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Monday, 22 August 2011
Page: 5069


Senator MILNE (TasmaniaDeputy Leader of the Australian Greens) (19:39): I rise tonight to support the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. This represents a key step forward for the economy in Australia. We know that imagination is the resource of this century. Tragically, in Australia the focus on physical resources such as iron ore and coal has distracted people from the fact that we have seen a hollowing out of the manufacturing sector under the Howard government and subsequent to that.

It is the digging up of physical resources that has got us into the situation where we now have a two-speed economy, where we now have the high Australian dollar and where we are seeing a further loss of manufacturing jobs. But manufacturing jobs started to go offshore to low-wage econ­omies more than 20 years ago. The reality is that Australia could not compete with low-wage economies. Yet economies like Germany, which is not a low-wage economy, built for themselves competitive advantages in certain sections of manufacturing. They did it by thinking through: what are the trends of the 21st century, what do we as a nation have to do to build manufacturing, what is our industry policy, what do we imagine the future to be that can give Germany competitive advantage? So they chose to go for the highest end of the low-carbon economy market. They wanted, for example, to build luxury cars, but the most fuel efficient cars in the world. They combined excellence with a low-carbon economy. They did it with the energy sector as well, in particular the solar sector, by bringing in a feed-in tariff. It was an industry policy that said: 'Germany will set itself a high target to reduce emissions; it will build competitive advantage globally in renewable energy.'

We must understand that innovation and creativity, driven by imagination, are critical to rebuilding manufacturing in Australia, creating jobs and building a competitive advantage as we move into this century. When I meet with renewable energy companies and they talk about building manufacturing facilities in Australia, I say to them, 'Other people have built those facilities in China and India, they argue there that they have critical mass, and they have a low-wage economy, so why would they want to build those facilities in Australia?' The answer is: the more sophisticated the economy the more it needs a sophisticated and reliable workforce. They recognise that Australia is a secure environment in which to build a manufacturing industry that is based on 21st century technologies. But they need a guaranteed market to warrant the investment in the first place. That is why they want to see industry policy in the low-carbon economy matched to their kind of tech­nology. That is why the feed-in tariffs have worked so well in Europe and why the OECD has just brought out a report saying, 'If you want to get transference to the low-carbon economies through renewables, feed-in tariffs are the best way to go.' They are not just about renewable energy for reducing greenhouse gas emissions; they are about creating a market for the technologies at a scale that enables manufacturing to have a foothold in the country in which it is attractive to invest.

The Greens came to the R&D bill saying, 'Australia is currently suffering from underinvestment in education and training; underinvestment in our schools and universities; the hollowing out of the manufacturing sector because it went overseas to low-carbon economies; an over­dependence on resource based industries, of digging it up and cutting it down; and a failure to invest in the brain space, particularly of small companies.' It is the small- to medium-sized companies that are likely to have the greatest imagination, the greatest innovation, the greatest capacity for R&D, but the least amount of monetary capacity for R&D. These are the people we need to support in Australia. They are the brains base, if you like, from which we can develop manufacturing industry. We approach this bill with that in mind. But of course we recognise that there are people arguing strongly against the bill, and I will get to that a little bit later. I have to say we found this an incredibly difficult piece of legislation to work through because there were such passionate views on both sides of the argument, each of which was based on a reasonable degree of rational argument.

The proposed new R&D incentive replaces the existing incentive and comprises two main components: firstly, a 45 per cent refundable tax credit for eligible entities with a turnover of less than $20 million; and, secondly, a 40 per cent non-refundable tax credit for all other eligible entities. The incentive is available for expenditure on eligible research activities or for the decline in value of depreciating assets used for eligible research activities. The 45 per cent refundable tax credit is equivalent to a 150 per cent tax deduction and doubles the current base incentive for small entities to expend money on R&D. The doubling of that current base incentive for small entities is a very attractive part of this legislation because it does go directly to those companies which have imagination—the new brains base—but do not have the capital, as it turns out. Because the 45 per cent credit is refundable, eligible entities can access the incentive as a cash refund when submitting their tax returns.

