I also stand tonight to speak in support of the Tax Laws Amendment (Research and Development) Bill 2010. This bill, in combination with the Income Tax Rates Amendment (Research and Development) Bill 2010, introduces a new research and development tax incentive to take the place of the outdated and complex R&D tax concession. This reform is the biggest to happen to the R&D landscape in a decade. It is designed to boost investment in R&D, support Australian companies and create jobs. It will increase assistance for genuine R&D and will redistribute support in favour of small and medium-sized enterprises—the majority of businesses and the lifeblood of our economy. It is neither sustainable nor in the national interest for 60 per cent of government investment in business R&D to be received by 100 firms when Australia has two million enterprises. The previous speaker, Senator Milne, also spoke about that.
The government’s intention is to lift Australia’s R&D performance by encouraging businesses to take advantage of the scheme and in so doing ensure Australia’s place as a clever country. The revised definition of R&D is about simplification and clarification. It replaces ambiguities and overlapping tests with a clearer statement of what core R&D activities are. The key elements are the need for an experiment and the generation of new knowledge. These concepts are in common use in the R&D community, which understands what an experiment is in the R&D context. The revised definition is designed to bring out the key elements of the previous definition of R&D in a more easily understood way. In particular, it removes references to considerable novelty and high levels of technical risk by focusing on the character of experimental activities. More targeted eligibility criteria will ensure that the scheme promotes activities that will benefit the economy as a whole.
R&D activities create new knowledge and technologies and as a result increase productivity, jobs and therefore economic growth. We expect many more firms to participate in the scheme because of the higher base rates, wide availability of cash refunds and the redistribution of assistance in favour of small and medium enterprises, which are more responsive to fiscal incentives. There will be no reduction in the amount of support available for business R&D; it will simply be delivered more evenly and more effectively.
Australia must be prepared to face the challenges that come its way both now and in the future and must move with the times. The incentive provided by this bill has two key components. The first is a 45 per cent refundable tax offset for companies with a turnover of less than $20 million. Companies with a turnover greater than $20 million will receive an offset of 40 per cent. The 45 per cent offset doubles the present base rate available to SMEs, and the 40 per cent offset increases the rate by one-third for larger companies. The offsets will be calculated on the basis of expenditure on eligible R&D activities and the declining value of depreciating assets used for eligible R&D activities.
Small, innovative firms will be the big winners as a result of this new incentive, with greater access to cash refunds and the increasing rate of assistance provided. For example, a company with a turnover of $10 million spends $1 million on eligible R&D activities in an income year and is in a tax loss position. Under the new incentive that company will be entitled to a cash refund of $450,000. Under the existing R&D tax concession, the company will only receive a tax deduction worth $375,000, and there is a zero benefit until the company starts to turn a profit. So the new incentive will support small, innovative businesses when they need it the most.
The new incentive focuses more support towards genuine R&D activities. The key elements of this approach are a clearer definition, a robust test for supporting activities and better administration of the incentive. This new system will see companies rewarded for genuine R&D, not for business-as-usual activities. The new incentive will also ensure that most software R&D is treated consistently with that occurring in other sectors, and this is particularly important given the all-encompassing nature of information technology.
There has also been a substantial rationalisation of activities excluded from core R&D activities in order to further improve this incentive. This bill will also make it possible for foreign corporations that have a base in Australia to access the incentive. It will mean that the incentive will be accessible to companies that carry out R&D activities in Australia, even if the intellectual property is held overseas.
The government will introduce quarterly payments for small and medium businesses from 1 January 2014. These firms will get their credit sooner, significantly improving their cash flow and incentive to invest in R&D. The lowering to 28 per cent of the tax rate for small businesses from the 2012-13 income year will not affect the 45 per cent refundable tax offset for companies with a turnover under $20 million.
Australia’s R&D spending in 2007-08 amounted to 1.3 per cent of our gross domestic product. This compared with an OECD average of 1.6 per cent and with a rate in some countries—such as Japan, Korea and Sweden—of as high as 2.7 per cent. We must lift our R&D expenditure for our economy to remain internationally competitive. Dr Brendan Shaw, Chief Executive of Medicines Australia, states:
…we know that [Australia] has world-class research infrastructure, a stable socioeconomic environment, a strong intellectual property system and an efficient regulatory system … but these factors alone are no longer sufficient to stimulate investment growth.
There are several reasons for this. The most important among them is the rapid transformation of developing nations in Asia, South America and Eastern Europe as viable destinations for long-term investment in research and development.
Dr Shaw goes on to state:
… we should also be worried about the impact this has on Australia, and be particularly worried, because, while Australia remains an attractive location for R & D investment for our industry, other countries are now looking even more attractive.
It is expected that this tax incentive will be budget neutral over the first four years of implementation. The 2009-10 budget provided an additional $38 million over four years for administrative agencies to ensure a smooth transition. In order to improve certainty for taxpayers, AusIndustry will provide improved guidance material as well as introduce a new system of private binding rulings, called ‘advance findings’. There are many ways to grow an economy, but the key to long-term sustainable growth of the economy of any country—and Australia is no exception—is productivity. Productivity has three main drivers: infrastructure, a skilled workforce and innovation.
For 12 years prior to Labor forming government we had a federal government that failed to invest in infrastructure, failed to invest in education and training and failed on innovation as well. That is why productivity fell under the Howard government. The Gillard Labor government is making up for the failures of those opposite in all three areas. We now have record investment in infrastructure, such as roads, rail, ports and the National Broadband Network. We have made record investment in education and training, such as trade training centres, new school facilities through the Building the Education Revolution program and additional university and TAFE places.
And this bill is an example of how we are encouraging private investment in innovation in addition to our public innovation agenda. This is why we want to better target R&D investment—to enhance innovation in Australia to drive productivity and grow a modern economy. The objects clause clearly states that the tax incentive will be provided for industry to undertake experimental activities for the purpose of generating new knowledge or information in either a general or applied form. The ‘development’ aspect of R&D is captured by the application of knowledge—that is, applied form. These development activities can be undertaken in a production environment. The government has clarified the objects clause, which states that development activities are covered by the clause. The amendment clarifies that ‘new knowledge’ includes new knowledge in the form of new or improved materials, products, devices, processes or services. The term ‘improved’ covers development activities.
The R&D tax credit is about new knowledge created through experimentation, and this is consistent with the approach of the Frascati Manual and international best practice. The Frascati Manual explains that the basic criterion for R&D activities is an appreciable element of novelty and the resolution of scientific and/or technological uncertainty.
This bill is significant in simplifying taxation law. The new provisions are not only drafted in plain English but are less than one-third of the length of the provisions they are replacing. If enacted, this bill will deliver much-needed reform to public support for business innovation. It will offer an increased incentive for companies to undertake R&D activities in Australia. It also recognises that the innovation dividend for the economy will come from changing the focus to genuine R&D instead of normal business activities. I commend the bill to the Senate.