Summary and Recommendations
Research and development (R&D) by businesses can lead to
innovations which boost productivity, an important contributor to economic
growth. The Committee notes that Australia's R&D performance, allowing for
its industrial structure, is comparable to its peers. It believes that there is
potential for the economy to grow faster if businesses undertook R&D which
provides value for taxpayer support and stimulates growth in value adding
activities. It therefore understands why successive Australian governments have
operated schemes to use tax concessions, among other measures, to encourage
firms to undertake R&D.
The current scheme, however, does not make the best use of
the money which taxpayers are foregoing. This bill seeks to reprioritise this
support. An effective scheme will focus on generating additional R&D
which brings broader benefits which spill over to other companies,
rather than merely benefiting the company undertaking it. This is more likely
to occur when the support goes more to small to medium, newer, more innovative
companies undertaking genuine R&D. Too much support under the current
scheme is going to large established firms undertaking routine spending only
tangentially related to research and benefiting only themselves. It is
unsurprising that such firms, and their advisers, may oppose the bill, but the
mere fact that big companies currently receive support is not in itself a
justification for their continuing to receive it. It is neither sustainable nor
in the national interest that 60 per cent of the total government support for
business R&D is consumed by 100 firms out of Australia's two million
enterprises.[1]
The design of the new R&D assistance has been informed
by a number of detailed inquiries with broad consultation with industry, unions
and consultants, both before and since the release of the exposure draft.
A significant change welcomed by the Committee is allowing
companies with turnover less than $20 million to receive a tax credit, rather
than having to wait until they are profitable to benefit from the tax
concession. This recognises that many new innovative companies may take some
years to become profitable and it is precisely during this period that support
is most beneficial. The Committee is also pleased that the level of support for
smaller companies increases to the equivalent of a 150 per cent deduction (from
the present 125 per cent), doubling the after-tax value of the support. The
removal of the complex 175 per cent incremental premium, which perversely
rewards volatile R&D and is of no assistance to new firms, is also a step
forward.
A change in the bill that attracted wide support is removal
of the requirement that intellectual property be owned in Australia. Similarly
the changes to the exclusions surrounding 'in house' software have been
generally applauded.
While the intent of the bill is to ensure that access to
R&D support is timely and targeted, the Committee is concerned that there
appears to be a mistaken view that the bill proposes to restrict support solely
to (basic) research. In particular, the proposition was advanced that requiring
supporting expenditure to have a 'dominant purpose' of supporting core R&D
was excessively restrictive. The opportunity should be taken to ensure the
intent of the law is clear prior to its enactment and a process is in place to
monitor and review issues as they arise.
Recommendation 1
The Committee recommends that subsection 355-5(2) of the
objects clause be amended to clarify the reference to 'new knowledge or
information in either a general or applied form' by adding 'new knowledge in an
applied form includes new or improved materials, products, devices, processes
or services'.
Recommendation 2
The Committee notes that many of the concerns were raised by
organisations who want to maintain the status quo. Nevertheless, given the
concerns raised, but acknowledging the need to ensure that public support is
targeted appropriately, the Committee recommends that the definition of 'core
R&D activities' in section 355-25 be amended to remove the word 'about'
from paragraph 355-25(1)(b) so that the paragraph reads as:
[talking about experimental activities] that are conducted
for the purpose of generating new knowledge (including about the
creation of new or improved materials, products, devices, processes or
services).
Recommendation 3
Given the scope of the changes proposed, the Committee is of
the view that the amended provisions, including the effect of the 'dominant
purpose' test, be reviewed after two years to ensure that the legislation is
operating consistently with the Government's intent.
The Committee supports the goal of reducing complexity which is
an impediment to small business benefiting from the assistance. It commends the
many areas where the bill has simplified matters. The Committee notes some
concerns about the complexity of the feedstock provisions and the dominant
purpose test but does not believe these will be a problem for large companies.
The Committee recommends that some of the additional $38 million in funding
being provided to the Australian Taxation Office and the Department of
Innovation, Industry, Science and Research is used to help small businesses
comply with the provisions.
Recommendation 4
The Committee recommends that companies with revenues under
$20 million be exempt from the dominant purpose test.
Recommendation 5
The Committee recommends that a broad–based working group
including small business and union representatives be established to advise
Innovation Australia and the Department of Innovation, Industry, Science and
Research about any unforeseen circumstances that emerge as the bill is
implemented. This working group would also inform the two year review of the
bill (Recommendation 7).
The Committee notes concerns about the capacity of
Innovation Australia to assess eligibility claims. Having considered the
evidence presented, the Committee takes the view that they have the expertise
and the requisite knowledge and skills to make decisions. The general guidance
material and public findings to be provided should mitigate the compliance concerns
raised by some submitters.
The Committee's attention was drawn to claimed drafting
errors.
Recommendation 6
The Committee notes the claim of drafting errors. The
Committee notes that minor drafting errors are common when framing new
legislation. The Committee does not believe that these minor errors are of
sufficient magnitude to delay passage of the bill but considers it preferable
that they be dealt with before the bill is enacted.
The Committee expects the bill will increase the amount of
R&D by small firms and in time this should lead to stronger economic
growth. Firms continuing to receive assistance will be paid at a higher rate.
On the other hand, the 175 per cent premium concession is being abolished and
eligibility rules tightened. The Committee accepts Treasury's modelling that
the net impact will be about revenue-neutral, although it is hard to be
precise. Given these uncertainties the operation of the bill should be reviewed
after it has been operating for some time.
There have been calls for the Senate to delay considering
the bill and defer its operation for a year. The Committee takes the view that
many of these calls are more an expression of opposition to the Government's
policy objective of targeting R&D assistance more towards small and medium
enterprises and spreading the benefits more effectively across industry. This
opposition is unlikely to disappear as a result of further discussion. The
Committee believes its recommendations address the misapprehensions that have
led to some calls for delay.
Recommendation 7
The Committee recommends that the Senate pass the bill, with
the amendments proposed in the earlier recommendations, before the end of June
2010. The operation of the bill should be monitored on an ongoing basis and reviewed
after two years.
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