business to have any confidence that experimental development will continue to attract a tax incentive. I am of the opinion that the government has erred greatly by proposing the definitions it has and that the definitions of core and supporting R&D should be reconsidered to be more closely aligned to the Frascati model of R&D before these bills can be supported.

But the poor policy decisions reflected in these bills do not stop there. The government has also introduced sweeping changes to the eligibility requirements—changes which again threaten to significantly erode support for R&D investment in Australia. Again, they are also fundamentally inconsistent with the government's stated intent of making R&D tax support arrangements simpler, more predictable and more generous. Instead, they impose a series of barriers upon firms rather than offering encouragement for innovation. Under this proposed legislation, there will be a significant amount of additional planning required by companies so that they can reassess their eligibility under the new definition, on the one hand, and also to predetermine, perhaps throughout the annual life of a project, what activities will now be core and what will be support. This clearly will impose a significant new and challenging burden in predetermining eligibility.

Further complicating matters is a lack of clarity over what an essential aspect of this proposed legislation actually means—that is, the use of the term 'dominant purpose'. The bills define a range of activities as not being core activities. If a company has an activity that comes under that list of exclusions then it will have to jump over another hurdle. They will then have to show that this activity is for the dominant purpose of supporting a core activity. This leads to the need for a company to be able to define what its core activities and its supporting activities are and to justify the fact that an activity has the dominant purpose of supporting a core activity. This will inevitably prove to be relatively complex and deliver uncertainty to companies planning their R&D activities. Also, companies are required to identify and categorise their activities upfront when they are registering their R&D activity to qualify for the tax credit, which imposes a high compliance burden on all businesses.

As noted at the hearing, in a manu­facturing setting a company may come up with a process concept or a new product concept, but in just about all cases it will need to be tested in real life or through a scale-up version. Scale-up is a real challenge to successfully commercialising R&D, so it is important that this stage is recognised in these bills before they can be supported. Evidence also noted that in manufacturing, typically, there will be a batch run of a new concept or product and there will be feedback R&D. Invariably, the first trial will not be the final product. Feedback R&D highlighting shortcomings and failures within the system gives the R&D team the knowledge to further improve and create the product or process they are seeking. It is clear that in a manufacturing setting this would be a common occurrence, and the proposals before us totally fail to recognise this.

As it stands, under the current definition of R&D activities, all activities qualify under the 'systematic, investigative and experi­mental' test—SIE test—or the 'directly related' test. No distinction is made. Under the proposed legislation, the taxpayer needs to split activities into core or supporting and then establish which of the four tests the supporting activities apply to. These decisions will be based on the overall circumstances of the activities and little if any guidance is available yet for companies to assess these issues. The overwhelming evidence is that a 'dominant purpose' test will exclude a large proportion of the production trial activity that is a necessary and legitimate part of the research and development cycle.

If the government's aim is to contain the cost to revenue associated with large and open-ended production trials, the introduction of a cap on the total value of the group's R&D claim would better achieve this objective, whilst also providing clarity and simplicity for claimants. Of course, the government claims that the changes will be revenue neutral. However, the evidence suggests that eligible activity will be greatly curtailed with the end result that there must be savings for government revenue. The bottom line is that the dominant purpose test should be removed as it imposes an unnecessarily high threshold and does not target those few excessive claims which the government purports are occurring. There are better ways to address these, such as a 'purpose directly related to' test, substantial purpose, apportionment of expenditure, dollar capping the extent of production trials on the total value of the R&D claim for companies with group annual revenue exceeding $1 billion or on eligible R&D expenditure, more sympathetic language, specific provisions for specific excesses, time limits for trials, or pre-approvals for projects above certain values.

