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Monday, 9 December 2013
Page: 1999

Mr FLETCHER (BradfieldParliamentary Secretary to the Minister for Communications) (19:02): I am very pleased to speak on the Tax Laws Amendment (Research and Development) Bill 2013, and to follow the member for Fraser. I was expecting a thoughtful policy discussion from the member for Fraser but unfortunately we got some warmed over class warfare rhetoric, which is particularly disappointing.

The whole question of tax incentives for research and development spending, which is dealt with in this bill, is a very important area. The question of innovation policy is of critical importance to our national competitiveness and to our prosperity. Tax measures are a vital policy lever in stimulating the kind of behaviour from the private sector that is so important.

The stated purpose of this bill is to better target the expenditures that are made in underpinning research and development spending by the private sector. In particular, this bill amends the Income Tax Assessment Act so as to direct the research and development tax incentives to companies with aggregated assessable income of less than $20 billion. It does this by denying the incentive to companies that have an assessable income of $20 billion or more in an income year.

In the brief time available to me this evening I want to make three points. Firstly, that innovation is key to our national economic performance. Secondly, that this bill seeks to align innovation tax concessions where they will have the most impact. Thirdly, that there is more to do on innovation.

Let me turn to the first proposition: that innovation is key to our national economic performance. If we are to continue to improve our living standards, create new business opportunities and remain globally competitive then we must have an innovative economy. This is essential to creating jobs, improving productivity and improving competitiveness.

If we look around the world there are many examples of successful innovation. We can look at the powerhouse IT companies of silicon valley. We can look at the many impressive developments in Israel, described in a recent book as the start-up nation. We can look at the 10,000 PhD qualified engineers graduating in China each year. We can look at the great pharmaceutical companies of Europe and the United States. We can look at the consumer electronics companies of Japan and South Korea. There are many shining examples of successful innovation around the world, and it is no surprise that innovation policy will always be a focus for government. Nor is this a new thing. It is some 50 years since then UK Prime Minister Harold Wilson talked about the white heat of technological innovation. So this has always been an area of acute interest to governments and policy makers. We all know that there are policy settings that can encourage innovation and there are policy settings that, if we get them wrong, can hold back the amount of activity occurring in Australia at each stage of the innovation process.

As we consider the particular tax measure before us this evening it is wise to recognise that the evidence shows that the returns on innovation are greater than ever. Look, for example, at the take-up rate of new products, which are much faster than they used to be. According to a 2012 article in the MIT Technology Review, it took 30 years before electricity reached a 10 per cent penetration of the consumer market in the United States. The mobile phone took 12 years and the tablet computer took less than three years. At the same time we have a world that is more affluent than it used to be, so the global rewards for developing a new vaccine, a new genetically modified crop or a new IT application are greater than they ever have been. The returns on innovation are high. Conversely, the penalty for not being an innovative nation is more serious than ever.

The other important factor in this policy mix is the very close linkage between innovation and productivity. It is innovation that drives productivity improvement, and it is productivity improvement that drives prosperity. The US economist Robert Solow won the Nobel Prize in Economics for his finding that technology was more important than either capital or labour in driving productivity growth. He observed that in the US per capita income quadrupled from 1869 to 1953 and he studied the factors that drove this quadrupling of income. Only 15 per cent of that growth was due to more inputs—that is to say, more labour or more capital being put into the national economic machine. The rest of that very impressive growth in prosperity came from technological innovation.

The prize for having an economy that delivers innovation is very high and, therefore, the imperative for getting policy in this area right is compelling. We can all agree that makes sense. What is less easy to agree on is what exactly ought those policies be, and where should the tax measures that this bill is dealing with fit in to that overall matrix. It is tempting to think of Australian researchers doing world-leading pure research and to think of Australian institutions and companies taking that research and turning it into commercially useful technology that is protected by patent, by copyright or other intellectual property rights and to think of Australian companies taking that technology and selling around the world products and services that embody that technology. And we have some examples of that end-to-end value chain, and I will talk in a moment about one of those companies, Cochlear, which is a world leader in hearing aids.

But the reality is much more complex than this simple vision. It is neither feasible nor desirable to suggest that basic research that is done in Australia may only be commercialised by Australian companies. Innovation, as we know, occurs in many different settings—in universities, in research institutes, in for-profit companies and in other places as well. Indeed, Australia's Chief Scientist recently highlighted a very interesting phenomenon: on the one hand, Australia compares well to other countries based on the number of researchers per head of population in higher education. But we have a noticeably lower number employed in business enterprises.

