Chapter 8
Estimated impacts of the bill
The impact on usage of the scheme
The number of supported companies
8.2
The Treasury was quite clear that the number of assisted firms will
increase:
...it makes cash refunds available to more firms...[1]
8.3
Innovation Australia was also explicit on this point:
I would expect that there would be an increase in the number
of companies that were registering for the R&D tax credit or offset, if
only because the quantum of the benefit they can get is greater.[2]
8.4
An example is Z-Filter, an SME developing innovative filtering
technology, who submitted:
The global financial crisis has reduced Z-Filter's (and other
SMEs') access to capital via debt and equity markets, therefore the refundable
tax credit is absolutely vital as the lifeblood for SME undertaking innovative
activities.[3]
Sectors likely to attract less
support
8.5
The Treasury commented:
This bill does not seek to distinguish between industries...I
would characterise it as a fairly neutral impact, because you are not
necessarily favouring one sector or another and you let the commercial
imperatives out there take the research where it might go.[4]
8.6
This does not, of course, mean that the impact will be equally spread
across industries. The changes in the bill will mean industries that do more
genuine research will benefit at the expense of those who have previously
claimed for activities only tangentially related to research.
Large versus small companies
8.7
The changes in the bill will, by design, shift support towards smaller
firms:
...there is unquestionably a move towards supporting R&D
which is carried on by SMEs.[5]
It’s clear the Government is focused on rebalancing and
retargeting the R&D tax credit for the SME market, rather than the big end
of the market.[6]
8.8
The change to a refundable credit will benefit more small firms than
large as small start-ups are more likely to be in a tax loss position. But this
is not discrimination against large firms. There is an explicit decision to
offer a somewhat higher rate of assistance to firms with a turnover below $20
million.
8.9
By contrast, the current scheme appears to concentrate unduly on a small
number of larger firms:
There is no doubt that the majority of R&D concession is
held in the hands of very few claimants.[7]
Support for research versus development
8.10
The Treasury said:
Contrary to some public commentary, the bill recognises that
R&D is often done alongside business-as-usual production activities. It
does not skew the tax incentive towards pure research...[8]
8.11
It does, however, shift emphasis towards research generating new
knowledge with more widespread benefits, and away from development work of
benefit only to the company undertaking it. This is the policy intent.
Estimated economic impact
8.12
The changes are expected to increase the total amount of R&D by
increasing the size of the incentives and making them more attractive to small
firms. KPMG do not expect the changes to definitions to have any material
effect on research undertaken. Their report:
...does not factor in the proposed changes to definition, as
this is likely to have less impact on pure and academic research.[9]
8.13
Over the medium term, increased R&D and innovation will boost
productivity, economic growth and national income.
The KPMG study
8.14
The Treasury tabled a report by KPMG, Competitive Alternatives 2010:
Special Report: Focus on Tax, which comments:
Comparing the rankings [of ten OECD economies for tax on
R&D operations] in 2010 to 2008, the most dramatic change is for Australia,
moving up from fifth place in 2008 to first in 2010. The change is the result
of Australia adopting a new R&D tax credit system as of July 1st
2010 that is refundable for corporations that meet defined revenue limits.[10]
8.15
KPMG themselves were somewhat more cautious in interpreting the results
of their research, making the caveat that the report 'did not purport to rank
countries by how well their respective tax systems support commercial entities
that undertake R&D as part of their wider operations, but rather, how well
the tax system supports pure R&D entities'.[11]
Will the bill be revenue-neutral?
8.16
The Committee heard conflicting views on whether the bill introduces a
revenue-neutral change (ie that the budget deficit is unaffected by moving from
the old to the new scheme) as intended.
