Dissenting Report by Coalition Senators
The Coalition supports increased business investment in research
and development (R&D) and appropriate reforms to legislation to help
achieve this outcome. We also accept the general principle that changes to the
current law may potentially help to achieve a higher R&D rate for a greater
number of Australian businesses.
However, we will not be supporting the Tax Laws Amendment
(Research and Development) Bill 2010; Income Tax Rates Amendment
(Research and Development) Bill 2010. There are several shortcomings in the
Bills that will be addressed in this report.
Consultation
Throughout this inquiry, there have been complaints about
the failure of appropriate consultation associated with the legislation.
In order to understand and apply these changes, the industry
will need time to consult on the legal implications to ensure compliance, and
individual companies will need to develop and implement new internal mechanisms
to administer the scheme.[1]
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.”[2]
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.[3]
Firstly, the Government has given 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. The
new approach would apply to all business R&D expenditure undertaken from 1
July 2010 and, under the timetable presented to us, business will have about
two weeks to examine the new Act before R&D spending will come under the
new regime. Putting aside the particular features of the proposed changes, this
timetable for introducing a fundamentally new approach will increase the range
of grey areas surrounding the tax incentive and the resulting uncertainty will
see businesses scale back their expenditure. This outcome sits in stark
contrast to the purpose of the R&D tax incentive – which is to encourage
additional R&D expenditure by business.[4]
...lament the missed opportunities to genuinely consult over
the months before January 2010.[5]
This was arguably best highlighted in the submission from
Michael Johnson Associates.
A consistent theme of the submissions to the Committee’s
hearings was that there has been inadequate time to digest the key documents
associated with the introduction of the Bills. The main causes of concerns are
as follows:
- The Second Exposure Draft (which was materially different to the
First Exposure Draft in many aspects) only allowed 11 days (across the Easter
and school holiday periods) for stakeholders to prepare responses and it
omitted key provisions such as those relating to feedstock.
- The feedstock provisions did not appear until the Bills were read
in to Parliament. At the Committee hearings, Senator Back indicated that he was
not aware that the provisions had been made available at all prior to the
commencement of the Committee hearings.
- The Committee hearings began within a week of the Bills being
read into Parliament meaning that written submissions actually follow rather
than precede the hearings and that many stakeholders were unaware of the
hearings taking place.
- The legislation will commence with no guidelines available to
assist taxpayers and no transition process to allow taxpayers to make
arrangements for the new legislative environment.
- AusIndustry has indicated that it will be rolling out its first
wave of program material in July/August 2010 and that this will not be
developed in consultation with industry.
At the Committee hearings, even the Chair of the TCC conceded
that the above timetable represented a “fairly rushed process”. One consequence
of the rushed approach is that the EM contains a number of mistakes in terms of
references to the Bills (see Attachment A).
Taken along with the wildly divergent views expressed at the
Committee hearings, the timetable above has meant that the Bills and EM have
been prepared in haste and are distinctly lacking in clarity and accuracy.
MJA submits that the package is in poor shape and should not
proceed to law in its proposed form on 1 July 2010.[6]
This was reflected in the committee hearings as well.
Cutler reviewed the PC report and came up with the polar
opposite: increase the base and scrap the incremental. We then went on to a
consultative process where we got that consistency of viewpoint, and then the
rather unfortunately timed Christmas package, which arrived just before
Christmas, did not take that consultation into any real account at all, and put
forward a definition that virtually word-for-word mirrored what was in the
Productivity Commission report. We then got 131 submissions over the Christmas
period. Again, the almost unanimous tenet was, ‘Do not make these changes.’
This has not happened, and I do feel that in the very specific consultations we
had that we did get an opportunity to express our views but we were essentially
being prescribed, ‘This is what we are doing; what do you think?’ rather than
being asked: ‘How would you tackle these issues?’ For example, we were not
asked about the suggestions we have about how we could deal with large claims
under the existing definition of putting too much strain on revenue.[7]
Normally there is adequate time to examine these things, to consult
with them and to provide scope and opportunities for things to be adjusted
before they are taken to the parliament, but not in this case.[8]
From my perspective, having been engaged in this process
since it started, this all points to the haste with which we are trying to nail
this so that it can apply from 1 July. The second exposure draft was completely
different from the first exposure draft. I speak openly when I say that the
first exposure draft we got just before Christmas was a dog’s breakfast. From
my perspective, only then did real consultation start. We had a wasted
opportunity from the time we had the Cutler report, to the consultation paper,
to the first exposure draft. That time should have been used, I think, working
on what we have as the second exposure draft, which was somewhat of an
improvement, and then even the bill. On the second exposure draft I think we
had 11 business days to consult. The bill came out last Thursday and we are
here today talking about it. It is rushed and you will have a suboptimal
outcome because it is rushed. I think you need to think about it.[9]
This is a reflection of the overall approach of the Rudd
Government, which continues to rush legislation into Parliament without due
consultation and consideration. Additionally, the Committee has not been given sufficient
time to consider the Bills – another trademark of the Rudd Government's
approach to legislation and policy making.