The government anticipates that 5,500 small firms could benefit from the incentive and, as I said, that is a particularly attractive part of it as far as the Greens are concerned. The 40 per cent non-refundable tax credit is equivalent to a 133 per cent tax deduction and raises the current base incentive for larger entities by one-third.

The proposed new incentive distinguishes between core and supporting R&D. Eligible expenditure under both categories qualifies for a tax credit under the proposed new incentive. The bill sets out several definitions and tests—mostly distinct from those in existing concessions—to determine whether a given activity qualifies for the incentive. The purpose of these tests is to ensure that the incentive is directed towards scientific research and away from such activities as industrial development with an element of novelty. That is really important, because the Greens were certainly of the view that there has been rorting of the existing R&D tax concessions. I say that because there is a big difference between scientific research and activities which are business as usual but have an element of novelty, and a lot of people were basically claiming an entire development, even though only a small part of it had novelty associated with it. That was, in my view, a diversion of money that should have gone to research and development. That was something that we were very keen to address. The proposed new incentive is intended to stimulate more companies, particularly smaller companies, sometimes described as small to medium enterprises, to undertake R&D activities. The Greens, having thought about all of this, having met with people on both sides of the argument and having formed the view that there has been rorting of the R&D tax concession for quite some time, have come down in favour of the bill.

Few debated the findings of the 2007 Productivity Commission report Public support for science and innovation, which found that the criteria for the basic 125 per cent tax concession do not screen out R&D—which would have happened anyway—and that the benefits of the existing incentive were not large and could in fact be negative and that the net pay-off from the concession could be substantially improved by maintaining the access to the concession for small entities only. A subsequent review commissioned by the government in 2008, known as the Cutler review, released a report, Venturous Australia—building strength in innovation, which reached similar conclusions and made a series of recom­mendations, many of which are reflected in the bill. So the bill has not come out of nowhere; it has come out of quite a serious review.

In 2009-10 the R&D tax incentive was estimated to cost approximately $1.5 billion, and unfortunately we have had something of a delay. That is unfortunate but at least we have got to it now. While 8,000 companies registered for the scheme, the top 100 firms currently take 60 per cent of the total funds from the scheme. I am going to say that again because this is one of the key statistics that got me thinking that this is not an effective spend on R&D. The top 100 firms currently take 60 per cent of the total funds for the scheme. If you have got 8,000 companies registered for the scheme and 100 are taking 60 per cent of the total funds then we are not actually spreading this money around the sector as I think the community would expect. Those 100 companies tend to be some of the largest companies in Australia and about one-third of them, at least, are the large mining companies. So in effect we are spending a large percentage of our R&D spend on business as usual in the mining industry in a sector which is making massive profits, and it is not going to those small, innovative sectors which potentially could make such a big difference.

In 2007-08, 37 of the top 100 firms—that is, over a third—were from the mining sector, and between them these 37 firms took 17 per cent of the total funds from the R&D scheme. That is 37 out of a total of almost 8,000 companies. Something has got to be wrong when we have got that situation. The Greens believe that large firms in particular have been essentially complementing or getting money for business-as-usual activities by claiming a small part of innovation in that whole business and that essentially it has been a rort. As an example of a claim that has a large proportion of supporting activities in relation to core R&D in the mining sector, a mining company registers an R&D project for the tax concession which is concerned with improving extraction techniques. The cost of this core R&D is, say, $20 million. Nonetheless, given the current weaknesses in the definition around supporting activities, it claims $500 million, the bulk of which is for normal mine operations and mineral extraction, to test the R&D. That just shows you how it has been rorted to date. The case that we need change is clear. This, as I said, has been a highly unusual bill in that we found it very difficult to work out, from both sides of the argument, the best way to move forward. There are many people and organisations supporting the bill—including Medicines Australia, the Australian Informa­tion Industry Association, AusBiotech, Australasian Industrial Research Group, the Australian Private Equity and Venture Capital Association, TGR BioSciences, Game Developers' Association of Australia, Lateral Economics and Australian Tech­nology Network of Universities—but there are also many firms and industry associations that do not support it. I have to note that those opposed to the changes included several large accounting firms, the AMWU and the Australian Industry Group, who all argued very passionately that this bill would undermine research and development and not be in the national interest.

