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Wednesday, 8 August 2001
Page: 29385


Dr LAWRENCE (10:24 AM) —Here is a bit of a reality check after the bluster we have just heard from the previous speaker, the member for Fisher, about what is really happening in the tax system and how, in this case, it is undermining the research and development effort so critical to Australia's future. On the face of it, the Taxation Laws Amendment (Research and Development) Bill 2001 amends various acts to change and make additions to the R&D tax concession, and it arises from initiatives that were contained in the Howard government's Backing Australia's Ability document, announced in January this year. These amendments have been described by the government as being designed to encourage investment in business R&D. I hope to demonstrate that they have pretty much had the reverse effect.

The main amendments to be made to the income tax law are the inclusion of an objects clause and some changes to the definition of R&D activities, and one commentator described some of these changes as `gobbledygook'; an R&D tax offset for small companies to have access to the cash equivalent to the R&D tax concession; a premium rate of 175 per cent for additional R&D; the removal of the exclusive use test and the introduction of a 125 per cent effective life write-off for R&D plant; and a retrospective change made to the manner in which plant expenditure is claimed.

Before considering the major effects of this bill, however, let me summarise the government's track record on tax concessions for R&D, because I think it is important to put it in that context. Firstly, we have seen that the value of claims for companies undertaking R&D was first cut in half in 1996—it was one of the first acts of the Howard government—from 150 per cent down to 125 per cent. Industry have been seeking to restore it ever since. This effectively reduced the after-tax impact, from 18 cents in the dollar down to nine cents in the dollar—a figure that, of course, fell to 7.5 cents in the dollar with the reduction of the corporate tax rate to 30 per cent. So it has been seriously eroded as an incentive.

We have also seen the government preside over shaving the incentives related to pilot plant and plant generally. Feedstock claims have been abolished, with effect particularly in the chemicals industry, and, now, prototypes are to go as well. This legislation contains changes to the definition of R&D, to require both innovation and high technical risk, which will further reduce the number of eligible projects and companies, some assessors say, by as much as a third. As one commentator put it, the result is that only labour and some overheads are left. The same commentator suggested, and I share this view, that tax concession for private sector R&D is dead. The changes since 1996 have abolished it, and this bill is its obituary.

In the context of this debate, I remind members of one very simple but important fact: business research and development in Australia is in serious decline, and has been since 1996. Not only is it in decline now; it has been in steep decline since 1996, when Howard's newly elected coalition government made the extraordinary and short-sighted decision to slash public spending on research and development, despite very considerable promises to do exactly the opposite. I think it is important to realise that, until 1996, the measure of Australia's business R&D performance had grown each year, not dramatically but steadily. There had not been even one single year of decline and, although we still lagged behind much of the developed world, we were around the OECD average.

With every new set of statistics since 1996 released by the ABS and others, we have seen that continued decline. I have to say that the credibility of the Prime Minister and the responsible minister diminishes by a similar magnitude. Both the Prime Minister and the responsible minister have abused critics who have drawn attention to these catastrophic effects of their policies on public and private sector R&D, and they have done very little in response. They claim, for instance, that the current statistics do not take account of the proposals put forward by the government in the January Backing Australia's Ability statement, and those initiatives were partially funded in the last budget. That may be true, but let no-one in this place or elsewhere be fooled: what these statistics do measure is the effect of those 1996 and subsequent Howard government policies that saw hundreds of millions of dollars of public support torn from the research sector. As the Group of Eight universities have shown, the Backing Australia's Ability statement in total, let alone in the business area, has barely shifted our sluggish performance when measured against the rest of the developed world, who I would have to say are galloping ahead. The rate of increase is minuscule, if at all.

With all the self-congratulatory carry-on surrounding the Backing Australia's Ability statement, I guess we could have been forgiven for thinking that Australia's R&D crisis had been solved—far from it. Despite the media's apparent reluctance to dissect the policy, the Prime Minister should not think that he has fooled the research and industry communities. They understand what has happened. They know he has not presided over a triumph in innovation policy; rather, he has filled a few potholes and failed to reverse the serious decline in our national research capacity.

