A devalued R&D Tax Incentive will diminish Australian innovation

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The Australian Industry Group has urged Senators to reject further changes to the Research and Development (R&D) Tax Incentive, which are due for a vote in the Senate this week, writing to and speaking with Senators to ensure they understand how industry and the economy will be harmed.

The Tax and Superannuation Laws Amendment (2015 Measures No. 3) Bill 2015, if passed, would reduce the value of the R&D Tax Incentive with adverse impacts for innovation in Australia.

Business innovation is central to longer-term advances in our economic and broader social wellbeing. It is also key to the restructuring task currently needed to build an economic foundation that is stronger, more resilient and more balanced across industries and regions.

In Ai Group’s submission to the Taxation Review, we argued that the tax system is well suited to provide a stable and predictable means of correcting for the systematic under-investment in spillover-generating, private sector R&D. But our members note that frequent changes to the R&D Tax Incentive undermine confidence in, and the effectiveness of the incentive.

Unfortunately, the measures proposed in the Bill currently before the Senate are at odds with the objectives of building a stronger economy. The provisions in the Bill would reduce the R&D Tax Incentive by 1.5 percentage points, effective from 1 July 2014. This Bill was originally intended to align with the previously announced across-the-board cut to the company tax rate. If the company tax rate had been cut, the changes to the rate of incentive would have preserved the nominal value of the tax incentive.

However, now that the tax cut is not occurring other than for businesses with annual turnovers of less than $2 million, the Bill before the Senate, if legislated, would erode the value of the tax incentive.

For companies with revenues of $2 million and $20 million, the incentive will fall in value by 10%, and for those companies with revenues over $20 million, the incentives will decline by 15% in value. All companies in a loss position will see a reduction in the value of the incentive. The latter is particularly disadvantageous for companies attempting to innovate in response to difficult trading conditions. These proposed reductions in the value of the incentive would see businesses spend less on their own R&D. In addition they will make less of a contribution to Australia’s research infrastructure and research networks.

These outcomes are clearly undesirable. Further, they stand in stark contrast with other current policy directions which are focused on lifting commercially related R&D. They also follow recent changes to cap the amount of R&D that can be claimed to $100 million. Ai Group will continue to pursue this issue, and other tax reform issues, with the major parties and crossbenchers to ensure that industry is given solid and stable settings that enhance the competitiveness of Australian businesses.

Has your business used the R&D Tax incentive? How will the proposed changes affect your future plans to invest in innovation? Share your experiences and thoughts below.

Ai Group is also keen to hear from members on broader business tax issues as we participate in the Federal Government’s tax review. Please leave your thoughts below or call Pip Freebairn on (03) 9867 0261.

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Innes Willox
Ai Group Chief Executive since May 2012, Innes joined as Director International and Government Relations in 2008. Prior to this he held a number of senior roles in both the public and private sectors: Australian Consul General to Los Angeles (2006-08); Chief of Staff to Minister for Foreign Affairs, Alexander Downer (2004-06); and Manager for Global Public Affairs, Singapore Airlines (2000-04). He began his career as a journalist, with his positions including Chief Political Correspondent and Chief of Staff at The Age.

2 Comments

  1. Steve Oakley

    I despair with the total lack of real, continuing support for Australian Manufacturing. As a niche market manufacturer (turnover circa $5M) of special purpose cooling equipment we have relied on the R&D Tax incentives to allow us to keep up with and at times ahead of a fast moving local and international market.
    Development Grants are too slow, not cost effective for small grants, and often highly politicised in terms of application and timing.
    The R&D Tax Incentive with all its limitations is at least predictable and once engaged relatively easy to understand and apply.
    We utilise the services of KPMG to assist us determine eligibility and costs in a symbiotic relationship that minimises risk and costs.
    The R&D schemes need nurturing for real industries to develop and thrive. Sending such calamitous messages of the continuing down grade and lack of real support of local small OEM industries is short sighted and shows a lack of real understanding about where the real jobs are.

    Reply
    1. Innes WilloxInnes Willox (Post author)

      Hi Steve, thanks for your feedback. We have also heard very similar comments from other members, who all see benefits from the existing R&D tax incentive, but are troubled with all the recent tinkering to the incentive. Frequent changes to the R&D Tax Incentive undermine confidence in the scheme for business people like you who wish to invest in their business. We have stressed this point to the Government in Ai Group’s submission to the Federal Taxation Review, and we have also spoken to the Federal Government, Opposition and Crossbenchers directly on this issue.
      We should have a further update on the Bill we discussed in this blog post when Parliamentary sitting resumes in August, as the Bill didn’t make it to a vote in the final sitting week before the Winter Break. We are continuing to speak with Senators on the proposed changes in the meantime.

      Reply

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