Something ventured, something gained
Article published in the Australian Financial Review
‘venturousaustralia’, the Cutler review’s green paper released last week, broadens the Government’s approach to innovation. It is a bold policy blueprint that aims to bring together the different types of innovation done by companies, universities, government agencies and research institutions to find synergies and maximise Australia’s innovation output, to drive the Australian economy to meet the challenges of the future.
But despite its boldness, there are also missed opportunities.
The move towards a tax credit based on the amount of R&D undertaken to replace the three current concessions (125%, 175% and Australian-centred R&D) is positive. The recommended two-tiered tax credit (40% tax credit for companies with a turnover above $50 million; 50% refundable tax credit for SMEs) brings Australia into line with modern economies offering tax-based support for innovation.
But the treatment of R&D expenditure as non-deductible for tax purposes effectively reduces the actual rates of support to 10% and 20% respectively - comparatively low on a global scale.
Replacing the requirement that intellectual property must be effectively owned by Australian companies with a location-based requirement is also a step forward. This will make it easier for multinational corporations to use Australia as a base for R&D, and aligns us with 18 of the 35 major economies providing R&D incentives, including Canada, the US, UK and India.
The negative impact of the proposed R&D tax credit on franking accounts could reduce R&D support to a mere ‘timing’ benefit. We hope that the Government will reconsider this during the consultation process. Tax-based support for R&D should not negatively affect corporate franking accounts.
The review has not recommended the extension of the R&D tax concession to trusts, partnerships, unincorporated joint ventures - or ‘enterprises’ as in New Zealand. The current limitation to corporates means there is no government incentive for R&D carried out by non-corporates – even though they have the same potential to benefit our economy.
The change from an after-tax benefit for SMEs of 7.5 to 20 cents in the dollar is very positive. The increase in after-tax benefit from 7.5 to 10 cents in the dollar for large firms is small, but also positive. But major firms with a history of increasing R&D investment will no longer have access to the 22.5% incremental benefit.
Acknowledgement of the current negative bias against service-based sectors, while welcome, needs further analysis. The review’s proposal of industry-specific programs appears overly complicated and rather than encouraging innovation, this could increase the administrative burden of the tax concession.
The recommendation that the ‘multiple sale’ requirement be removed for open-source code development is positive. The continuing multiple sale requirement for software development more generally though seems out of step with a modern, knowledge-based economy where software and IT deliver services and value.
If the Government grasps the opportunity to build on the foundations of the review’s policy blueprint, and fine-tunes the details during the consultation process, they will set the stage for Australia to meet the challenges of the next generation.
Serg Duchini is Deloitte’s national R&D and tax incentives leader.
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