Industry commentators and participants alike know the truth—the Howard government caused the problem and they are now trying to take credit, as recently as this week, for `the single largest increase in funding in this area in Australian history'. So says Senator Alston in a media release of 7 August. While Senator Alston's staff were preparing this release they might also have noted that the coalition government also presided over the largest cuts to public research in Australia's history and the largest, and only, decline in business research and development in recorded Australian history. They are the outcomes of the policies. Besides, I think they should note that they took out $5 billion and they have replaced it with only $2.96 billion. In fact, in this financial year the increase in expenditure across the board for the Backing Australia's Ability initiatives is only three per cent. This $2.9 billion is all on the never-never. We have a three per cent increase at a time when the CPI is running at six per cent, so there is a real decline in expenditure in this area—hardly `the single largest increase in funding in this area in Australian history'. They should take to actually reading the history and the data.

It does not take a genius to recognise that if you create a massive problem then your solutions will need to compensate for the previous cuts as well as funding the expansion of effort which is clearly needed in this area. I think it is fair to say that across the board, not just in relation to R&D tax concessions, the Howard government have presided over a very ad hoc approach which is lacking a broad and coherent strategy. And, importantly, they have operated without an appropriate sense of urgency. Although we have had a lot of reports, including from the Chief Scientist and the Innovation Summit Implementation Group, which have recommended substantial and immediate action to stem the decline in business R&D, the government have taken the simple option of increasing expenditure on measures that promote their short-term political interests ahead of the much harder and much more complex task of building long-term strategic investment in Australia's future. We understand that. That is what the Knowledge Nation is all about. The community also understands that need.

The government did announce belated action in January this year, after they had been nagged by the business and research communities, and we are debating the outcomes of that statement today. But, as I said, it will do no more than repair some of the damage created by their own decisions. Even that is dubious and will do little to develop the sort of momentum and commitment to innovation that they were urged to undertake and that is so clear in the economies of other nations with whom we compete. As the President of the Business Council of Australia, and others, put it recently, `Unless we embrace change, others who do embrace it will eat us for breakfast.' Frankly, we are halfway down the international community's gullet right now.

It is now more than clear that this failure to spend more on research generally is stifling innovation and dragging down other parts of the economy. The Howard government do not appear to understand that future industries are built on today's research. At the moment we are living off the fat of previous generations, and we cannot afford to continue to do it. In that context, it is not at all surprising that Australia is now perceived by many of our international peers as an old economy with few, and diminishing, prospects of participating fully in emerging industries that are built on information technology, biotechnology, nanotechnology and renewable technologies, to name a few. A carefully constructed innovation and industry strategy is needed if we are to reverse these trends, and we are not seeing that effort from this government. We need significant effort and investment in education, particularly in science, mathematics, engineering and technology. We need significant investment in research and research infrastructure, and in industry research and development, from both the private and the public sectors.

Perhaps more importantly, and this is certainly an area where the government have failed the nation, is the fact that such a strategy also depends on an intellectual property regime which rewards innovation and a financial system with the capacity and willingness to fund longer term, more risky investments in innovative products and processes. That is what this bill should be about, and that is what it is not about. These must be priority areas for attention, as they are for Labor under the banner of the Knowledge Nation, the framework for which was outlined by the task force chaired by Barry Jones and in which I had the pleasure of participating. Instead, under the coalition all we have seen have been sustained attacks on the research sector, shrinking funding, and even recent attacks by the increasingly aggressive Australian Taxation Office on specific characteristics of new economy sectors, like the structure of contracting within the information technology sector and the treatment of web development expenses by companies. It sets innovation in that area back significantly.

So just what is the state of Australian research and development? In the last year of the Labor government, the Commonwealth was spending over $1 billion each year in support for research and development by business, and that included the R&D tax concession. Under the Howard government's new proposals, the government will still be spending less than $1 billion in each of the next five years in support for research and development by business. In other words, by 2005-06, after this so-called big package, a decade after the initial cuts, the government will still be spending less on support for business R&D than we were spending in 1995-96. We cannot afford that as a nation.

As a result of the Howard government policies, business investment in innovation and spending on R&D have fallen sharply. It is not just that the government contribution has gone down; business spending has gone down—and gone down very quickly. As I said earlier, the decision to cut the R&D tax concession from 150 per cent to 125 per cent in 1996 produced an immediate decline from a peak of 0.86 per cent of GDP in 1995-96 to just 0.64 per cent in the most recent statistics. I think we should all understand this: our expenditure now compares very unfavourably indeed with other industrialised nations. At a time when almost everyone else is investing heavily in the knowledge bases of their economies, the government have significantly reduced business R&D—not to mention public sector R&D, which is, for the first time, also going down.

