Denham Sadler
July 31, 2018

Over reliance on R&D tax scheme

Policy

Over reliance on R&D tax scheme

Bill Ferris: Australia must find a way to boost business R&D investment

The federal government is over-reliant on the R&D tax incentive as its core innovation support policy and should instead focus on direct initiatives like grants and co-investment, Innovation and Science Australia chairman Bill Ferris.

Speaking at the Australian Financial Review Innovation Summit 2018, Mr Ferris said the drop in Australian business expenditure on research and development (BERD) “warrants significant national attention” and is a “major blockage” to Australia becoming a leading innovation nation.

While the average expenditure on R&D has increased for all other OECD countries, in Australia it has fallen to 1% of GDP.

Mr Ferris said there needs to be an overhaul of the government’s support for R&D activity, with a move from indirect to direct support.

“Our hypothesis is that a key path to address these disparities should be through re-thinking the form, and not just the amount, that government support for business R&D takes in Australia compared with the leading innovation nations,” Mr Ferris told the conference.

While the R&D Tax Incentive is an “indirect” incentive because it is sector agnostic and self-assessed, more direct incentives include government co-investment, improve procurement, export development grants and commercialisation grants, he said.

“These are some of the significant direct measures available to correct the imbalance in our business incentives and to reverse the decline in BERD," Mr Ferris said.

"ISA looks forward to working with government to develop suitable policy options which would allow all of them to be actively prioritised and expanded."

In comparison to countries like Germany, Sweden and Israel which offer no indirect support, Australia has a “sub-optimal imbalance” between direct and indirect incentives, he said.

ISA is now calling on the government to reallocate the $3 billion spent annually on indirect incentive expenditure to fund more direct measures.

“We believe a smarter rebalancing of our direct and indirect support mechanisms is overdue and will be essential to reversing Australia’s decreasing levels of business investment in innovation,” Mr Ferris said.

The federal budget this year finally revealed significant changes to the R&D tax incentive that had been in the works for several years. The changes will save the government $2.4 billion as part of a major crackdown on the scheme, with reduced grant levels and increased compliance.

Mr Ferris said he “welcomed” these reforms, but the government has become too reliant on the scheme in support business innovation.

“We view these reforms as fundamental to improved integrity and efficacy of the incentive and therefore to its sustainability,” he said.

Also speaking at the summit, innovation minister Michaelia Cash said these changes to the R&D scheme are all about reduce the support provided to “business as usual” activities and focusing it on true innovation.

“The revised incentive’s central purpose is to get businesses doing more real and additional R&D. If you focus on business as usual you will not get the returns that our economy needs. Encouraging greater intensity will mean greater benefits for the community” Senator Cash said.

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