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ECONOMICS LEGISLATION COMMITTEE
21/05/2010
Tax Laws Amendment (Research and Development) Bill 2010

Mr Willox —Thank you very much for the opportunity to appear today to discuss what the Ai Group sees as a critically important issue if we are to move in the right direction in raising the research and development effort and the broader innovation effort of Australian companies. We have a short opening statement that we will make in two parts, if we may. I would like to make some comments about why we regard the subject matter of this inquiry as so critical, and then I will hand over to Dr Burn, who will indicate our major concerns with the legislation that this committee has been asked to examine.

In essence, the Australian Industry Group believes the proposed legislation overall to be deeply flawed and, if implemented, it would significantly reduce the innovation efforts of Australian industry. The feedback from our members as we have researched this legislation indicates very little support for the proposals in core economic growth industries, such as mining, manufacturing and construction.

Despite around 20 years of moving in the right direction, Australia continues to lag behind the OECD average on business expenditure on research and development. Our view is that the government’s proposed R&D scheme will undermine this trend and more likely put the country’s business R&D effort into reverse. One may ask why this is so important. We would argue it is important because research and development undertaken by business drives primary improvements in its productivity and equips it for greater global competitiveness. This is particularly important in the context of the demographic and, indeed, the environmental challenges we will face over the coming years as these challenges give us even more reason to improve domestic productivity and competitiveness. When business R&D gives rise to new and improved products, services and processes in a primary business, it demonstrates to other businesses avenues that they can follow by adopting similar improvements in their own businesses. This process of demonstration, leading and following delivers benefits called spillovers that are not captured by the primary business that undertakes the R&D. The presence of these spillovers provides the rationale for public sector incentives in support of the primary R&D process. Without support from incentives, the R&D decisions of the primary businesses will fail to factor in the broader economic and ultimately social benefits that derive from business R&D, and therefore in total there will be less than the socially optimum level of business R&D expenditure.

By providing an incentive, the government stimulates a level of expenditure beyond that which the primary businesses would otherwise undertake and elevates the quantity of business R&D spending towards a socially optimum level. The importance of R&D in raising productivity and improving competitiveness is, of course, relevant across the entire economy. However, it is doubly valuable for businesses on the slower side of Australia’s two-speed economy. The pressures on key sectors, such as manufacturing, agriculture and tourism, to adjust to the greater call on internal resources, the higher domestic currency and the upward pressure on interest rates that are associated with the ongoing strength of demand for Australia’s mineral commodities put a premium on improvements to productivity and competitiveness improvements. Moreover, for the manufacturing sector in particular, the same forces driving demand for our mineral commodities—that is, the rapid industrialisation of China and other emerging economies—are also driving unprecedented levels of global competition for manufactured products, pulling down prices and challenging Australian producers both in export markets and in our domestic economy.

For these overall reasons the Ai Group has long been a supporter of business R&D and of the tax incentive for business R&D. We regard it as a critical element in the relative success of Australia over the past couple of decades. We regard the role it has to play over coming decades as being of even greater importance. I will now hand over to Dr Burn, who will elucidate more formally our concerns about the legislation as it now stands.

Dr Burn —As my colleague has said, Ai Group is a strong supporter of business R&D and of the tax incentive for business R&D. In this context there are a number of elements to the proposed changes to the R&D tax concession that Ai Group fully supports. These include the change to the form of the incentive from an augmented deduction to a tax credit. This, together with the higher effective rate of incentive and the more substantial increase in the rate of the refundable credit for a broader range of small to medium businesses, was warmly received by our Ai Group over a year ago, and we retain this support.

We also support the proposal to extend eligibility for the tax incentive in cases where the intellectual property is owned offshore, and the proposal to partially remove the anomalous treatment of software under the tax incentive. We supported these changes despite the government’s proposal to remove the premium 175 per cent concession for certain incremental R&D expenditure. Our reasoning was that, given the government’s unwillingness to expand its support for business R&D, funds needed to come from somewhere. It was not our preferred position but it was one we supported in the light of restrictions imposed by the government.

