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Wednesday, 18 September 1996
Page: 4510

Mrs WEST(10.41 a.m.) —I should remind the previous speaker, the honourable member for Hotham (Mr Crean), that the Industry Research and Development Amendment Bill 1996 is about proposed changes to the Research and Development Act 1986 which make research and development tax concessions better value for Australian taxpayers—and we are going to do that. The government has, as its brief, to fix up the problems that you created and that you started to improve but did not go far enough in the direction of improving in the system. That has been left to us.

This government recognises the effect and the positive impact of R&D for business and technology and, when applied appropriately, R&D is to be restored to its primary purpose: support for business and innovation. This government will put into action the words and the empty rhetoric that we were left with in December 1995.

What this bill addresses is the slothful way the previous government moved in doing something about making R&D better value. What did it do? The previous speaker spoke of statistics. They doubled, but I will address the dollars and cents issue later on. The previous speaker used statistics, but really statistics can hide and mask a measure of sins. I have a positive outlook for R&D under the auspices of this government, not the doom and gloom perceived by the previous speaker. No growth: I think not. If anything, our policies will be designed for growth and, putting it in its proper perspective, good value for taxpayers' money, not what we got before—a rorted system.

The reality is that we, the current government, will put R&D into an accountable perspective. We agree with your sentiment on the importance of R&D and we acknowledge the attempts by you to address this in government. But it was too late. And what happened? We are now on the government side of the House and you are on the other. Who put us in the 19th position? Labor put us in the 19th position as far as the estimates of value and the effort that we put into R&D are concerned.

Industry and research development is what this government is committed to. This bill proposes the changes and we are going to deliver them. We will do this by both stopping the unintended use of the concession and making the administrative procedures better suited to the needs of industry. The amendments bring the R&D tax concession program closer to its aim of stimulating the performance of R&D which, in the absence of a government subsidy, would not be undertaken. This is achieved, as has been stated by the Minister for Industry, Science and Tourism (Mr Moore), by reducing retrospective access to the subsidy under section 39J to a reason able period after the end of the year of income in which the R&D activities are conducted.

In speaking to this bill, Mr Deputy Speaker, I draw your attention to the fact that during the election campaign the coalition endorsed the revenue protection measures proposed by the previous government with respect to the operation of the 150 per cent R&D tax concession policy. The government will implement these measures, subject to minor modifications which will improve the operation of the tax concession. This bill confirms measures the previous government announced in their innovation statement in December 1995 and endorsed by the coalition prior to the March federal election. Our government is, in effect, meeting our election commitments and at the same time putting into place changes proposed by the former administration.

However, while the previous government proposed changes to the IR&D legislation, they have since walked away from these measures. Under the previous government the administration of R&D was in a parlous state. Once again, it has been left up to the coalition government to take the initiative and turn words into action. It has been the job of this government to act in the most responsible and accountable way with respect to R&D programs.

One of the aims of this bill is to address the proliferation of gravedigging, not to be confused with the opposition's current scaremongering of elderly and frail nursing home clients. Gravedigging was the practice of consultants ploughing through years of companies' accounts looking for a tax sweetener for their clients. This practice generates no additional R&D but results in significant cost to revenue and runs counter to the intention of the concession.

A secondary industry has developed around this retrospective access to R&D tax concession whereby a consultant approaches a company and offers to identify activities conducted as early as 1985 which qualify for the concession in return for a percentage of the obtained deduction.

The intent of this bill is to end gravedigging. This will be manifest by requiring the companies to lodge their application for registration with the IR&D Board within six months of the end of the relevant income year. The scope of this activity is so extensive that measures are expected to result in revenue protection totalling $235 million over the next three financial years. What a saving!

