Denham Sadler
February 1, 2019

End R&D tax 'tinkering': Cochlear

R&D tax

End R&D tax 'tinkering': Cochlear

Cochlear: An improved R&D tax scheme would bring research work back to Australian shores.

The CFO of billion-dollar Australian firm Cochlear has urged the federal government to stop “tinkering” with the research and development tax incentive.

A public hearing for the senate inquiry into the government’s proposed changes to the research and development tax incentive (RDTI) was held in Melbourne on Wednesday.

Senators heard a number of concerns about the proposed changes and a lack of transparency surrounding them.

Cochlear Limited CFO Brent Cubis said the changes have been discussed for five years, and the ongoing uncertainty has been damaging for local businesses.

“I would like to urge the community, the government, the opposition, and everyone involved with policy-making to stop tinkering with the RDTI. A typical timeline for the implementation of our products is eight years. In the past eight years we have seen numerous amendments to and reviews of the RDTI,” Mr Cubis told the hearing on Wednesday morning.

“It’s been the best part of four to five years, and it’s really hard to plan. There’s a lack of certainty and it takes a long time to get decisions made. You need to have that certainty when you’re planning R&D. It’s critical and Australia is going to be very uncompetitive if it doesn't continue to do so.”

Legislation making a series of changes to the RDTI to achieve cost savings of $2.4 billion over four years was unveiled by the government last year after it was flagged in the May budget. But with very few sitting days remaining before the May federal election, it appears unlikely that it will be passed or even debated before a new Parliament is elected.

The changes include a $4 million cap on annual cash refunds for companies with annual turnovers of less than $20 million, with the refundable offsets to be calculated as 13.5 percentage points above the claimant’s company tax rate.

Companies with annual turnover of $20 million or more will be subject to an “intensity” measure to determine their refund. The government has also proposed to raise the expenditure threshold from $100 million to $150 million.

The cuts to the RDTI have been widely criticised, especially by the startup and tech sectors, with submissions to the inquiry saying the “ill-advised” changes will do “untold damage to large sections of the Australian innovation community”.

In contrast, Cochlear Limited is broadly in support of the changes, solely because of the increase to the expenditure cap, Mr Cubis said.

“Placing an arbitrary cap simply encourages companies with globally mobile R&D capability to look at other options once that amount has been reached. Cochlear has just started to hit the $100 million mark, and in response to the cap increase announced in May’s budget, we brought R&D that we had intended to conduct overseas back to Australia,” Mr Cubis said.

“Raising the cap will mean more jobs in Australia, more intellectual property created in Australia, more tax paid in Australia and huge spill over benefits for the innovation ecosystem. If the cap is not increased we will need to review this decision and our future R&D conduct in this context.”

David Lamont, the CFO of biopharmaceuticals firm CSL, was more critical of the proposed changes, pointing to the impact they will have on smaller companies in Australia.

“We rely on an active startup and small business sector so we are very concerned at the proposed $2 million cap on the annual cash refund for those businesses. It is really important that we are able to understand and predict what the investment environment will look like. The constant change introduces uncertainty and impacts Australia’s relative attractiveness as an investment location,” Mr Lamont said. 

Several of the companies appearing at the hearing were also critical of the way the government handled the announcement the changes, with no notice given before they were outlined in last year’s federal budget.

Mr Cubis said he was told about the changes at the budget dinner in Canberra.

“I was trying to work out the impact of it on a napkin at the dinner. That’s one of the challenges - it’s a bit complicated. It was difficult to work out what the impact was of the intensity things that night,” he said.

The proposed changes to the RDTI are of significant concern to the local startup sector, with StartupAus claiming they pose a “critical risk” to local companies.

Shadow innovation minister Kim Carr was at the hearing and was critical of the government’s handling of the changes, and its decision to not reinvest the savings from the changes back into research and development initiatives.

Senator Carr also said that there is “no premium on patriotism”, warning that companies may move overseas due to the RDTI changes. The Opposition has pledged to “preserve” the RDTI, but it is currently unclear if Labor will support the passage of the government’s legislation if it is introduced before the election, however unlikely this is.

“There is a real chance this will never get debated in this current Parliament,” Senator Carr told the hearing.

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