8.17
Michael Johnson Associates told the Committee that:
...we have supplied modelling to all the Treasury submissions
in relation to the drafts, and our modelling on the publicly available figures
suggested that, with the increased rates of credit and introduction of
foreign-owned IP, offset by the cost savings of the incremental
provisions—which we think are about 30 to 35 per cent of the current cost of
the program—you have already got a revenue-positive result, and that is before
you start to look at the apparently restrictive impacts of the new definition.[12]
8.18
The Advanced Manufacturing Coalition put a similar view:
The concerns we have raised above will have the effect of
substantially reducing the quantum of eligible R&D activities across all
claimants in the future. We do not believe that the increased value of the tax
offset would compensate for this reduction. It therefore follows that...this
change is likely to represent a net gain to the Commonwealth revenues.[13]
8.19
Some accounting firms also suspected the bill would increase government
revenue:
...the abolition of incremental 175 provisions that save
hundreds of millions of dollars. Conversely, there is rate and threshold
increases, particularly at the SME level that costs money. There have been
tightening measures that have occurred, dominant purpose, feedstock and other
areas, but no modelling has been done that I am aware of that shows this policy
intent, which I understand and respect, has actually been achieved.[14]
8.20
In stark contrast, Treasury, who have done modelling on this question
and have the experience in this kind of assessment, stated that the changes
will be revenue-neutral:
...this whole bill has been designed...to be revenue neutral...the
dominant purpose test and things of that nature... yield some savings and they
are broadly offset by the increase in the rates. [15]
8.21
Treasury believe that the numbers bandied about as reductions in
eligible claims (such as 30 to 60 per cent) may be true for some individual
categories but are vastly overstated for industry as a whole.[16]
Their own modelling suggests there will be around a 15-20 per cent (around $300
million) reduction in revenue foregone as a result of tightening eligibility
offset by a similar increase due to the higher rates on existing projects and
the additional projects induced by those higher rates.[17]
8.22
One of the key factors in assessing whether the changes are
revenue-neutral is the extent to which the current scheme is undeservedly
rewarding expenditures only tangentially related to R&D (or 'rorts' to put
it less kindly).
8.23
MJA provide one piece of evidence on the responsiveness of firms to the
size of concessions:
...the effective halving of the available benefits under the
Concession in the 1996 Budget saw program participation rates drop by some 30%
in the next 3 years...[18]
8.24
This seems broadly consistent with the data shown in Chart 8.1.
Chart 8.1: Summary of
registration data from 1985-86 to 2007–08
Source: Innovation Australia, Annual Report 2008-09, p. 22.
8.25
Some back-of-the-envelope calculations suggest that Treasury's estimate
that the changes will be revenue neutral is at least plausible. It is estimated
that the existing concession costs around $1500 million in 2009-10 so:
- Abolishing the 175 per cent incremental tax concession saves
around $350 million per year[19];
- Tightening the eligibility criteria will lead on Treasury's
estimates to a 20 per cent saving, or around $250 million per year.
- Effectively increasing the rate of the former 125 per cent tax
concession represents a doubling of the benefit for small businesses and a
one-third increase for large businesses. While smaller businesses (under $20
million annual turnover) are the majority of the recipients by number, by value
the majority of the benefit goes to just 100 firms, suggesting the increase in
cost will be much closer to a third than double. Applying this increase to the
20 per cent smaller base adds around $300 million to $400 million per year
to the cost.
- If, as suggested in MJA's calculation above, a 50 per cent change
in benefits led to a 30 per cent change in take up, then a 33 per cent change
in benefits could lead to a 20 per cent change in take up. Allowing for the
larger effect on smaller firms, this could add around $250 million to $300 million
per year to the cost.
- Summing these suggests the change to the budget balance could be
between a saving of $50 million and a cost of $100 million.
8.26
There is inevitably a significant degree of uncertainty around these
estimates. The Cutler Review referred to 'the inherent difficulty of accurately
forecasting the effects of changes to a tax instrument'.[20]
8.27
The Corporate Tax Association also recognises the uncertainty around any
modelling exercise and suggests:
If the law is to be changed on the basis of the Bill as
currently drafted, we strongly urge the government to monitor the level of
claims – particularly for large business. In the event that the level of claims
drops in a way that was not anticipated the government should move quickly to
fine tune the eligibility rules so that an appropriate level of industry
support is restored.[21]
Committee view
8.28
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. The
Committee accepts Treasury's modelling that the net budgetary 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.
Recommendation 7
8.29
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.
Senator Annette Hurley
Chair
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