Research and Development incentives: the lifeline of innovation

Parliament resumed this week after its long post-election break. But there is a legislative proposal to be debated which threatens to erode Australia’s brand as a destination for investment in R&D and Innovation.

A near-$1bn cut in the R&D Tax Incentive has been added to twenty other savings measures which the government has included in an omnibus Bill it will put to parliament. It makes up a sizeable proportion of the $6.5bn ‘saved’.

Labor reversed its long-standing opposition to the cut in the Incentive during the recent election campaign and says it will now consider the package of measures before committing to a position.

The omnibus bill includes a 1.5 percent reduction in the Incentive claim rates, with the refundable rate dropping from 45 percent to 43.5 percent and the non-refundable rate from 40 percent to 38.5 percent.

This equates to an effective cut in tax incentives of 10 percent to start-ups and SMEs and 15 percent for larger companies, including high -tech and biotech companies. That is a material blow.

In a sense, the $990m cut to the R&D Tax Incentive is not surprising given how governments have invariably seen it as a cost more than an investment. In the first half of last year a Treasury-led review of the incentive was announced, only for this to be redirected in December as part of the National Innovation and Science Agenda. Reviews invariably involve tightening of tax concessions rather than expansion.

We have had uncertainty over the fate of the Incentive for nearly 10 years now, but until the announcement was made on August 18, some hope still remained of a shift in approach. But the Government’s decision to proceed with this significant cutback has cast doubt over the strategic priority of R&D in Australia. The rhetoric of support for innovation is undermined by this move.

The cost of domestic R&D will be increased, thereby driving R&D activities offshore where they will be undertaken in the most after-tax cost-effective country.

To use Australia’s Olympics performance as an analogy, we can see the difference that additional investment made to other countries.  We need to decide what we want to be famous for – given that Australia is already falling in the global innovation rankings, we need strong and stable innovation policy and a commitment to its priority.

Large scale transformational projects are often undertaken with elements of R&D. These are invariably not just for the benefit of the company concerned, but are inextricably linked to broader supply chains and create flow-on impacts to employment. And given the flak which big business came in for during the election campaign, it should be pointed out that it is larger companies which often invest in riskier and more radical R&D which involve significantly higher costs.

Government policy in the 21st century must do all it can to foster and facilitate innovation hubs, and an effective R&D tax regime is crucial to this. These are pivotal factors underpinning the economic growth that can improve Australia’s deficit.

Whilst the bill introduced this week will save $1bn, how much more will potentially be lost?

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