We support these changes and think they should take effect from 1 July 2010. These are positive changes that will improve the tax incentives for business R&D. They are measures that are aimed at improving productivity and competitiveness. However, we very firmly oppose the fundamentally new approach to defining business R&D expenditure that is embodied in the legislation before the committee. It is embodied in the objects clause, the changed definitions of eligible expenditure and the restrictions related to the treatment of core and supporting expenditure.

Our opposition has three elements: the timetable that the government has imposed, the restrictive nature of the definition of eligible business R&D expenditure and the heavy compliance requirements that we anticipate would arise from the structure of the new approach. Firstly, the government has given itself an absurdly short timetable for community consultation and examination by the parliament of what is a fundamentally new approach to the definition of eligible expenditure. The new approach would apply to all business R&D expenditure undertaken from 1 July 2010. Under the timetable now before us, business will have about two weeks to examine the act before R&D expenditure will come under the new regime. Furthermore, as this is a new approach, legal experts and practitioners undoubtedly will discover anomalies and unintended consequences over the coming months. These will require amendment and will require convincing the government that amendments should be made. Assuming the government is receptive, the new approach to business R&D will be adjusted on the run.

Putting aside the particular features of the proposed changes, this timetable itself will increase the range of grey areas surrounding the tax incentive and the resulting uncertainty will see businesses scale back their expenditure. This outcome sits in stark contrast to the purpose of the R&D incentive, which is to encourage additional R&D expenditure by businesses.

The second and central basis for our strong opposition to the new approach to defining eligible business R&D expenditure is that it is highly restrictive. For approximately 25 years, our R&D tax incentive has been based on what is known as the Frascati model, which has been developed under the auspices of the OECD over a number of decades. Under this model, R&D is defined as:

… creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of humanity, culture and society, and the use of this stock of knowledge to devise new applications.

The second part of the definition, ‘the use of this stock of knowledge to devise new applications’, is central to our objections to the new approach proposed by the government. The objects clause of the bill states:

The object … is to encourage industry to conduct research and development activities … by providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form.

Critically, this clause omits the second critical element in the Frascati approach—‘the use of this knowledge to devise new applications’.

The narrow coverage of the objects clause suggests to us that the government intends to pare back the role of the R&D tax incentive to fund, almost exclusively, research. It does not intend to include much of what business R&D is about—namely the development of existing knowledge to ‘devise new applications’. Instead the government intends that the R&D tax incentive will apply to activities conducted for the purpose of producing new knowledge. It would be more straightforward to refer to it as the ‘research tax credit’.

The definition of core R&D activities in the bill confirms the research focus of the new approach to business R&D. The approach outlined in the bill leaves little room for the majority of what business R&D is actually about—what, in the Frascati model, is called ‘experimental development’. Experimental development is defined as:

… systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed.

In its 2007 report Public support for science and innovation, the Productivity Commission broke down the proportion of business expenditure on R&D into four categories: pure basic research, strategic basic research, applied research and experimental development. Based on 2004-05 data it estimated that the total business expenditure on R&D was allocated as follows: pure basic research, 1.8 per cent; strategic pure research, 5 per cent; applied research, 31.6 per cent; and experimental development, 61.6 per cent. Critically, the Productivity Commission used exactly the same definition of experimental development as quoted above. The central point about that definition is that it covers systematic work, drawing on existing knowledge gained from research and/or practical experience.

It may be contended that while experimental development is excluded from the definition of core R&D, it is adequately covered in the definition of supporting R&D. We think that it is not and that the neglect of experimental development is further reinforced by the definition of supporting R&D activities. In the bill, supporting R&D activities are defined as activities directly related to core R&D activities except if they are activities that are explicitly excluded or if they are an activity that ‘produces goods or services’, or ‘is directly related to producing goods or services’. One of our advisers put it this way:

… it is difficult to think of many supporting activities that don’t fall into one of the three dominant purpose categories given that any activity directly related to production is captured.