Where does tax expenditure on innovation fit into the overall picture of government policy in this area. If you take the numbers that were announced in the lead-up to the 2012-13 years, the Commonwealth government at that time announced that total spending was going to be $8.9 billion. Of this, $1.8 billion was the industry research and development tax measures, so the measures that we are debating this evening form an important part of the overall mix of innovation policy. Some of the other major line items included $950 million for the National Health and Medical Research Council, $737 million for the CSIRO and a range of other programs. But the key point is that the research and development tax incentives make up a very big part of the overall policy picture when it comes to the policy settings in Australia to encourage innovation and the kinds of activities that we hope will lead to these economy-wide benefits that I have spoken about.

I mentioned earlier the hearing implant company Cochlear, which is a shining example of this process at work. Most recently, Cochlear has had sales of around $800 million, with some 85 per cent of that from outside Australia. They sell cochlear implants that use unique Australian developed technology. Very importantly, thanks to the company's success, it now reinvests substantial private money—over $100 million a year—into ongoing research and development. This is an example of the virtuous circle that can arise if we manage to catalyse the kind of research that leads to commercialisation that leads to commercial success and now is producing substantial money that is being ploughed back into R&D in particular companies.

As many have observed, we have some success stories in Australia—Cochlear, ResMed, CSL and others. But we would like to see many more. When we look around the world, we see examples of countries that have achieved more success in generating innovation and in generating a high-tech sector than we have achieved in Australia.

Let me turn next to the specific measures in the bill before us this evening. The measures in the bill align innovation tax concessions where they will have the most impact by limiting the R&D tax incentive to companies with an aggregated income of less than $20 billion. The rationale for this is to target the access to that incentive to small- and medium-sized entities, which, it is expected, are likely to be more responsive to government incentives in their research and development spending than larger organisations might be.

In the time remaining, I want to make a third and final point, and that is that there is more to do when it comes to innovation policy. This bill is one particular measure designed to achieve greater outcomes for the taxpayer's dollar. But there is more that can be done. Commentators in the area of innovation policy point to a range of policy levers. One of the challenges in this area is that those policy levers extend across many different portfolios. For example, immigration is an important policy lever and the success of the US high-tech sector—the success of Silicon Valley and the many other areas around the US where innovation has prospered—is linked in significant measure to talented people coming into that country from many other countries to complete their education and often to do higher education and then to stay and to contribute to the high-tech sectors in that country. Immigration policy in Australia also acknowledges the desirability of bringing talented people into the country. So immigration is an important lever when it comes to innovation policy.

One of the other questions that arises and has engendered a lot of debate in Australia is the question of how best to tap into the very large pool of superannuation capital, now exceeding $1.6 trillion, to increase investment in start-up technology companies. Let me hasten to add that I certainly do not advocate any simplistic notion of some kind of quota. But the generalised question of whether there is scope to draw on that pool of capital, and to offer attractive investment opportunities to those investment managers to give them opportunities to access innovative companies, is a very good question and a question we do need, in my view, to think about seriously.

Yet another factor that is consistently raised by start-up companies and companies in the early stages of their development in Australia is the question of stock options and the fact that it is more difficult under the tax system in Australia to offer stock options as an incentive to employees than it is in the US. In the US, as is well known, it is very common to offer people stock options as an incentive to join a start-up company. The rationale for doing so is that it is difficult to offer significant remuneration in cash but people who join a company at an early stage and contribute to its development have the capacity, if things go well, to share in the wealth that is created if that company meets the highest expectations. Of course there is significant risk there, but the structure of this kind of remuneration arrangement is designed to give people the chance to share in the upside, should it come off, and it has clearly been the case that that has been a significant factor in the growth and success of the high-tech sector in the United States. It is certainly not for me to comment on tax policy. I simply make the point that this is an important policy lever that bears on innovation policy, just as the research and development tax incentives that are the subject of today's bill bear on innovation policy.

I want to make one final point. On this side of the House we recognise the absolutely critical and central role of the private sector in innovation and the commercialisation of innovation. Unlike the previous government we do not think you can regulate your way to greatness in innovation policy or in any other area.

Let me conclude by noting that the measures in this bill are important as part of the overall range of measures designed to stimulate innovation and to stimulate research and development. To that extent they deserve support, but they form part of a broader, complex and important policy picture.