Further, the object clause needs to be revised in respect of spillover and additionality benefits. The objects clause of the draft legislation is too narrow and restrictive and implicitly or explicitly accords greater emphasis to research rather than development. It will change the emphasis that has been in the objects clause one way or another since the inception of the R&D tax concession in the mid 1980s. The emphasis that has always been central to the objectives of this incentive has focused on increasing investment in both R&D in Australia and helping Australian industry become more internationally competitive, export oriented and innovative. But, as noted at the hearings, in a sense this restricts the eligible research and development to those circumstances where a company could perhaps be asked: would you not have done this without the credit? That is actually not a very sensible position, because the credit should just be a cost-planning issue in a matrix where you make a decision about whether to do the work or not.

The narrow coverage of the objects clause suggests to us that the government intends to pare back the role of the R&D tax incentive to fund, almost exclusively, research. It does not intend to include much of what business R&D is about—namely, the development of existing knowledge to devise new appli­cations. Instead one can only conclude that the government intends that the R&D tax incentive will apply only to activities conducted for the purpose of producing new knowledge. It would be more honest to refer to it as a research tax credit. (Time expired)

Ian Macdonald (Queensland, Liberal Party, Shadow Parliamentary Secretary for Northern and Remote Australia) Share this | Link to this | Hansard source

Can I start by congratulating my colleagues on this side who have spoken on these bills on their precise understanding of a very complex tax arrangement in relation to research and development. Senator Back, Senator Bushby and, before that, Senator Colbeck addressed all aspects of the bills in a clinical and forensic way. They particularly went into specific provisions in some detail. In fact, they made such a case that need say little more to indicate why the opposition opposes this legislation: because of the damage it will do to the Australian economy and to Australian innovation. I do not want to go into the bills in the depth that my coalition colleagues have done but wish simply to very briefly lament the Labor government's complete lack of interest in and support for research and development in our country. Since Senator Carr has been in charge of research and development, Australia seems to have gone backwards. In fact, it seems that everything Senator Carr touches goes backwards as well. As a minister for manufacturing he has presided over perhaps the worst set of circumstances that Aust­ralian manufacturing has seen for many a year, and this is from a government that pretends that it is interested in manufacturing workers' jobs. BlueScope Steel's quite tragic decision today is evidence of this. What is the Labor government doing? It is flounder­ing around, saying it is going to provide some money for those who lose their jobs. People who lose their jobs do not want money. They do not want compensation. They want jobs. This government, unfortunately, appears to have absolutely no understanding at all.

What do you think the carbon tax is going to do for manufacturing jobs in Australia? I simply cannot believe that my colleagues opposite in the Labor Party, who supposedly look after the unions that put them in this place, particularly manufacturing unions—and those unions supposedly look after the interests of their members—could possibly support anything as dramatically bad for the Australian economy as the carbon tax will be. We all know that the carbon tax will export Australian jobs offshore, particularly Australian jobs in the manufacturing industries. You do not have to be Einstein—and I am certainly not—to work out why. Australia does have a competitive advantage at the moment because we have some of the cheapest forms of energy of anyone in the world. Because of that, although our wages and working conditions are high, we are able to compete. We have good systems, we have good research and development, and we have moderately priced energy sources. This government is determined to make our energy costs as expensive as any in the world and, in fact, more expensive than most, with the result that jobs will simply go offshore.

That is already starting to happen. Talk to any of the people in the manufacturing industry around Australia and you will hear that, if it has not already happened, the indications are that that is where they are heading if this government continues in the way it has operated in the last couple of years, particularly if it proceeds with a carbon tax. I lament the whole approach of this government of disinterest in research and development and the way that this minister, supposedly supporting manu­facturing and industry in our country, is doing just the exact opposite—and that is only the tip of the iceberg.

With these bills this government will inflict greater pain on the great entrepreneurs who exist in small business and in our large enterprises that are the backbone of continued economic growth in this nation. As I understand it, if passed into law they will considerably cut activity that currently goes into research and development in our country. We on this side believe there are fundamental flaws and problems with this legislation.

