Labor Senators' Minority Report
1.1
Tax incentives are recognised as one of the most effective tools
available to government for stimulating and attracting investment in
innovation. This investment, in turn, is critical to the development of dynamic
and highly productive industries, able to compete at the top of the global
value chain. As the Australian Industry Group notes:
Innovation by business, including innovation associated with
business engagement with research and development, is critical to the future
success of the Australian economy. It is particularly important at the moment
because we have a legacy of low productivity growth to address and because
there is a need for new sources of growth to emerge to assist the economy
rebalance as the boom in mining investment wanes.[1]
1.2
The point was recently echoed by Mr Glenn Stevens, Governor of the
Reserve Bank of Australia, joining the growing consensus that 'a culture of
innovation is the real key to the challenges of economic transition.[2]
1.3
This is not a matter that can simply be left to chance. The global
competition for research talent and investment capital is intense—and with good
reason. Every nation wants the jobs, skills and opportunities that go hand in hand with
R&D investment.
1.4
Australia has every reason to enter this competition with confidence. As numerous submissions to the committee have affirmed, the excellence of our
scientific institutions and the talents of our research workforce—when
partnered with our stable investment climate and strong intellectual property
framework—are an attractive proposition for global investors.
1.5
The fact remains, we cannot afford to be complacent about these
advantages or fall behind in the race for new technologies. All sides of
politics acknowledge the obligation of governments, state and federal, to
showcase and nurture our strengths for the future. In this respect, the
significance of our R&D tax environment cannot be emphasised too strongly.
1.6
Submission after submission points to the R&D Tax Incentive as an
important, even decisive factor for companies looking to allocate their highly
prized research dollars. Telstra, one of our largest R&D investors, notes:
As a proud Australian company, and one with an increasing
global footprint, the R&D Tax Incentive has been one of the reasons behind
Telstra's commitment to undertake the majority of our R&D work onshore, and
where we partner with our vendors to undertake R&D on our behalf; we have
mandated this requirement with them.[3]
1.7
At a time when companies like Telstra and the automotive manufacturers,
another significant R&D investor group of companies, are offshoring jobs,
it is now more critical than ever to ensure their R&D spend—and the jobs it
creates—remain in Australia.
1.8
Given the importance of this measure, and the need for clear signals to
prospective investors, any changes must be approached with great caution and
underpinned by a compelling policy rationale. As Mr Serg Duchini of Deloitte
submitted:
It is clear that attracting innovation and its contribution
to domestic prosperity depends on more than favourable tax policy decisions,
but recent studies have confirmed that business expenditure on R&D is
indeed strongly influenced by stable innovation policy.[4]
1.9
That is not to say that the policy framework should be static. On the
contrary, it is important that the policy keep pace with the needs of modern
business and the nature of modern research.
1.10
The Labor Government recognised this need with the pivotal reforms of
2011, which replaced the old concession with a credit, tightened the
eligibility criteria to focus on genuine R&D, and lifted the level of
support for both smaller and larger firms. The impact was immediate. In the
first year alone, the number of firms registered grew by 15 per cent; and the
total sums invested grew by 20 per cent. In the same year, the Labor Government
committed to introducing R&D quarterly credits from 1 January 2014 as a
further measure to boost R&D expenditure.
1.11
All of these measures were proposed and adopted with the benefit of
widespread consultation across the innovation community, in and beyond
Australia. In this way they affirmed—rather than called into question—our long-term
commitment to this vital policy.
1.12
The Government now proposes to add a third tier to the eligibility
requirements for the R&D Tax Incentive, with the result that very large
companies with aggregate Australian assessable income of $20 billion or more
would no longer be able to claim the R&D Tax Incentive.
1.13
It is true that this proposal stems from a measure put forward by the
Labor Government in February 2013. That measure, however, must be understood in
context. It was not an isolated savings measure, but the means of funding an
ambitious package focussed on innovation policy, A Plan for
Australian Jobs, centred on strategic industry-led Innovation Partnerships.
These Partnerships would have the scale to attract major global investments in
Australian firms and research institutions. They were, in other words, a new
means to the same end: working with business to build jobs for Australians.
1.14
That rationale is gone. The Abbott Government has made no commitment to
the job-building measures the previous Labor Government tied to the changes to
the R&D Tax Incentive. Nor has it earmarked the savings from this measure
for the vital task of lifting R&D investment. It is simply ripping support
from innovators in business.
1.15
As Michael Johnson Associates notes:
As acknowledged elsewhere in the Explanatory Memorandum, this
is a savings measure and to brand it as better targeting of the Incentive is
misleading.[5]
1.16
The submissions are almost unanimous in their opposition to this bald
grab for any available 'savings'—savings that exact a heavy toll in jobs lost,
capabilities impaired and talent sent offshore with no corresponding benefit
introduced.
1.17
Three risks in particular are highlighted.