I can summarise the second element of our strong opposition to the changes to eligibility for business R&D in this way: they exclude a large proportion of business spending on R&D.

The third element of our opposition to the proposed approach is that it will increase compliance costs. Under the proposed approach, business will need to split its R&D activities into core R&D activities, directly related supporting R&D activities and supporting R&D activities subject to the new dominant purpose test. This would be a permanent feature of the new approach and will add substantially to the business compliance costs of the program. As is generally the case, the extra compliance costs will fall disproportionately on smaller businesses.

Our claim about compliance costs is very different to the claim made by the government in the explanatory memorandum. We think the government’s claim is wrong. It appears to rest on a view of the relative complexity of the 175 per cent premium concession that will be removed. It is true that the premium concession is complex and has a high compliance cost. However, only 26 per cent of the 7,754 companies who were registered for the tax incentive in the 2007-08 year used the premium concession. The other 74 per cent used the 125 per cent concession. Certainly for these 74 per cent of businesses the compliance costs under the new arrangements would be higher. Our assessment is that, for the remaining 26 per cent of businesses, the jury is out on whether the complexity of the premium concession would match the complexity of the proposed approach.

I have a final point on the compliance cost argument. We think that most businesses that would claim the R&D tax incentive under the new approach would experience an increase in their compliance costs. However, we would concede that, once mature, the new approach would involve a reduction in the total compliance costs associated with claiming the tax incentive across the business community, but this is because we anticipate a very sharp reduction in the number of businesses that are eligible to claim the new, highly restrictive tax incentive and assess it to be worthwhile to apply for a tax incentive that applies to such a narrow range of their total R&D expenditure.

CHAIR —Dr Burn, you probably would not have had the advantage of seeing the evidence yet, but yesterday we questioned Treasury, the Department of Industry, Innovation, Science and Research and AusIndustry about the question to which you have alluded related to production processes not being included in R&D expenditure. They were adamant that that is not the case and that the examples in the explanatory memorandum illustrate that. Have you had discussions during the whole consultation period about this bill with Treasury officials? Have you raised your concerns with them?

Dr Burn —We have raised our concerns with them about their approach. I should say that since Easter there have not been a lot of opportunities to raise our concerns with the brand new approach that was unveiled just prior to Easter. But we certainly have raised our concerns with them and we do not get any comfort from the examples they provide.

CHAIR —Why is that so? Can you provide examples where it would not be covered? I am struggling with this because we get people saying it will not be covered and we get people who will be responsible for the administration of this bill saying it will be covered.

Dr Burn —Fundamentally, our concern that production related activities will not be covered is because they are excluded or, rather, subject to a dominant purpose test.

CHAIR —Yes.

Dr Burn —That is fundamentally why we say that. Our advice and our reasoning is that activities such as trials and testing, prototype development and troubleshooting in process improvements, which are all things that would be undertaken in a production environment, would not be eligible as supporting expenditure. No matter what the government people might say, we can only go on what is in the words of the bill and what we and our advisers and our members interpret those words to mean.

We have a self-assessment regime here. We do not want to be left to the whim of officials and their interpretations and assurances—‘Oh, yeah, sure; that’ll be included’—when, on any reading of the bill, people looking to self-assess will say, ‘I’m excluded.’

CHAIR —But the provisions allow for people to go to AusIndustry, discuss it with them and get a binding ruling.

Dr Burn —Which runs counter to or in conflict with the nature of our self-assessment regime, which is how the tax system works. It will then be up to the interpretations of whichever official you may happen to get to indicate what they think should happen or may happen, and then there is the uncertainty of an audit.

CHAIR —But is that not normally so with the tax system as it is? You are relying on the interpretation of a tax official.

Dr Burn —We take much greater comfort when the law—what is written in the bill—is more conducive to what the officials are saying, but when the bill contains words that appear to exclude the activity we cannot then rely on the assurances.

CHAIR —You said yourself it was excluded unless it was the dominant purpose.

Dr Burn —Yes.

CHAIR —Don’t you think that that is reasonable—that a production process that is included should be part of the R&D if it is to qualify for R&D expenditure?