The investment that that this bill seeks to achieve is 33 per cent lower than it would have been had it continued to increase at the same rate over the three years before the cut. We have lost one-third of our capacity. A plethora of small and ad hoc grants are not an effective alternative and have not filled the gaps. There is no evidence to show that they are working. Unless we reverse this trend and start to catch up with our competitors, Australia will miss further opportunities to improve our standard of living and will squander the skills and creativity of our people. The Chief Scientist's report describes innovation as `the only way forward'. There are no alternatives. As outlined in a recent US report on innovation—and the government should heed this:

There are few capabilities as important to our national life as those which allow us to generate, diffuse and employ new technologies. Our standard of living is directly linked to productivity growth driven by technological innovation; both profits and higher wages depend on this growth. The nation's defence, the health of its children, the quality of its environment—all of these public goods and many others can be provided more effectively and at lower cost.

Innovation does not arise spontaneously.

The government should listen: it does not arise spontaneously.

It is the product of private entrepreneurship, intellectual creativity and collective effort.

We have to work together on this. It is a significant national challenge, similar to that which we faced after the Second World War. In the case of Australia's innovation environment, we can still see examples of significant achievement and development, despite the damage caused by the coalition's economic decisions. The cultivation of a lively culture of research and innovation in Australia, which is already shown in such institutions as cooperative research centres established by Labor and in many of our universities and public institutions, is a priority for a future Labor government. We need that culture of innovation.

In my terms as Premier of Western Australia, and subsequently as a minister in the Keating federal government, I clearly understood the value to our economy of a strong and growing research and innovation sector. Our standard of living depends on it. Among some of the other reports I mentioned earlier, the recent Yellow Pages global entrepreneurship monitor report, which seeks to create international benchmarks for innovation characteristics and performance across comparable economies, demonstrated that high levels of innovation activity are strongly correlated with high economic growth. This study found that, while Australia ranked well in some entrepreneurial business practices, it was lacking when compared with some very key benchmarks. For example, Australia's venture capital industry, which enables us to commercialise good ideas, is underdeveloped. We ranked only 15th out of 19 in terms of venture capital invested as a percentage of gross domestic product. The United States percentage of gross domestic product, in comparison, is more than seven times that of Australia.

In the critical area of information technology, Australia ranked 16th out of the 17 countries for investment in the IT industry sector. To again use the United States as a comparison, their percentage of GDP invested in IT firms was 24 times that of Australia. The problems in the ICT sector—the information communications technology sector—are symptomatic of this government's failure to understand the fundamental economic, technological and social changes that should be, and are to some extent, transforming Australian society and the rest of the world.

Despite obvious opportunities and strengths in the ICT sector, Australia has not developed a strong growing domestic industry in design and production of hardware, software and digital media content—and I underline this—relative to other countries of similar size and economic conditions. Indeed, some are very much smaller than us. Some research suggests that growth will decline over the next three to four years rather than going ahead. It is clear that the lack of concrete and effective public policy support for innovations and development in these critical areas has contributed to this slide. Perhaps more importantly, profitability growth in the sector is also predicted to decline in coming years, so we will make even less money from it, particularly with competition increasing from international suppliers into our domestic market. The potential removal of existing import restrictions, most commonly described as parallel importation, will add to this.

The Australian information industries currently account for only two per cent of the world's information sector activity and represent only a minor part of what is becoming a heavily integrated global market for so-called new economy goods and services. This is pretty remarkable, given the trumpeting we have heard from the Prime Minister and others about our alleged performance as a new economy. Where are the concerted strategies under this government to ensure that the opportunities presented by technological change are opportunities for all of us?

For the Prime Minister, the simple solution to these problems is to ignore the problems, to talk up what little progress we have made and to pretend that the mere use of ICT tools, rather than the production and export of them, makes us a new economy. The Prime Minister has claimed that the International Monetary Fund research refutes the claim that poor production and manufacturing figures show a decline in our relative progress as a new economy, but his argument is very misleading. In fact, in a recent analysis of the global IT, the IMF, which he is fond of quoting, found that `IT spending as a share of gross domestic product is extremely high in Australia, but production of IT equipment is a small share of total output'. As innovations in this sector develop worldwide, we will be disadvantaged by not exploiting the opportunities provided by the domestic research and development of new tools and applications. There are many who are keen to do it—and able to do it—in Australia.