Proper consultation with all relevant industry stakeholders
over an extended period of time would have prevented the numerous problems identified
in this report.
Stakeholders are consistently urging the Government to at
least delay the introduction of the Bills. Given the Government’s failure to consult
appropriately, this is an eminently sensible suggestion; indeed, it is entirely
prudent for these bills to have their start dates deferred. This was supported
both in submissions and in evidence given to the Committee.
I would suggest that the prudent thing to do would be to
delay the implementation date to 1 July 2011. Let us use the next 12 months to
tweak this, to get it right, and then pass it as the law.[10]
We submit that the introduction of the Bills be deferred to 1
July 2011, to enable appropriate consultation and clarification on the changes
and related guidelines. Companies require additional notice to consider the new
rules and adjust their business plans accordingly. The proposed passing of the
Bill in the last week of June, for application on 1 July 2010, without
guidelines, will create confusion and are unlikely achieve the desired changes
in levels of R&D activity for 2010/11income year.[11]
The radical nature of the shift in innovation policy cannot
be easily assessed and applied in practice by taxpayers. Therefore the Minerals
Council of Australia recommends the Bill be delayed for at least one year (to 1
July 2011) until more detailed consideration can be undertaken.[12]
Further to this, it was pointed out that there is no
evidence of any supporting documentation, rulings, regulations, guidelines or forms
for the new legislation.[13]
This is concerning, particularly if the Bills are to take effect from 1 July
2010.
I was a bit shocked that in July there will be a road show
around the guidelines and they have not engaged with industry on those
guidelines. How effective will they be?[14]
It was stated in the hearings that the educational material
was still being developed by AusIndustry.
However I can say that it is our intention to produce
sectoral guidelines as educational material for different industry sectors, but
neither of us, unfortunately, could comment on the policy deliberations.[15]
The fact of the matter is that the legislation is being
unnecessarily rushed through the Parliament, leaving the Department of
Innovation, Industry, Science and Research to prepare education campaigns,
regulations and guidelines that have not yet been adequately tested with
industry and stakeholders. This is an inappropriate state of affairs when
industry is recovering from the global financial crisis and facing a second
potential downturn in the economy, if current media speculation in Europe and
the United States is to be believed.
Recommendation 1:
The Coalition recommends that the start date for these Bills be
amended to 1 July 2011.
An additional result of the hasty development of the Bills
was numerous drafting errors, as well as inconsistencies between the
Explanatory Memorandum and the Bills, as identified in several submissions.[16]
The Coalition continues to be alarmed at the regular drafting errors that keep arising
in legislation under the Rudd Government – although it is hardly a surprising
outcome given there is often such limited time between drafting and
introduction. All drafting errors must be eradicated before the legislation’s
enactment.
Recommendation 2:
The Coalition recommends that the passage of the Bills be
delayed in order to rectify the issue of drafting errors.
Definitions of ‘core’ and ‘supporting’ R&D
The Bill substantially alters the definitions of ‘core’ and
‘supporting’ R&D. In narrowing the definition of what constitutes genuine
R&D, the Bill will disqualify from assistance many forms of R&D
undertaken by Australian businesses. 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. There will be particularly grave consequences for firms focused on
industrial R&D and other ‘non-lab/white coat’ activities, including those
involved in manufacturing, prototyping and process development.