We ended up in a situation where I thought that the best thing to do would be to get them all in the one room and have some of them put their case and have it contested in a moderated way. I thank Minister Carr for agreeing to this and enabling it to happen. In the room we had people from the minister's office and from unions and accountants of some of the major people opposing the bill, as well as companies in favour of it. We had a meeting for just over an hour. One of the people there, Anna Lavelle from AusBiotech—I am sure she will not mind me naming her—said at the end of the meeting that they had achieved more in that hour than they had achieved in 10 years trying to negotiate the changes to this. We also had Treasury in the room contesting these ideas.

It was Anna Lavelle who suggested one of the things that would make it easier for small companies, which was quarterly payments. She said that the bill was really good for small companies but if you leave it until the end of the year there are cashflow problems for them. So being able to get the payment on a quarterly basis would enable small businesses to maximise their engagement. She put that forward and we took it back to Treasury. There was not wild enthusiasm, I have to say, for implementing it but, nevertheless, the government had a look at it and found it was possible, and now the government is moving quarterly payments as an amendment. In terms of moving the debate forward, getting an outcome, contesting the arguments and coming up with something that business thought would be very useful, the roundtable worked very effectively. I think for everybody concerned, including the Greens, it was an excellent way to move forward.

I also want to note that in the course of all this we did support Tony Windsor's sensible amendment for a review of the new laws after two years to make sure that everything that has been put forward, which we have believed to be the case, is actually the case. I think it is regrettable that it has taken so long to get this measure through the Senate. It was in the national interest for legislation to come into effect from July last year, but the with the Senate make-up then, that was not possible. Nevertheless, we are now moving into what I think is a very positive area for R&D.

One area which I was concerned about—and the Greens seem to be the only party concerned—is the change to make the R&D concession open to international firms that hold relevant intellectual property offshore. I am not going to move an amendment on this because I recognise that the Greens are the only party to be concerned about it, but the logic for the previous position—that only firms which held the IP domestically would be eligible for the concession—obviously meant that the ongoing benefits of research would reside primarily in Australia. I note that the Productivity Commission report recommended that, while there should be some relaxation of the rules which prevent subsidiaries of foreign owned companies from accessing the existing tax concession, they should not be relaxed for the existing basic 125 per cent tax concession or the existing refundable R&D tax offset for small companies.

The approach taken in this bill goes further than the Productivity Commission recommendation. The argument that the government has put forward for making this change is that there are national benefits from having large local investments in R&D by multinational enterprises. These include the likelihood that these investments will anchor local R&D activities and attract further R&D investment by other multi­national enterprises, that multinational R&D investments increase the flow of global expertise into the country, that they provide the conduit for global commercialisation of local discoveries and that they facilitate exports by local suppliers. I am interested to see what actually happens on this front. I am still wary about it but the people in many of the business sectors we talked to are confident that this change is in the national interest. We will see as it plays out over time whether that actually turns out to be the case.

In conclusion, I want to reiterate that the challenge for Australia is to rebuild a manufacturing sector that has competitive advantage in a 21st century moving to a low-carbon economy. That means we need to diversify the economy to build resilience by building a diverse sector and get away from such dependence on digging up, cutting down and shipping away. Whilst there is a boom, that is fine, but when the boom collapses you are left with holes in the ground and you have failed to invest in the intellectual capacity of the country. A knowledge based economy needs a massive investment in education and in research and development because, if you take it—as I do—that imagination is the resource of this century, we need to make sure that we maximise that through making sure the money in research and development goes to the best brains, which is often in those small enterprises, and I think the bill achieves this.