1.18
The first is the obvious risk of major R&D investments from very
large companies heading offshore, with neither the R&D Tax Incentive nor
the Innovation Partnerships to attract them. It cannot be put more clearly than
in KPMG's submission:
The estimated savings of $1.1 billion gained by the proposed
changes are flawed and will provide the Government with at best a small increase
in consolidated revenue now at the price of longer term growth in Australia in
future.[6]
1.19
The argument has been put by the majority of the Committee that larger
organisations are less receptive to tax incentives than smaller firms. The
underlying assumption is that larger firms have the will and capacity to make
these investments without the need for government prompting.
1.20
The evidence for this argument is far from clear.[7]
What is certain is that these companies have the flexibility to direct their
research investments to the jurisdiction they judge most attractive. Cost is
clearly a relevant consideration, as is the commitment to innovation displayed
by the national government. On both fronts, this Bill risks sending investment
from 'the companies that spend the most'[8]
offshore.
1.21
The second risk is the flow-on impact to small and medium enterprises, in addition to Australian research institutions (including universities and
public agencies such as the CSIRO). The point was well made in evidence by Mr
Duchini, who cited the SME technology company Gekko Systems as an example.[9]
As a research partner, Gekko is naturally concerned that the changes will
discourage our largest firms from building collaborative ventures with
Australian businesses.
1.22
The University of New South Wales notes that 30 per cent of its research
effort at is supported by business entities directly impacted by the proposed
changes.[10]
The Innovation Partnerships, along with the move to quarterly credits, might
have alleviated these concerns. The Government's proposal does not.
1.23
The third risk is the 'perverse outcome', as KPMG notes, of a large
foreign company receiving preferable tax treatment in Australia to an
Australian company of equivalent size.[11]
It is an unfortunate message to be sending to local industry at this time.
1.24
Labor is keenly aware of the challenges facing many Australian firms as a result of the unprecedented strength of the Australian dollar, the rapidity
of technological change and the increased competition in both domestic and
export markets. We are concerned by the crisis in the automotive sector with
the coming loss of all three major vehicle producers. We are concerned by the
mass lay-offs in the aluminium sector, aviation, and service industries,
amongst other sectors. We are concerned that the Government has failed to lay
down a coherent strategy for a shift from the resources boom to the jobs of the
future—jobs in advanced manufacturing, creative industries and health
technologies, to name a few.
1.25
This is not the time to be putting investments in future industries at
risk.
1.26
Another concern to Labor members is the Government's decision to scrap the option of quarterly credits. Even if the ostensible rationale for the
targeting of the R&D Tax Incentive to smaller firms is accepted, it is often smaller
firms and innovative start-ups that have the most difficulty with cash flow and
accessing capital. The flexibility of the quarterly credit is critical to the
very firms and industries the Explanatory Memorandum claims the Governments wishes to support. This
contradiction between stated aim and likely outcome is a mark of the incoherent
and ill-considered approach by the Abbott Government to a vital national
agenda.
1.27
The Government has attempted to downplay the significance of measures in
the Bill, in stark contrast to the position it adopted prior to the election.
1.28
Then Coalition Industry spokesperson Ms Sophie Mirabella MP responded to
Labor's proposed Jobs Package with the claim that the 'change to the R&D
tax concession [sic] casts doubt on the stability of tax policy and raises more
concern about the sovereign risk of investing in Australia'.[12]
1.29
In its subsequent Manufacturing Policy Statement, the Coalition pledged that:
'We will therefore use the opportunity of the scheduled 2014 changes to the
R&D Tax Incentive programme to review access to R&D tax support for
many businesses that have been barred from possible access under a series of
retrograde cost savings made by Labor'.
1.30
From this, the business community could reasonably conclude that the
Coalition Government would maintain, if not expand, the generosity of the
R&D tax environment. These same businesses are now left with only the
certainty of a further review, further changes and—as is foreshadowed in this
current revenue grab—further cuts.
Conclusion
1.31
Labor recognises that investments in innovation are critical to the
future prosperity of Australians. We were and are prepared to work with
business and researchers to ensure the innovation budget is used wisely. We are
not prepared to stand by as the Government plunders that budget for savings.
1.32
This is the time for innovation to be the frontline of economic policy
and the signals from the Government must prove it.
1.33
The evidence tendered to the Committee overwhelmingly argues against the
changes proposed by the Government. Labor accepts this evidence and the flaws
it points to in the Government's approach.
1.34
In our view the Government has not provided a credible rationale for the
proposed cuts to the R&D Tax Incentive, particularly given its opposition
to the corresponding innovation measures they were designed the fund and its lack
of any other plan to use these savings to support innovation.
1.35
For these reasons Labor does not support the majority report and is
opposed to the Tax Laws Amendment (Research and Development) Bill 2013.
Senator
Mark Bishop
Deputy Chair
Navigation: Previous Page | Contents | Next Page