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Thursday, 17 June 2010
Page: 5708


Mr CRAIG THOMSON (10:00 AM) —I rise to support the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010. It should not come as a surprise to anyone in the community that the opposition is opposed to this legislation. This is an opposition that is opposed to a two per cent cut in the company tax for all businesses. It is an opposition that wants to put a new tax on businesses as well. The fact that it has taken a position opposed to what is a very beneficial piece of legislation that is supportive of business should not come as a surprise to any of us here. Indeed, the opposition is the worst friend that business has ever had and it is demonstrating that again here today with its opposition to these bills.

These bills implement the government’s new tax incentive for research and development to replace the existing R&D tax concessions. The new R&D tax incentive is about boosting investment in research and development, strengthening Australian companies to become more innovative, productive and prosperous, and creating jobs for the future. I want to talk little bit about productivity for a moment. I would have expected the member for Farrer, who is a member of the House of Representatives Standing Committee on Economics which recently delivered a report on this subject, to have made a more meaningful contribution in this debate. Unfortunately, the position of the opposition really is to oppose everything and we again had a demonstration of that today.

I recently had the pleasure of presenting the Standing Committee on Economics report entitled: Inquiry into raising the productivity growth rate in the Australian economy. Over the past decade, Australia’s productivity growth has slowed considerably. Average annual labour productivity growth fell from 2.1 per cent in the 1990s to around 1.4 per cent in the 2000s. Compared to other countries in the OECD, Australia’s average annual productivity growth has performed relatively well since 1985, approximating the OECD average and ranking 12th, one below the US. But the productivity growth rate has been in decline since the 2003-04 productivity cycle, with growth rates averaging minus 0.2 per cent per year.

What would it mean if we were to increase our productivity again? An increase in productivity growth rates would mean a larger economy, higher living standards, and a reduction of the fiscal pressure from ageing. It is useful to remind ourselves of this simple fact: if we were to boost productivity growth from an average of 1.6 per cent to two per cent a year and sustain this over the next 40 years, real GDP per person would be around 15 per cent higher. That is equivalent to raising living standards by $16,000 a year in today’s dollars by 2050 for every man, woman and child in Australia.

Given that increasing productivity is one of the desired outcomes of the new research and development tax incentive, it is pertinent to talk about how we can increase productivity. Productivity growth was responsible for 80 per cent of the increase in our incomes over the past 40 years, but achieving this higher average productivity growth will not be easy. It will take the right investment and effort and it also requires all sectors of the economy to work together to achieve this goal.

The government has a broad agenda to increase Australia’s productivity including: investment in critical nation-building infrastructure such as roads, rail, ports, clean energy, water, and health and education infrastructure including computers and trade training centres in schools; investment in skills and human capital, including measures to enhance teacher quality, the early childhood quality education agenda, and investment to achieve ambitious targets for higher education attainment rates; support for innovation in critical areas, including innovation by business, collaboration between private and public sector researchers and investing in the research capabilities of our universities and public research agencies; economic reform, including reducing business costs from regulation and tax reform as part of this government’s response to the Australia’s Future Tax System Review.

Productivity-enhancing reforms, particularly through nation-building infrastructure and improving the skills base, will grow the economy, improve living standards and partly offset the fiscal pressures of ageing. By growing the economy we increase our capacity to meet the fiscal costs of ageing without increasing the overall tax burden on working Australians. The best way to grow the economy is to maintain our focus on productivity and on investing in skills and infrastructure—nation building, the education revolution and regulatory and tax reform to underpin productivity growth in the decades to come.

Building productivity, of course, is not just a challenge for government. Ultimately, it is Australian workers and businesses that will deliver higher productivity by skilling themselves up, tooling up, and working smarter. With an ageing population, productivity growth is the key driver of future growth prospects. Reforms that reduce barriers to participation will also lift growth and reduce future pressures. Steps to grow the economy and ensure permanent spending growth is sustainable, including through the implementation of the government’s fiscal strategy, will reduce future adjustment costs and the economic and fiscal consequences of ageing.

