James Riley
March 7, 2016

Rebalancing the R&D tax scheme

R&D Policy

Rebalancing the R&D tax scheme

Alan Finkel: Cognisant "there's tweak fatigue out there"

Australia’s new Chief Scientist and deputy chair of Innovation and Science Australia Alan Finkel has outlined a compelling case for increasing Government’s direct investment in business R&D as a proportion of all Commonwealth support of industry.

Dr Finkel, who took over as Chief Scientist in January, was wondering out loud during the Q&A session that followed his address to the National Press Club last week whether the Commonwealth should be investing more funds directly in business research and development.

This a direction that the government has already set. But funding for this direct government investment in business R&D must come from somewhere, and Dr Finkel suggests a ‘rebalancing.’

It means the R&D tax concessional regime will almost certainly be tightened up.

It also opens up new possibilities for using R&D tax concessions to drive collaboration between industry and universities (where government is already a direct investor in research.) That is, where an R&D tax incentive is used to drive the private sector into collaboration with universities.

Pondering the various mechanisms that government can use to encourage universities to seek collaborations with industry, Dr Finkel said “there is a possibility that we’ve talked about through the R&D tax incentive to look at ways of using the incentive itself to encourage the opposite direction, industry to reach into research institutes.” Nothing has been decided he says, but it is being given consideration.

The suggestions on rebalancing direct and indirect R&D support arrives at an interesting time in Australian politics. For as long as most people will remember, government ‘picking winners’ is bad. Dr Finkel is putting the notion that government picking winners can be good.

It is a policy that suits the new regime. A quick scan of the personnel and you sense that this is an outfit that will back itself to unearth a few winners.

Dr Finkel is himself a storied entrepreneur and investor.

The chair of Innovation and Science Australia Bill Ferris is one of the founding fathers of Australian VC, considered (literally) the nation’s safe pair of hands in this area.

CSIRO chief Larry Marshall made the extraordinary leap from running a VC fund to leading the research organisation, and serial entrepreneur Adrian Turner is running the agency inside CSIRO (Data61) that will drive its capacity.

Each of these men has spent extended periods in Silicon Valley and all have VC experience. (And of course there is the former Telstra CEO David Thodey as CSIRO chair.)

When the board of Innovation and Science Australia is announced in the next week or so, you can expect to see a heavy weighting of entrepreneur and venture capital experience – people that have built businesses.

So you start to see where the chief scientist is coming from when he talks about a rebalancing of direct and indirect government support.

“Compared to our other countries across the OECD and some selected countries in Asia and Americas, we … spend more on indirect support of R&D in industry than we do through direct support,” Dr Finkel said.

“Other countries – and America is a particular example of this – through competitive grant schemes and directed contracts spend more to support business R&D than they do through tax forgone.

So one of the things in the long term – and there’s no immediate promise for addressing this – is to deal with that imbalance.

There is nothing in Dr Finkel speech to suggest government is spending too much on R&D, whether it’s direct or indirect. But he does make the point that it could be spent more effectively.

It is a long time since anyone in the tech sector has been allowed to talk about using the Commonwealth’s $50 billion-plus annual procurement spend to drive innovation and industry development. It has been taboo since the earliest days of the Howard Government.

Unless you’re building something strategic (let’s call it a ship or a submarine), or if you’re making cars here, ‘Buy Australian’ for industry development purposes is not OK in this country. Until now. The National Innovation and Science Agenda changed all that by using the word ‘innovation’ as a synonym for ‘industry development.’

Dr Finkel points to a small-ish Business Research and Innovation Initiative as a prototype program that lets government think more laterally about how it plugs outside businesses (and startups will form a core of this) into government programs.

The BRII follows a similar program in the US (called the Small Business Innovation Research program or SBIR) that enables competitive grants. It will offer ‘rewards’ for solving problems, and fund the development of prototypes.

These competitions have become commonplace in the US and UK, and are very definitely a direct investment by government in innovation, and in industry development.

Whatever happens with the R&D tax incentive scheme under this government, it is unlikely to be a tinkering at the edges. Dr Finkel has talked about the scheme having been ‘tweaked’ from time to time and being cognisant that “there’s tweak-fatigue out there.”

And of course, he says also that the current arrangements are somewhat complex for small companies – something the constant tweaking has not helped. And so the scheme’s reviewers want it simplified and made more “efficient”, something the tax consultants may not welcome.

“For a lot of the small companies who very legitimately benefit from [R&D tax scheme], there’s quite a cost in preparing all the paperwork associated with it, and they inevitably end up paying that to highly paid tax consultants,” Dr Finkel said.

“And so the money that goes to the tax consultants of course is not being spent on the R&D. So we’re looking at the efficiency of the system.”

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