The problem with the new definition was outlined as:
The new definition of R&D is not better aligned with the
Frascati Manual definition as had previously been contended by Treasury. In
fact, the eligibility of the third limb of the Frascati definition –
experimental development – is in real doubt.[17]
There is a very narrow definition of a core
activity—experimental work, unknown outcomes, new knowledge—and then there are
a range of choices as to what a supporting activity might be, with a strong
flavour that anything in a production environment is in danger of not being
eligible. It is those trials that could be unable to be claimed.[18]
Certain companies look at this definition and they believe
that the majority of what they do is ‘core’ and that their claims might be able
to be sustained in this environment. Equally, other companies look at this
definition and say: ‘A lot of what we do is in a production context.[19]
The definition of R&D in the Frascati model, as
developed under the auspices of the OECD is:
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.[20]
This is a well recognised definition and several witnesses
pointed out that this had been the model they had worked with for quite some
time and the new definitions that were being pushed by Treasury and the
Department of Innovation, Industry, Science and Research could cause problems.
On the need to bring the definition into better alignment
with the internationally accepted Frascati Manual definition of R&D: I
think they are no longer maintaining that. I think that the proposed definition
in this bill recognises the first two elements of Frascati being basic and
applied research, but query the applicability of the third limb, which is
experimental development. This package seems to query the extent to which that
work would be eligible.[21]
The second and central basis for our strong opposition to the
new approach to defining eligible business R&D expenditure is that it is
highly restrictive. For approximately 25 years, our R&D tax incentive has
been based on what is known as the Frascati model, which has been developed
under the auspices of the OECD over a number of decades. Under this model,
R&D is defined as:
... 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.
The second part of the definition, ‘the use of this stock of
knowledge to devise new applications’, is central to our objections to the new
approach proposed by the government. The objects clause of the bill states:
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 in
the Frascati approach—‘the use of this knowledge to devise new applications’.[22]
The new definition of ‘core’ R&D is:
(1) Core R&D activities
are experimental activities:
(a) whose outcome cannot be known
or determined in advance on the basis of current knowledge, information or
experience, but can only be determined by applying a systematic progression of
work that:
(i) is based
on principles of established science; and
(ii) proceeds
from hypothesis to experiment, observation and evaluation, and leads to logical
conclusions; and
(b) that are conducted for the
purpose of generating new knowledge (including about the creation of new or
improved materials, products, devices, processes or services).[23]
Several submissions were critical of this approach.
The new definition of core R&D requires taxpayers to seek
new, previously unknown or undiscovered information and carry out scientific
experimentation to uncover that new knowledge. Claimants such as Caltex 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 development of processes and products.[24]
The definition of core R&D activities in the bill
confirms the research focus of the new approach to business R&D. 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.[25]
When it came to the hearings, the witnesses were strident in
their view that the definition of core R&D was inappropriate and would 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.[26]
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.[27]
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.[28]
This has been of considerable concern in several submissions
and followed up on during the hearings. The submissions and witnesses pointed
out:
By redefining supporting activities as proposed, incentives
for R&D will move away from industrial R&D programs to laboratory-style
programs. Caltex’s industrial R&D occurs on a commercial scale, with
improvements to processes and outputs trialled in live conditions rather than
laboratory or theoretical conditions.[29]
The whole concept of supporting and inducing additional
R&D will be undermined by that uncertainty. Even if overall it worked out
to be a fantastic new approach once the dust had settled, this problem would
exist.[30]
I think we agree entirely that, in the manufacturing or
production environment, it will be an additional compliance because of the
dominant purpose test, but there is still a significant compliance issue
required in the non environment, where most of our R&D happens to be, in
order to address the core and supporting activities.[31]
The Australian Industry Group pointed out two major concerns
with the definition of supporting R&D.
Firstly, supporting R&D expenditure is only eligible if
it is ether “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 its R&D expenditure could qualify as supporting R&D expenditure.
If a business has no expenditure that qualifies as core R&D, it will have
no eligible R&D expenditure.[32]
Secondly, in any case much experimental development is
neglected by the dominant purpose test in the definition of supporting R&D
activities. In the Bill (s355-30), 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, or if it is an activity that
“produces goods or services”, or if it is an activity “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.[33]
One of our advisors put it this way: “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.”[34]
Put simply, 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.[35]
Recommendation 3:
The Coalition recommends that the definitions of core and
supporting R&D be reconsidered to be more closely aligned to the Frascati
model of R&D.
Eligibility Criteria
The Government’s changes to the eligibility requirements are
sweeping, and threaten to significantly erode support for R&D investment in
Australia. 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.