Dr Burn —We think that the activities should be included if they are producing novel results. Whether or not they are connected to the production process seems to me to be irrelevant to that. The fact is that things are done in reality. In the business world, innovations are made as things are being done. The fact that that happens and that that is the nature of business innovation is why we object to this. Those activities are directly related to production. On the reading of the bill, those activities are excluded.

CHAIR —If they are not related to the core R&D?

Dr Burn —No. It is ‘or’. I think that the clause is—

CHAIR —We had very explicit evidence from Treasury that that is not the case.

Dr Burn —I have a great deal of respect for the Commonwealth Treasury, but they are not always right. Very often, in framing legislation or an approach to legislation, they run into errors.

CHAIR —How would you phrase it?

Dr Burn —Normally there is adequate time to examine these things, to consult with them and to provide scope and opportunities for things to be adjusted before they are taken to the parliament, but not in this case. I am sorry—what was your question?

CHAIR —How would you phrase it? How would you like to see it phrased, given that the government has been very clear that it does not want to include production processes that are not related to R&D?

Dr Burn —We like the idea that supporting activity should be directly related to the core R&D, and that is the definition that applies.

Mr Willox —I think we have difficulty with the concept.

CHAIR —What concept?

Mr Willox —The concept that the government is trying to apply here from the dominant purpose test.

CHAIR —Even if it is tangentially related, you would like to see it included in the R&D. I do not understand. What is wrong with dominant purpose? Is it unreasonable that it has to be dominantly related to R&D? How else would you phrase it?

Dr Burn —The current act’s phrase is that it is directly related.

CHAIR —Even 5 per cent?

Dr Burn —Sorry—even 5 per cent?

CHAIR —If a tiny part of your production processes are taken up with R&D—5 per cent—you think that that expenditure should be allowed.

Dr Burn —We think that it would be a very sensible outcome to include it, because it is R&D.

CHAIR —A small percentage of it is R&D or is related to R&D.

Dr Burn —I am sorry, no. The directly related elements should be counted. I am not saying that the whole expenditure on production should be included, but the parts that are directly related should be. But, under the proposal, things are excluded if they are connected to production.

CHAIR —Again, all I can say is that Treasury are adamant that that is not the case.

Senator EGGLESTON —I would like to pick up on your comment that novel innovations development that is related to a production process but where that nevertheless is not the dominant purpose of the development should be included in this. Would you like to give us some examples for the record of what you would regard as novel developments which are produced by research?

Dr Burn —Examples of novel developments produced by research?

Senator EGGLESTON —You were talking about novel invention.

Dr Burn —Okay—research and development.

Senator EGGLESTON —Research and development that is not included under this definition.

Dr Burn —Our understanding is that if something is directly related to production and is a supporting activity then it is not included. Things like prototype development and troubleshooting in process improvements, which are clearly related to novelty, would not be included.

Senator EGGLESTON —So these would be unique developments which your process of research would have discovered or developed and they would enhance the production process of whatever it is that you are producing. Is that not what you are saying? You can have small developments which add some unique approach to a program.

Dr Burn —They can be small or they can be large. We are not too worried about the research elements of things. We think research hopefully will be captured in the element of core R&D. What we are concerned about is the experimental development—that is, the application of existing knowledge in new ways. Clearly it does not fall into the definition of core R&D and, because one way or another it is excluded under the supporting R&D tests, it will not be eligible to be claimed as supporting R&D either. That is our concern and that is not really research related; that is more experimental development—this process of developing things on the run, if you like, in the production process, which is, as the Productivity Commission notes, where 61.6 per cent of 2004-05 R&D expenditure undertaken by business actually occurred. I emphasise: that is 61.6 per cent.

Senator EGGLESTON —That is a very significant amount, so that is very important to have on the record. You also mentioned in the beginning of your comments that you were concerned about the lack of consultation and the timing of the release of this legislation inconveniencing business. Would you care to expand upon that for the record?