Of course, the bills I am speaking on today will do a number of things besides offering better incentives to Australian firms for increasing productivity. The new research and development tax incentive provides more generous benefits and is better targeted towards R&D that benefits Australia than the existing concession. It redistributes support in favour of small and medium firms which are more responsive to fiscal incentives. It provides cash upfront to small innovative firms, giving them the certainty they need to invest in growing their business. It is also substantially simpler and accompanied by improved administrative arrangements. The new R&D tax incentive replaces the existing R&D tax concession for all income years starting on or after 1 July 2010.

The two core components of the new incentive are a 45 per cent refundable R&D tax offset for eligible entities with a turnover of less than $20 million, which is small and medium enterprises, and a non-refundable 40 per cent R&D tax offset for all other eligible entities. This doubles the base rate of existing support for small and medium enterprises and raises the base rate for larger firms by a third. Instead of receiving 7.5c in every dollar, small and medium enterprises will receive 15c for every dollar and larger firms will receive 10c for every dollar. The new refundable tax offset provision makes upfront cash support available to more small and medium-size companies. The new refundable tax offset is available to corporations with turnover under $20 million. Under the current law, a refundable tax offset is only available to corporations with an annual group turnover of less than $5 million whose group aggregate R&D expenditure is not more than $2 million per year.

The government aims to lift Australia’s R&D performance through increasing the number of businesses undertaking R&D. There are two million businesses in Australia and only around 8,000 of these businesses benefit from the current R&D tax concession. The government’s intention is for the higher rates of reward under the new incentives to attract more firms to the program. It is fairly obvious that a very small proportion of Australian businesses—only 8,000 out of two million—are taking advantage of the current R&D tax concession. Without a doubt we need to encourage many more businesses into R&D and this legislation will help towards that end.

This legislation also tightens up the scheme of R&D tax concessions. The existing scheme is allowing some companies to use taxpayer dollars to subsidise ‘business as usual’ activities rather than research and development activities. It appears from the member for Farrer’s contributions she is keen to ensure this continues. The government has a responsibility, however, to deliver value for money for taxpayers through better targeting of the scheme. This has been achieved in the new legislation through a more focussed definition of eligible R&D activities.

The new definition of core R&D activities still covers both research and development activities. A common misperception—and one that the member for Farrer tried to perpetuate—is that the new incentive excludes R&D activities carried out in a production environment. It is not true that production trials are effectively excluded by the dominant purpose test. Manufacturers will still be able to claim core R&D activities that fall within the definition of an experiment generated for the purpose of acquiring new knowledge. The dominant purpose test only applies to supporting R&D activities that are production activities. The explanatory memorandum emphasises that the fact that an activity serves a commercial objective as well as being directly related to R&D does not preclude it from qualifying as supporting R&D.

The government has undertaken—despite what the member for Farrer said—an extensive consultation process, including inviting public submissions on a consultation paper and two exposure drafts of legislation. The government has received over 380 submissions during these three rounds of consultation and has held public hearings attended by 550 people. In addition, there have been extensive discussions with key industry representatives and advisers over almost a year. So for the member for Farrer to say that this legislation is rushed is simply not true and a misrepresentation of what occurred in what was a very extensive consultation process.

During this consultation process the government has made some significant changes where stakeholders have made constructive suggestions for improvement. In particular, the definition of core R&D is now simpler and the dominant purpose test for supporting R&D has been limited to production activities and activities on the exclusions list. The government has decided not to enact the widely criticised ‘augmented feedstock’ rule that was set out in the first exposure draft legislation. The government still plans for the new R&D tax incentive to start on 1 July 2010. Although some industry groups have called for its introduction to be delayed for a year—as the member for Farrer did—a delay would mean that many Australian companies would not get the very substantial benefits that the new scheme offers, with a doubling of benefits and cash upfront to smaller firms.