Because of the operation of the dominant purpose test and the
feedstock provisions, an eligible R&D activity may have no costs associated
with it and therefore the customer or the client or the SME can go away from an
AusIndustry meeting believing that they are eligible for the R&D tax credit
program, only to have that eligibility wiped away because of the application
of, for instance, the feedstock provisions or the eligibility of expenditure
provisions.[36]
While that requirement will not exist under the new
legislation, there will nonetheless be a significant amount of additional
planning required by companies so that they can reassess the eligibility under
the new definition, on the one hand, and also, importantly, to predetermine,
perhaps throughout the annual life of a project, what activities will now be
core and what will be support.[37]
However, there are a number of concerning implications which
flow from what I refer to as the core building blocks of the proposed bill... the
burden of proof and evidence required to sustain eligibility by all claimants;
and the compliance burden.[38]
‘Dominant Purpose’ Test
The major concern was the use of the term ‘dominant
purpose’. Several witnesses expressed concern as to what that term actually
meant.
The third tier comes about with what we still refer to as the
exclusions list, although it is no longer called that in the bill. It says that
a range of activities are defined as not being core activities. If you have an
activity that comes under that list of exclusions then you have to jump over
another hurdle. You have to show that that activity is for the dominant purpose
of supporting a core activity. So I guess the issue is the complexity of having
to define what are your core activities and you're supporting activities and
justifying the fact that an activity has the dominant purpose of supporting a
core activity. That is relatively complex. Also, companies are required to
identify that upfront when they are registering their R&D activity to
qualify for the tax credit. That is a relatively high compliance burden on our
members and other companies. That is our concern.[39]
In a manufacturing setting a company will come up with a
process concept or a new product concept, but it will need to be tested in real
life or at a scale-up version. Scale-up is a real challenge to successfully
commercialising R&D, so it is important that the technical issues and
problems are overcome. A production trial can be very small or very large, and
it will depend on the particular facts. 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. In a manufacturing setting this would be common.[40]
In submissions and during the hearings, there was evidence
of continual and considerable confusion about what was meant by dominant
purpose.
The Easter draft persists with the notion of the need to
introduce a dominant purpose test to qualify supporting R&D activities.
Four categories of supporting activities have been identified and the taxpayer
needs to identify which category its supporting activities belong to – if the
activity is on the exclusions list, production or (somewhat bizarrely) directly
related to production, the dominant purpose test applies; if not in any of these
categories, then the directly related test applies. The introduction of
production is a first-time concept for the R&D tax incentive and has
wide-ranging implications that the Easter draft does not fully explore.[41]
Under the current definition of R&D activities, all
activities qualify under the ‘systematic, investigative and experimental’ (SIE)
test or the ‘directly related’ test. No distinction is made. Under the proposed
Credit, the taxpayer needs to split activities into core or supporting and then
establish which of four tests the supporting activities applies to. As
discussed earlier, these decisions will be based on the overall circumstances
of the activities without the EM providing any definitive guidance as to how
circumstance relate to the law.[42]
The introduction of the dominant purpose test appears to be
a large impost on businesses.
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. If the 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.[43]
The dominant purpose test should be removed as it imposes an
unnecessarily high threshold as evidenced in the EM, and does not target the
minority of excessive claims which the Government purports are occurring;[44]
It is concerning that many submissions were advocating for
the removal of the dominant purpose test. Several alternative models were
suggested, such as:
- ‘A purpose directly related to’ test[45]
- Substantial purpose[46]
- Apportionment of expenditure[47]
- Dollar capping the extent of production trials,[48]
on the total value of the R&D claim for companies with group annual revenue
exceeding $1 billion,[49]
or on eligible R&D expenditure.[50]
- More sympathetic language[51]
- Specific provisions for specific excesses[52]
- Time limits for trials[53]
- Pre approvals for projects above certain values[54]
Recommendation 4:
The Coalition recommends that the dominant purpose test be removed
and be reconsidered.
Object Clause
The object clause needs to be revised in respect of
spillover and additionality benefits. The object clause currently reads:
(1) The object of this Division is to encourage industry to
conduct research and development activities that might otherwise not be conducted because of an uncertain return from
the activities, in cases where the
knowledge gained is likely to benefit the wider Australian
economy.
(2) This object is to be achieved 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.[55]
It was pointed out that this is a more restrictive term and
could impact on Australian industry.