Dr Burn —My concern is that just before Easter a fundamentally new approach to the business R&D tax incentive was unveiled. I have forgotten the time lines, but it was about two weeks.

Mr Willox —It was two weeks.

Dr Burn —It was about two weeks that we had to digest and provide feedback on it. It was a short time before the legislation was produced. We will detail in our submission things about this new legislation that we were uncovering yesterday and will no doubt uncover today and tomorrow as well. We are only just uncovering that now. No doubt after 26 May, when submissions close, new things will emerge. This time frame is not an appropriate time frame for introducing a fundamentally new approach to the central program this government has for supporting business research and development.

The inconvenience to business is something that will come out later on because, from 1 July 2010, the new regime, if it is passed, will be the regime that governs R&D, and business will just be there saying: ‘Well, who knows? We’ve got AusIndustry saying that. We’ve got the weight of legal opinion saying this. Who knows?’ The whole concept of supporting and inducing additional R&D will be undermined by that uncertainty. Even if overall it worked out to be a fantastic new approach once the dust had settled, this problem would exist.

Mr Willox —The time frame is very short. That is what is causing enormous agitation among our membership in particular. This is a whole new concept suddenly being laid out in front of them with very little time for them to absorb it, respond to it and then attempt to adapt to it. As Peter said, this is causing a lot of problems among our membership who are heavily involved in R&D, because they are now suddenly having to turn around and examine their R&D pathways through the future and how it applies under this new legislation without much time at all—hardly any—to adapt.

Senator EGGLESTON —Have you discussed the time frame with the government?

Mr Willox —Yes, we have. We put it forward in our original proposals that the legislation should be delayed to allow for further discussion with business.

Senator EGGLESTON —How long would you like to see it delayed for?

Dr Burn —We have asked for it to be delayed, but we have suggested that the delay should apply to the restrictions on eligible R&D but that the changes that are relatively straightforward—that is, changes related to the change of the form of the tax concession, the changes to the rate of the new tax credit, the expansions relating to software and proposed changes relating to offshore-owned IP—should all proceed. But the restrictions should be examined much more closely. The reason for that is that no doubt—not today—you have been made aware of concerns that exist around the misuse of the tax concession. We share those concerns.

When the Cutler report came out, we were very receptive to what was in it. Basically it said that there are some areas where there was a case of misuse and that the definition of R&D should be refined to address those areas of misuse. We think that is a sensible thing to do as ongoing maintenance of the tax act. But they did not recommend a wholesale rewrite of the definition of expenditure eligible for R&D, nor was there an indication in the government’s media release and announcements in the budget last year, when it indicated that it was proceeding with some changes, that it was going to redefine eligible R&D. I should say also that there was a consultation paper produced in September 2009 and draft legislation produced just before Christmas last year which pointed to and then contained a very different approach to changing the R&D tax incentive to that which was produced in April.

Senator EGGLESTON —So there is a lot of confusion there.

Dr Burn —There is ongoing confusion. We anticipate that it will only get worse.

Senator EGGLESTON —Unfortunately, it has been the pattern of the Rudd government to introduce legislation with short time frames and leave industry to try to cope with the changes without adequate time.

Senator CAMERON —What? Are you making political speeches? We can all do that.

Senator EGGLESTON —Thank you, Senator. I am making a comment.

Senator CAMERON —And I am going to give you political speeches if you want.

CHAIR —Order!

Senator EGGLESTON —I do think that this is an example of the typical pattern of the Rudd government—introducing legislation in short time frames.

CHAIR —Senator Eggleston, we have a short time frame.

Senator EGGLESTON —I would like to ask the witnesses whether or not they would like to see the introduction of this legislation deferred for at least a year so that all the problems can be sorted out.

Dr Burn —Our first, best approach would be to see those changes which I mentioned earlier go through and the restrictions on eligible R&D expenditure put aside and then re-examined with clarity around what the objectives are. If the objectives are as set out in the Cutler review—to refine the tax concession to address areas of misuse—that should be put forward as an objective, and consultation on how to achieve that should be undertaken. We would be an active and willing participant in that. We would support a number of the changes, as I have indicated, but would recommend that the restrictions on eligibility not be proceeded with and that they be delayed and reshaped so that they address the objectives set out in the Cutler review.