Introducing the new incentive is critical to Australia’s future, to enhancing productivity, to making us more competitive and to creating new wealth and jobs. Stakeholders in the biotechnology and pharmaceutical industries have been supportive of the new incentive and are keen to see the new R&D tax incentive enacted as soon as possible. The information technology industry has also welcomed the revised approach to software R&D. The government provided $38 million in the 2009-10 budget to ensure that AusIndustry and the ATO are equipped to assist taxpayers in adjusting to the new scheme. AusIndustry will provide guidance and educational material to industry, including specific information on those industry sectors in which there is the most concern—manufacturing and mining.

Research is critical to Australia’s prosperity. That is why this government has committed itself to a program of renewal and reform for Australian innovation and research. Our overarching goal is to create a stronger, fairer and more productive Australia. We must be a country where individuals, communities and industries all benefit from the fruits of research and innovation. This government is helping boost R&D performance, encouraging researchers and industry to collaborate in ways that make both more competitive, and helping translate new ideas and technologies into high-skilled, high-wage jobs.

Australia does a lot of research and much of that research is brilliant. In recent years we ranked 11th in the world for output of research papers and ninth in the world for total citations. We averaged ten citations per paper, which puts us in the top 20 internationally and which most people would agree represents a pretty high impact. But is this good enough? Can we do better? China and India have become research superpowers in a relatively short time and we need to be aware of that competition. China is increasing its total expenditure on R&D as a share of GDP by eight or nine per cent a year. In Australia, it is only one or two per cent. India lifted its spending on academic research by 180 per cent in the seven years to 2005.

Not only do we need to lift our productivity growth, but we also need to increase our overall research. If there are to be more new jobs and new economic opportunities, there has to be also a dramatic increase in collaboration between universities and industry. This is one of the great weaknesses of our innovation system and an area in which we fell further behind under the previous government. Australia ranked 16th out of 28 OECD countries for research collaboration between industry and universities in 1997. By 2004, we had fallen 10 places to be last out of 26 countries. ABS data for 2006-07 suggests that less than one per cent of Australian firms get information or ideas for innovation from universities.

Australian businesses will receive a significant boost in support for research and development under the new R&D tax incentive legislation about which I am speaking at the moment. This important reform will encourage more Australian companies to engage in R&D, providing Australians with the high-end technologies and skills needed to compete in a competitive global market. This will make Australian companies more innovative, productive and prosperous and position them to create jobs for the future.

This government is replacing a complex and outdated R&D tax concession with a simplified R&D tax credit that gives business better incentives to invest in research and development. The scheme will stimulate more of Australia’s two million businesses to undertake research and development—rather than just the 8,000 businesses that benefit from the current concession.

The R&D tax credit doubles the incentive for small and medium enterprises—the engine room of the economy—while increasing by a third the incentive for big business to undertake R&D. Small innovative firms will be the big winners from the new R&D tax credit, with greater access to cash refunds for their R&D expenditure and more generous rates of assistance. The R&D tax credit will focus on supporting genuine R&D and be worth $1.5 billion a year to industry.

These bills deliver one of the biggest improvements to public support for business innovation in over a decade. Small companies have greater access to cash refunds and a higher base rate of assistance being provided through the new 45 per cent refundable tax offset. Large companies can invest knowing they can claim a non-refundable tax offset of 40 per cent of their expenditure on eligible R&D activities.

The new R&D tax incentive better focuses public support towards activities likely to produce economy-wide benefits. This will ensure that the new R&D tax incentive rewards a company’s genuine R&D, not business-as-usual activities, as proposed by the member for Farrer. The new R&D tax incentive is an important part of the government’s plan to encourage knowledge-creating and knowledge-using industries to boost productivity and activity in all sectors of the economy.

I commend the bills to the House.