Protecting innovation in Australia: what is best for Australian companies?
The Tax Laws Amendment (Research and Development) Bill 2013 (commonly known as the Targeting Access Bill) was passed in the Senate on Tuesday night. As the Bill must return to the House of Representatives for the amendments to be passed; there is an opportunity for the Government to take stock and reconsider the potential adverse impacts of this measure on the Australian economy.
The proposed amendments operate to impact entities with large R&D project expenditure as the tax relief is restricted to the first $100m of R&D expenditure (above which no incentive is available). This should be viewed in the context of another proposed measure to reduce the R&D rate for all companies for the next financial year – a 15 percent cut for most, and 10 percent for SMEs. Thus, the House of Representatives needs to consider the combined impact of both proposed amendments.
The House of Representatives should also consider two other factors.
First, is it appropriate that this measure applies retrospectively from 1 July 2014?
Second, unusually there has not been consultation with industry on this and given the commercial impact, a range of views should be canvassed and impacts clearly understood.
For those companies that employ people specifically for R&D and factor the incentive in their cost calculations; what would this mean? An Australian Company with $150m R&D will now only get a $10m benefit – i.e. 6.66 percent – while a foreign company spending $80m on R&D will get its full 10 percent.
As the Government prepares to release the White Paper on Taxation; it would be prudent that this measure also be analysed; and that appropriate consultation take place.
What will be the result?
Companies will certainly look to offshore more R&D. Is this what Australia needs – at a time when innovation is critical to the economic growth of our country?
Large scale transformational projects, undertaken with elements of R&D, are not just of benefit to the company concerned, but are inextricably linked to broader supply chains and create flow-on impacts for employment. It is those companies; hit hardest by the $100m limit, which often invest in riskier and more radical R&D involving significantly higher costs.
This move is likely to reflect poorly on the country internationally and lessen Australia’s R&D and innovation credentials; which are pivotal factors underpinning economic growth. It will increase the cost of domestic R&D, thereby driving R&D activities offshore.
As KPMG’s recent report* on R&D in Asia Pacific demonstrates, R&D regimes across the region are stable. Further afield, other countries such as the UK, are expanding their R&D programmes despite tough economic conditions. And in 2013, when the original proposal was first mooted, the French Minister for Innovation invited our Australian companies to undertake their R&D in France.
Government policy in the 21st century must do all it can to foster and facilitate innovation hubs. Last year, in a survey by the Australian Industry Group, 39 percent of respondents had stronger R&D tax concessions in their top three budget priorities.
The measure effectively discriminates against successful companies with large operations in Australia and Australian resident companies. By reducing entitlements to the companies that spend the most, usually strongly weighted towards labour, this measure will discourage investment in R&D and potentially impair Australian jobs and international competitiveness.
The Government should not rush to pass these amendments until there has been an opportunity to accurately assess the impact of the proposed measures.
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