Senator EGGLESTON —Thank you.

Senator CAMERON —Dr Burn, it was not just the Treasury who gave evidence yesterday. The department gave evidence on what would and would not be eligible. I asked them specifically about one example I knew from practical experience in terms of applying research and development to a production process—and you are probably familiar with this. This is a food-processing plant that processes peas. New technology is produced—pneumatic technology, electronic technology and computer technology. It identifies a black pea coming through on the production line. The pneumatic jet pushes the black pea out. It is highly sophisticated break-through technology. You produce that technology on pure research. You then build the technology, you put it on your production line and you test it. I thought that was a perfect example of what you are saying is a problem if you do not get some access to research and development funding for testing it online. Both Treasury and the department were quite unequivocal in saying that, yes, the process of installing that on the production line—and you could even have the production line running for a day, a week or three months to test it and make it work—would be eligible. Isn’t that a typical example of that what you are looking at?

Dr Burn —I suppose there is a degree of comfort in that, but the bill says that supporting R&D activities are activities directly related to core R&D activities, except if they are directly related to producing goods or services. We have a problem with reconciling what our friends from the department of industry mean. I worked with these guys when I was in Treasury. They are also from Treasury. What these people say about that case is not what the bill is saying.

Senator CAMERON —I am surprised you were not monitoring the hearing. Did you, AiG, monitor the hearings yesterday?

Dr Burn —No. We have not seen the transcripts. I do not think they are up there.

Senator CAMERON —You could have monitored them, because both the department and the Treasury were there. They have made that statement in unequivocal terms. If that is the practical outcome of the legislation, does that make it a more acceptable form for you?

Dr Burn —We think that the legislation should be clear about what the practical outcomes should be. At the moment the bill suggests to us that that would not be a practical outcome.

Mr Willox —There is a difference here between the intent that they say will apply and what is actually written in the legislation. That is our concern. Fundamentally it is the legislation you go on, not the promise or an offer from an industry department bureaucrat.

Dr Burn —What would be the status of a comment made by an official in a Senate hearing when someone was being audited for their R&D expenditure?

Senator CAMERON —I think the statement would hold some weight, because you have senior department and Treasury officials indicating on a practical example that this is how it works. That Hansard will come out; it will be on the public record. Let me go to another issue. You talked about the Frascati Manual. I tried to have a look at the Frascati Manual, but you cannot get it; you have to buy it. That is always a problem.

Dr Burn —Could I buy him a copy?

Senator CAMERON —I do know that the Frascati Manual defines experimental development as:

… systematic work … which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed.

The argument you advance is that the bill is inconsistent with the Frascati Manual. Is that correct?

Dr Burn —That is right.

Senator CAMERON —Can you show me how the new definition does not fit that Frascati Manual definition?

Dr Burn —Yes. The definition of ‘core R&D activities’ under the bill is:

… experimental activities:

  • whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
  • is based on principles of established science; and
  • proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
  • that are conducted for the purpose of generating new knowledge …

I believe the Frascati model is about drawing on existing knowledge in the quote that you have just given me. Our view is that the quote that you have just given me related to Frascati does not fall into the definition of ‘core R&D’. The question then is whether it survives all the little obstacles that are put in the way of something qualifying as ‘supporting R&D’. We think that, given the general nature of those qualifications, there is a very grave risk that it will not qualify as ‘supporting R&D’ and will not qualify at all for any tax incentive under the new act, if this bill is passed.

Senator CAMERON —I ask you to have another look at that in the context I have put it to you. You might need to take it on notice. Could you also provide me with details of where experimental activity on a production line would not fit within the new definition of ‘core research and development’, because I am not convinced, after hearing Treasury and the department yesterday. We may actually be closer than you think in terms of where we are on this. I would like you to go back and have another look at that and answer those questions.