During the course of the public consultation process last
year the CTA and other external stakeholders urged the government not to
include an objects clause that refers to R&D activities that would not
otherwise occur and which are likely to involve spillover benefits for the
broader community. We are disappointed this remains a feature of the Bill
because we consider there is a risk that, at the margin, a court or tribunal
might be guided by such language in resolving disputed claims.[56]
While those concepts may be well and good, they are
impossible to prove and therefore should not be part of the statutory framework
– even as part of an objects clause. Such language might well be appropriate
for a second reading speech but, in our view, does not belong in the law
itself. We would much prefer the objects clause to make reference to increasing
the efficiency and international competitiveness of Australian business, which
reflects what we regard as the proper rationale for the incentive.[57]
The objects clause of the draft legislation was too narrow
and restrictive and implicitly or explicitly accorded greater emphasis to
research rather than development. It changed 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 1980’s. That emphasis that has always been central to the
objectives of an R&D tax incentive focused on increasing investment in
R&D in Australia and to help Australian industry become more
internationally competitive, export oriented and innovative[58]
But 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. I think
one of the great concerns about the idea of conditionality is that people keep
focusing on: ‘Prove that we are only funding things that would never have been
done.’ That does not make sense to me.[59]
It is concerning that several witnesses suggested that the
object clause concentrates more on research than development.
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 the government intends that the R&D tax
incentive will apply to activities conducted for the purpose of producing new
knowledge. It would be more straightforward to refer to it as the ‘research tax
credit’.[60]
The new object clause (s355-5), when taken in conjunction
with the new definition for core R&D, seems to reflect an intention to
limit support to research and exclude development. This is despite the fact
that development represents the largest and most important aspect of BERD.[61]
The objects clause in the draft legislation definitely
narrows the definition and has a much greater emphasis on the R rather than the
D, compared to the existing situation.[62]
The comment was made earlier that it is more about the ‘R’
and less about the ‘D’. I think there is a conflict between this definition and
the objects clause. I think the objects clause more eloquently and more
directly says that the object of this section is to promote and support
investments in R&D. But if you look at section 355-25(1)(b), I think you
will find that the wording in that subparagraph could be improved pretty
simply.[63]
This is not a positive sign for future research and
development. While the Coalition does not believe that the balance should be
tilted the other way, both research and development should receive equal
footing within the taxation system.
Recommendation 5:
The Coalition recommends that the Object clause be amended to
ensure that both research and development are given equal tax benefits.
Intellectual Property
There was concern by Cochlear Ltd about the ownership of
intellectual property outside of Australia, as this may be disadvantageous to
the Australian economy[64]
and it was additionally suggested in evidence given to the Committee that the
non-retention of intellectual property ownership within Australia be trialled
for three years and then reassessed.
I think, with care, that proposition could be accepted with
the government reviewing it maybe after two or three years of activity to see
exactly to what extent it has resulted in benefits domestically. It is a bit of
a risk for us in public policy but I think, given the globalisation of R&D,
it is something we should try out to see what the impact might be.[65]
Conclusion
In short, the Bill radically alters a regime that has been
operating effectively since the 1980s – and in a way that disadvantages a large
number of Australian businesses. Where companies must currently demonstrate
that their R&D activities are novel or have high technical risk, Labor essentially
proposes to fund firms only in cases in which they can show they have
introduced a wholly new technique, process or solution. Its effect is punitive
on a number of large companies (whose best innovations are often based upon
making refinements to existing practices) as well as the small business sector,
given that approximately 60 per cent of current applicants are SMEs.
Together, the proposed changes to elements of the
legislation such as the definition of R&D activities, the dominant purpose
regarding supporting activities, the registration processes and feedstock rules
will have the very opposite effect to the Government’s stated intentions of
providing greater generosity, predictability and simplicity. They will
disadvantage rather than benefit most Australian companies intending to
undertake R&D.
Unsurprisingly, the changes have therefore attracted
substantial criticism from a wide diversity of stakeholders, including major
organisations such as the Australian Industry Group, the Australian Chamber of
Commerce and Industry, Ernst & Young and KPMG.
We also note that the Chair’s report now implicitly acknowledges
a number of potential problems with the legislation, including drafting errors
and definitional concerns. We do not believe that it is appropriate that Bills
be rushed through when they contain such errors and when they therefore give
rise to considerable uncertainty. Reviewing elements of the Bills after three
years is also not an appropriate means of addressing problems of the kind
evident in this legislation – and a more practical step would be to make sure
they are more appropriately drafted in the first place.
Increased innovation and productivity are both key factors
in Australia’s future economic success. But these Bills seek to gut an
incentive that is integral to assisting and encouraging a diversity of
companies to improve their business operations.
The Coalition will not be supporting these Bills.
Senator Alan Eggleston Senator
David Bushby
Deputy Chair
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