The existing R&D tax concessions have delivered excellent results for Australia in the past, and I would suggest that a serious analysis of figures will show that the current concession tax system has played a critical role in fostering increased business investment in R&D. R&D expenditure in business in Australia rose to $16.9 billion in the 2008-09 year, based on the latest figures available from the ABS in September last year. I would hope that it continues to increase in the future, but those statistics point to, up to now, a very impressive increase in R&D spending, particularly during the past decade—that is, the decade of the Howard government—especially in areas of the economy that have been so vital to Australia and that will continue to be important, such as mining and manu­facturing. For the coalition, it will always be a priority to create and foster conditions in Australia that lift productivity, encourage enterprise and stimulate discovery and innovation.

I should note—as my colleagues before me have noted, detailed and dissected much more clinically and forensically—that this legislation weakens the current system. I recognise that the bills have significant limitations in relation to: the start-up date, which has been mentioned by my colleagues; the establishment of the dominant purpose test, which both Senator Bushby and Senator Back immediately before me went into in some length; the application of the feedstock provisions to a wide range of activities and results; and the reduction of support for R&D in the building industry in particular, an industry that has done so much for Australia and is so important to most aspects of our economy. Under these bills, there will be a reduction of support for research and development in the building industry. We also note with some concern the disqualification of many small- and medium-sized businesses from support because of the new rules in respect of their ownership structures and turnover. Many that would previously have been eligible will be disqualified. There is also a requirement for costs to be documented and attributed to core or supporting industries. Previous speakers in this debate have gone into that in some length. There are new provisions relating to third-party investors in firms' research and development and the proposed application of new rules relating to the disposal of R&D results to actions taken prior to the commencement of this legislation. As other speakers from the coalition have pointed out in some detail, these bills have a lot of flaws and simply indicate again that the Labor Party has little interest in fostering the innovation for which Australians have been so well renowned in the past.

I also mention tonight something not directly germane to this legislation: research and development corporations. Senators may be aware that there was a function in Parliament House last week at which the RDCs were celebrating their successes over the years. By and large, the research and development corporations have done fantastic work for Australia with some government seed funding and investment by private and other government agencies. They have really supported Australian research and development in what I might call an applied way. But there was an undercurrent of gloom at the function last week, because a lot of the RDCs are coming up for continuation, or new rounds, of funding. Many of them feel quite concerned that, under this government, the funding is not going to be available. I am told that a lot of the money that used to go into applied research and development in the RDCs has been taken out of that pool and put into what is called centres of excellence. As I understand them, centres of excellence are good things. I do not criticise them but they are, as I understand them, purely science—they are driven by academia. They do not have the same sort of applied approach to research and development that the research and development corporations have. I am concerned for the future of those RDCs and I am picking up from those directly involved a real concern about this government's commitment to any form of research and development.

I urge Senator Carr, the Minister for Innovation, Industry, Science and Research, to reverse what appears to be his current approach of cutting back, scaling back, assistance for research and development in Australia as is demonstrated, I suggest, by this bill before us and by the reduction in funding that has gone to R&D corporations in the term of the Rudd and Gillard govern­ments. I urge the minister and the govern­ment not to deplete further the funding that goes to research and development corpora­tions when their funding comes up for renewal in the new rounds, which I understand will be commencing shortly.

I have indicated, as my colleagues have done, our opposition to these bills. Again, I lament the difficult position which Australian manufacturing finds itself in, particularly under the stewardship of the current minister, Senator Carr. Senator Carr is not a bad sort of fellow, but his under­standing of his job and his ability to assist manufacturing, rather than just by giving outright subsidies, is something that all Australians, and certainly those of us in this parliament, should be very concerned about. I again appeal to those few Labor members in the chamber at the present time: please go back to the unions, who in many cases put you in this parliament. Please take some notice of the members of those unions who are desperately keen to keep their jobs. Forget the rhetoric; forget the politics of all this. Have a look at it yourselves. You must see that, as costs increase in Australia, as the cost of power increases in Australia, Australian manufacturing industries are going to become less and less competitive. The only way they will be able to continue into the future is if a socialist government continues to prop them up with government subsidies. That is not any way to have a manufacturing or any sort of industry in Australia. Industries that cannot make it on their own are certainly on the downhill slope.