Senator BUSHBY —Thank you for your evidence today, which I think has been very useful. Quite clearly, from your perspective, the nub of all of this appears to be that the way the bill is written does not necessarily reflect what the government and its officials are saying will be the impact. Yesterday we heard evidence from Treasury and were told that all real issues that had been raised have been addressed, other than those where that was specifically intended to be the case for policy reasons. The only other issues that had been raised with them were those that either were not made out because there was enough information or were not strong arguments. From your consultation with the government through its officials, do you agree with that statement—that real issues that you raised have all been dealt with?

Dr Burn —No, they have not been dealt with.

Senator BUSHBY —Do you think you raised them in a way that made the case and provided enough information for the government to understand those issues?

Dr Burn —We did the best we could do in the timetable available to us.

Senator BUSHBY —But I understand that—particularly recently with the final bill—there has not been a lot of time to do that. However, there were consultation processes previously where you raised these issues and you believe you did so in a way that the government should have understood, but they have not been addressed.

Dr Burn —Yes, we did. However, we raised only issues that were put before us at the time. Issues that arose only in April clearly were not the subject of any discussion between us and the Treasury.

Senator BUSHBY —Which particular issues arose only in April?

Dr Burn —The new definition of research and development.

Senator BUSHBY —The definition in particular.

Dr Burn —There is a new objects clause.

Senator BUSHBY —I just wanted to get that on the record. I am aware that we are short of time. On the intention of drafters, in your experience, is it always the case that laws are interpreted as intended or in accordance with statements that are made by ministers in explanatory memorandums?

Mr Willox —No, unfortunately that is not the case. We feel that, if the legislation goes through as it now stands, it will be the subject of much testing going forward. It will need a lot of examination—perhaps through the courts and through the auditing processes. This will lead to uncertainty in the years ahead, we believe, if this legislation stays in place, because it is not clear. The difference between the legislation and what might perhaps have been stated as to intent is quite marked.

Senator BUSHBY —I am not sure whether either of you is a lawyer, but are you aware of whether, under the rules of statutory interpretation, statements made by the minister in the explanatory memorandums or by officials at a Senate hearing are at all binding on courts in terms of the way they interpret law?

Mr Willox —Neither of us is a lawyer.

Senator BUSHBY —I actually know the answer, but I am not giving the evidence!

Senator CAMERON —Why don’t you prompt them? Then they can inform us.

Senator BUSHBY —Since you are asking the question, Doug, my understanding is that it will be persuasive when the wording is unclear, but it is not at all binding.

Mr Willox —Let me put it this way: where there are differences between intent and reality, there is often a great big black hole, which makes things very unclear for business when they are trying to go about the business of doing business. That, as well as the eligibility criteria and the compliance costs, will weigh very heavily on industry going forward in what it hopes to achieve and do in R&D programs as it moves forward. We have already seen from a lot of members indications that they would have to consider pulling back or pulling out of Australia in terms of R&D if the legislation goes through in its current form.

Senator BUSHBY —Okay. That is probably the case with your bigger clients. But I take it from the comments that were made earlier about the self-assessment process that a lot of your smaller businesses that these changes are specifically intended to benefit will look at all this, see the uncertainty and the compliance costs and come to the conclusion that it is all just too hard, and will not proceed.

Mr Willox —There is a lot of indication from smaller companies that this will all become too complex for them and will be a major disincentive for them to step forward in R&D because they do not know where it will end up and they do not know what the audit will find, and they do not know what the officials from whom they will have to seek advice will find. It makes it very difficult. When you are a small company, you do not have the resources to move forward.

Senator BUSHBY —We heard evidence yesterday that the rulings that are available are only on the facts, not on the law. Your main concern is about the law rather than the facts.

Mr Willox —Correct.

CHAIR —I think there is a question on notice.

Senator CAMERON —I indicate, Dr Burn, that I may have a number of questions on notice relating to the issue of core R&D, so I will get them to you as soon as possible in writing.

Dr Burn —Thank you very much.

CHAIR —I thank the Australian Industry Group for attending.

Mr Willox —Thank you.

[9.47 am]