The value of information and communications technology produced in Australia amounts to less than one per cent of our gross domestic product. Of the 19 OECD advanced economies, Australia rated the second lowest when it came to the production of IT sector goods. We can do better than that. The image that these statistics deliver to both international and domestic markets and potential investors in Australia's information industries is a negative one, particularly for those states with a declining share of the national industry. It is something that a committed government—a Beazley Labor government—would work to turn around. Instead more mirrors and smoke machines are brought out by the government to prove that statistics such as hours spent on the Internet by household can somehow be used to measure our progress as a new economy. That is a bit like claiming that watching television makes us all qualified television show producers.

Despite the fact that Australia's combination of a well-educated innovative work force and a pleasant physical environment make it ideally suited to this new economic environment, surveys of Australian based managers of multinational ICT firms have shown that they are highly critical of the federal government's policy in attracting information industries. And rightly so. The lack of support from industry is hardly surprising, given the government's lack of a clear understanding of policy in this area. Overall, the uncertainty created in all industry sectors by the cuts and subsequent definitional and operational changes, described by the government as `streamlining' in this legislation, have only served to increase the investment uncertainty and to act as a disincentive to incoming research capital.

When the budget was announced earlier this year, it was revealed that the government would actually be investing far less in business research and development than was promised by the Prime Minister in the statement in January. So it was even worse than we thought. In its innovation statement, the government committed an extra $335 million over four years to the R&D tax concession—sounded good—but, at the same time, it removed $250 million by changing the treatment of plant. When the budget emerged, this amount had actually increased to $330 million, leaving a net increase over the forward estimates of just $5 million. When we made this sleight of hand public, the government suddenly found an extra $70 million overnight—after the budget papers. In any case, this goes nowhere near restoring the cut the government made in its 1996 budget, which ripped $450 million a year out of the R&D tax concession, and there is still no estimate of the value of further cuts to be made as a result of changes in the definition of R&D.

Turning now to the details of the bill, I want to point out how we should be treating research and development under the tax system. A national industry R&D policy should meet several key objectives— and we would seek to meet them. It would, first of all, increase spending on R&D over present levels and over what would be done in the absence of incentives to at least equal the average OECD level; it should demonstrably improve public benefits, such as employment, exports, import replacement and so on; it should encourage linkages between public sector research and development and business; it should facilitate high technology based business start-ups and commercialisation of Australian ideas; it should encourage international alliances, inbound investment and R&D collaboration; and it should address the needs of all sizes and types of companies across Australia and in the regions. Such a policy should be based on the recognition that businesses need certainty and continuity in order to plan for innovation—not the chopping and changing we have seen from this government. Simplicity of administration is also essential to keep compliance costs low and to maximise take-up rates, especially for new and emerging SMEs which are often inexperienced in management.

This bill does exactly the opposite on all fronts. In fact, it is not an exaggeration to say that it may finally kill off access to tax concessions for R&D for the majority of Australian companies. The bill itself is poorly drafted and convoluted. Just last night, for instance, an additional 26 amendments were dropped on the table without warning or consultation with industry, let alone with the opposition. It appears that the minister responsible knew nothing about it. When contacted late last evening, the minister's office did not know about these amendments because they were drafted by Treasury, answering to the Assistant Treasurer. That is the history of these R&D tax concessions under this government—steady erosion by Treasury, which has always opposed them, regarding such concessions as rorts. The Department of Industry, Science and Resources have been sidelined yet again. They are increasingly rolled by the Treasury— not just in this, but in other key debates in relation to industry policy.

The bill proposes changes to the definition of R&D that will make it a requirement that eligible activities must involve both innovation `and', rather than `or', high levels of technical risk—the lethal `and', as it was described by one commentator. The result is that the hurdle will be raised for eligibility. As one accountant who works in this field pointed out to me:

The R&D tax concession program was implemented to cushion the financial aspects of undertaking a program of R&D activities.

That is what it is for.