The carbon tax is going to put real pressure on most businesses. Over the years, I have spoken about many industries. The cement industry is one that comes immediately to mind. It is a substantial industry in Gladstone, up in the state of Queensland, which I represent, employing a hell of a lot of people. Yet we do not know what concessions it is going to get. I do not think anyone knows, because the detail of this legislation is not out. Ms Gillard will not tell us who the top 500 polluting companies are. It is very clear that the cost will be so great as to encourage industries like the cement industry to look to Indonesia or China for the importation of cement. We are seeing it happen under Senator Carr's watch with BlueScope Steel, and that is just the tip of the iceberg. Motor vehicle companies in Australia are struggling. Some would say they are only continuing under this govern­ment because of subsidies—subsidies that seem to have been given in rather a strange way without much regularity as to who gets what and what gets who, but that is a discussion for another time. It is clear that what manufacturing is left in Australia will not be here once the carbon tax comes in because the carbon tax will add to manufacturing costs—it will add to the cost of living of all of us—and it will make prosperous manufacturing industry a distant memory, a thing of the past, in our country.

I hope that the government has listened to the debate on these bills and, in particular, assessed with an open mind the contributions so well made by Senators Bushby, Back and Colbeck, who have clearly demonstrated the real problems with this legislation. One would hope that the government intended it to provide support for research and development concessions, but it seems, like most things the Labor Party have done to date, particularly in the term of the Gillard government, they have wasted so much money that they have got to claw back what they can. It seems, from my understanding of this legislation, that some might say it is just an exercise in trying to grab some money back so that the budget deficit, which has blown out under Labor, can be reined in a bit. It is a pity that it is in the research and development area that cost savings are being made. I join with my colleagues in asking the government to seriously look at the obvious flaws in this legislation and to do something about them.

Don Farrell (SA, Australian Labor Party, Parliamentary Secretary for Sustainability and Urban Water) Share this | Link to this | Hansard source

I thank senators, including Senator Macdonald, who have contributed to this debate on the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. I particularly welcome the willingness of senators on the crossbench to consider these bills on their merits. Every independent member of the House of Representatives has done exactly the same. The crossbench has recognised the importance of this government's reform to support Australia's future prosperity. This is in contrast to the detractors, who have held the same course for over two years, distorting the intentions of the legislation and rejecting the evidence that supports it. They have had every chance to stand up for reform but they have simply ignored the beneficial changes and chosen to stir up fear. We heard a bit of that from Senator Macdonald a few moments ago.

The opposition continues to support measures that will add to the government outlays. It has no interest in tackling the real problem: the growing discrepancy between our innovation goals and our R&D tax incentives. In opposition, it seems there is no need for policy coherence. We need a research and development tax incentive that is fit for purpose—a mechanism that responds to the real needs of firms in the modern economy. The R&D tax concession was an important Labor reform in its day, championed, as I am sure you would know Mr Acting Deputy President Back, by the late John Button.

The world has changed over the past 25 years and so has the way in which businesses operate. What has not changed is the imperative for innovation. Australia's productivity performance has not improved over the past decade. The growth in our wages and living standards is largely the product of the resources boom, which I am sure, Mr Acting Deputy President, you are aware of in your home state of Western Australia. If we want to maintain that growth we must lift the performance of our firms. Innovation-active businesses are twice as likely to increase their productivity and 41 per cent more likely to increase profitability than businesses that shy away from innovating. Innovators contribute much more to Australia than just profits. They are more export orientated, they create more jobs, they generate new skills and they give more back to society and the environment.

So how do we encourage firms to invest in themselves? We are not the only ones treading this path. International competition to attract research and development investment is intense. We have to face up to the weaknesses of the existing R&D tax concession. John Button's legacy has been decimated as the concession's effective level of support has plummeted from 24.5c in the dollar to the current level of 7.5c in the dollar. This is simply not sufficient to influence decision making in many firms that might otherwise seize the opportunity to lift their performance. After taking up the reins in the new innovation portfolio, Senator Carr consulted widely on how we might best focus that support through an independent review and a national innovation system. The resulting report, Venturous Australia, which I expect you have read, Mr Acting Deputy President, recommended the introduction of the R&D tax credit. In Powering ideas, Australia's first long-term innovation strategy, the government accepted that recommendation.