The minister has stated that other advantages and improvements will be made to the registration process, such as advanced registration and registration of activities which also encourage companies to direct their creativity towards new technologies and new markets. The specific measures which will improve the operation of tax concessions were released in a joint statement by the Treasurer (Mr Costello) and the Minister for Industry, Science and Tourism on 3 June this year. The statement said:

The measures, which are to operate from the time of the original announcement, 2.30 PM EST 6 December 1995 are to:

.   apply the measures on the basis of a year of income rather than a financial year. This is the basis of registration under the current law and is practical for different tax accounting periods;

.   affirm the announcement of the former Government that there be no new registrations for expenditures incurred in the 1992-93 and earlier income years, irrespective of when applications for such registration may have been made;

The statement goes on:

.   allow time for registration for expenditures incurred in the 1993-94, 1994-95 and subsequent income years to apply on the basis of lodgement of application for registration and not actual registration. That is

-   in respect of years of income ending after 6 December 1995, taxpayers may lodge applications up to six months following the income year in which the expenditure was incurred; and

-   taxpayers may also lodge applications for registration in respect of the 1993-94 and 1994-95 transitional years of income at any time before 7 June 1996 (within six months following the former Government's Innovate Australia announcement); and

.   an application cannot be amended after the lodgement time for the application has expired.

The government has already allowed for a one-off transitional period of six months, ending on 7 June 1996, during which com panies could continue to submit applications for registration, in respect of the tax concession, for the 1993-94 and 1994-95 income years.

A number of changes have been introduced to bring the administration of the research and development tax concession into line with the self-assessment principles of taxation administration. These include reducing the obligations of the research and development board prior to registering a company and introducing the ability to set fees by regulation in relation to applications and requests to the board.

This bill represents a huge boost to the integrity of the research and development tax concession which is long overdue. This amendment begins the process of returning the program to its rightful focus of encouraging new research and new development.

The effectiveness of the scheme has been examined in recent years with various studies by the Industry Commission, the Bureau of Industry Economics and the Australian National Audit Office. The various studies were used by the Treasury, which examined the cost-effectiveness of the tax concession in the winter of 1995 edition of the economic round-up.

According to Chris Field, both the Industry Commission and the Bureau of Industry Economics found that the scheme provided net benefits to Australia. Both sides of the House agree on this point. The Industry Commission found that as much as 90 per cent of R&D investment would have occurred without tax concession, while the Bureau of Industry Economics found that the concession encouraged between 10 per cent and 17 per cent of R&D expenditure.

The Labor government repeatedly acknowledged the need to encourage Australian firms to increase their expenditure on R&D, yet in 1993 the Bureau of Industry Economics report conceded:

The amount of additional R&D expenditure induced by the concession appears to be between 10 and 17 per cent of eligible R&D. This implies that 83 to 90 per cent of R&D would be undertaken even in the absence of the concession.

The Labor opposition boast the statistic that BERD had doubled, as the previous speaker alluded to, in the period 1981 to 1993. What they did not quote was the very low base from which the statistic was generated, making even the smallest increase appear proportionately large. Therein lies the dilemma. It sounds good. Only 20 per cent of R&D expenditure was on genuinely innovative projects—hardly a high record.

Here is the significant finding: investment decisions are often based on the tax consequences of the investment rather than the nature of the R&D being undertaken, particularly when investment syndicates are involved. There you have it: a government sponsored taxation benefiting scheme masquerading as a research and development program. One has to wonder, like the previous speaker, how many genuinely innovative ideas and industrial ventures were stifled or put on the backburner because some companies were more interested in the tax concession than promoting employment, fostering manufacturing industry, building an innovative product and strengthening our business edge and wealth.

The former government and the former speaker talk about hypocrisy. Here it is, ladies and gentlemen. The former government's response was released on 6 December 1995 and foreshadowed a tightening of certain eligibility criteria, but not before the ramifications of this were leaked and there was a surge of applications submitted to catch the last wave of government assistance for tax concessions.

As stated previously, our government recognised the need to close this concession loophole. Here we are today restoring research and development to its proper place—as an incentive for business and companies to promote innovations, ideas, industry and intellectual property that will truly generate wealth and prosperity in the marketplace and not in the bank accounts of financial advisers and consultants.

Details of tax expenditure issued by the Treasury estimate that the scheme cost $400 million in 1992-93 and—it gets better—$525 million in 1993-94. The estimated revenue protection expected as a result of the passage of this measure is $235 million over three years—good value for the Australian taxpayers. For these reasons I commend this bill to the House.