Encouraging companies to bear the risk of failure in order to develop new technologies is the principal aim of the original piece of legislation. The critical point in relation to this lethal `and' is that “R&D is generally not conducted in isolation from an organisation's day-to-day activities. For this reason, a company may be conducting R&D when it decides to expose itself to a technical risk that could result in failure or it may be devoting resources to purely innovative thought in an attempt to gain a market advantage through superior technology. To require both innovation and technical risk to be present simultaneously will have a dramatic narrowing effect on the number and size of claims for the R&D tax concession.”

This proposal has been put forward several times in recent years. Industry has rebuffed it every time, but it keeps popping up. In the past, the government has been forced to abandon it after consultation, but Treasury has finally prevailed and the lethal `and' is in the bill. Analysis provided by the Australian Industry Group also suggests that the outcome of cases cited by the government as justification for this measure would be unaffected by the change in definition proposed. Interestingly, despite repeated questioning, the government has continued to insist that this measure will not result in any significant reduction in the claims made—greater savings to revenue. Why then enact the provision if it is only at the margin? There is no doubt that this proposal represents a further effort to curtail the existing scope of the concession, and it should be opposed for that reason.

Turning to the treatment of plant, the bill also purports to give effect to recent government announcements relating to the treatment of expenditure on plant for the purposes of the R&D tax concession. These announcements were made in an effort to placate industry concern about the potential impact of a draft Australian Taxation Office ruling issued in November 1999—which, by the way, is yet to be finalised. However, the bill also appears to include additional measures for which there was no previous announcement by government and no consultation with industry. In particular, it includes provisions that would act to claw back the impact of the R&D tax concession for expenditure on plant by requiring that companies offset any eligible deduction against profits earned as a result of the production of any saleable product that derives from the use of the plant in R&D activities. Earlier rulings by the ATO have had the effect of including prototypes in the definition of plant. In the view of many, this means that there is little or no value left in the tax concession. This aspect of the bill is incredibly complex in its effect and could only be improved with significant amendment, and we urge the Senate to recommend such amendments. In essence, these provisions of the bill would seriously undermine the effect of previous government announcements to provide pro rata access to the tax concession for plant expenditure which has a dual commercial and R&D purpose.

I will now look at the so-called 175 incremental tax incentive. The bill does give effect to this; however, it is based on a changed formula from that announced in the earlier statement. It contains additional provisions that provide for adjustment of a company's entitlement depending on the level of variation in R&D expenditure from year to year. If a company's level of R&D decreases by more than 20 per cent in any given year, an adjustment amount may be calculated that may affect the subsequent level of deduction under the premium tax concession. Successive adjustment amounts can be aggregated to provide an adjustment balance. The inclusion of an adjustment amount and an adjustment balance appears to greatly complicate the administration of the incremental or premium R&D tax concessions—no `appears' about it; it actually does, particularly for small business. It is likely to limit the usefulness of this additional incentive to those companies that have access to a sophisticated level of tax advice. It is also likely to penalise some companies that, for whatever reason, experience a high level of volatility in R&D expenditure. The bill also contains some retrospective provisions, which are worrying, operating back to 1985, which could result in an ATO led attack on legitimate prototyping expenditure claims.

In all, I have to say that this bill is typical of the government's performance on research and development since its election. It is poorly conceived; it is deceitful, and it is myopic. It will severely hamper the efforts of innovative Australian firms and do nothing to improve our now disgraceful national performance on research and development. No amount of bluster can change that. Every commentator can see it except, apparently, those people who advise government. I agree with many of the commentators who see this as killing off access to R&D and I think we are presiding today not even over the death of R&D business expenditure in Australia—I think that has been pretty much achieved—but over its obituary. That is why I move the following amendment to the motion for the second reading:

That all words after “That” be omitted with a view to substituting the following words:

“while not declining to give the bill a second reading, the House takes note of the serious decline in business research and development in Australia that has occurred under the Howard Coalition Government, and:

(1) notes the impact of the Coalition's cut of the R&D tax concession from Labor's 150% to the current 125%

(2) notes recent criticisms of the BAA tax concession proposals, including those concerning:

(a) the retrospectivity of some provisions;

(b) poorly defined definitions and terms;

(b) the unknown financial impact of some changes”.

I commend the amendment to the House and express the desire that the Senate will intervene on behalf of the suffering business sector of Australia to be subject to further scrutiny.


Mr DEPUTY SPEAKER (Mr Jenkins)—Is the amendment seconded?


Mr Bevis —I second the amendment and reserve my right to speak at a later time.