These two documents, Venturous Australia and Powering ideas, provide the framework of the bills that we are debating today. They have been further strengthened by extensive consultation with industry and the research community. The government has taken every opportunity to engage stakeholders, includ­ing three rounds of public consultation and a Senate committee process. I acknowledge in this chamber those of my colleagues who contributed to the report of the Senate Economics Legislation Committee in 2010, including of course Senator Hurley, who is now retired from the Senate. She contributed very significantly to that report and took a great interest, I might add, in the subject matter of the report.

In response to constructive suggestions raised during the consultation—and we did not get any of those from the opposition—improvements have been made to the program design, attracting even more advocates in industry. This is an R&D tax incentive for the 21st century, an incentive that will unlock talent wherever it lies. The new R&D tax credit is inclusive. It is designed to support those firms no matter the type or stage of technological development and it will support them at a more generous rate. That maximises our opportunities, particularly opportunities in the clean technology race, which are a major priority for this government. Many Australian firms are set to benefit from the clean technology investment boom triggered by the government's Clean Energy Future package. The new tax credit will allow them to access those opportunities by undertaking more R&D projects, with the potential to reduce carbon emissions. This will contribute to a more sustainable use of our resources, transforming industry and contributing to improved environmental outcomes. But, regardless of the market firms wish to target, these increased benefits will act as a beacon to bring them into the innovation system.

Under the new R&D tax credit, assistance to small and medium enterprises will double and they will be entitled to receive cash refunds if they do not have the liabilities against which to pay their tax offset. This is critical for cash-starved small firms and will provide innovative start-ups with the cash flow that they need to invest in research and development. Eligible companies with a turnover of $20 million will have access to a 45 per cent refundable R&D tax credit, equivalent to a 150 per cent tax deduction. After allowing for the normal tax deduction that the credit replaces, this doubles the base of the rate of government support compared with the R&D tax concession, which was only available as cash in quite limited circumstances.

It would be wrong to suggest only small and medium firms will benefit from the new R&D tax credit. Larger businesses—those with a turnover of $20 million or more—will also receive increased rates of support through a 40 per cent non-refundable R&D tax credit. This raises the base rate of the government assistance by a third, equivalent to a 133 per cent R&D tax concession. This new tax credit also has a simpler eligibility criteria, with two clearly identified categories of eligibility that will attract support—core R&D activities and supporting R&D activities. This will ensure support flows to genuine research and development.

The new definition of core R&D activities requires identifying a knowledge gap which is then solved by means of an experiment proceeding from the hypothesis to an outcome by employing a systematic progres­sion of work. The Senate Economics Legislation Committee, which I referred to earlier, reported results in the adoption of two amendments that clarify the extension of the tax credit to experimental activities for the purpose of generating knowledge in the applied form of new or improved materials, products, devices, processes or services. The government recognises that the experiments can and do occur in a range of settings in the laboratory and all the way through to normal production.

So let me be clear on this: the new tax incentive supports both research and experimental development, including a production environment. While certain activities are excluded from the core R&D activities, they can still qualify as supporting R&D activities if undertaken for the dominant purpose of supporting core R&D activities. Supporting R&D activities are those activities directly related to core R&D activities. If a supporting R&D activity results in production activities or activities listed on the exclusion list, they must be undertaken for the dominant purpose of supporting core R&D activities in order to be eligible.

I would like to conclude by saying that the government is presenting a considered and comprehensive reform program that will transform the way this nation does its business. It is very much a regret that the opposition persists in its attempt to gut this legislation and with it the country's hopes for the future. I am nevertheless confident that the spirit of reform can win through in this parliament and throughout the business community. This is the moment for all of us to turn from baseless fears and consider the part these bills can play for building a richer, fairer and greener nation. As a result, I commend the bills to the Senate.

Question agreed to.

Bills read a second time.