R&D tax: Focus on keeping our IP in Aus


Denham Sadler
Senior Reporter

The government’s planned changes to the research and development tax incentive are “unsalvageable”, and more is needed to be done instead to ensure that IP developed in Australia remains here, Centre Alliance Senator Rex Patrick says.

While the development of intellectual property may occur in Australia with assistance from the R&D tax incentive, this IP is often then transferred and registered offshore in a lower-tax jurisdiction.

There is a “huge opportunity” for Australia to take advantage of the IP developed locally and ensure it remains onshore, Senator Patrick said. This should be the focus of the government, rather than its planned $1.8 billion cut to the R&D tax incentive (RDTI).

“It’s clear that sometimes IP can be used for aggressive tax minimisation. The concept that we in Australia grant a company concessions to be able to produce IP and then it gets sold off to a parent company in another jurisdiction to generate all the profit from it, that’s something that needs to be addressed,” Senator Patrick told InnovationAus.

science research IP
Tax dodge: A focus must be put on using tax scheme to keep Australian IP here

“I want to make sure that if we fund IP, that it remains here in Australia and that there are significant penalties if it doesn’t. I’m looking at ways in which we can improve R&D in Australia, and to maximise the benefit it has to Australia,” he said.

“It’s easy for companies, particularly multinationals, to decide where R&D will be done. We want to make it attractive here and then make sure it sticks in Australia. So the work isn’t done here and then the IP is transferred offshore where the manufacturing is done and where the profit is realised in [an offshore] tax jurisdiction.”

The government’s RDTI legislation includes a number of changes to the popular scheme, with many companies and industry groups warning that they would lead to many businesses relocating their R&D or manufacturing offshore.

Senator Patrick said he would recommend that his party reject the bill entirely.

“I don’t think the bill in its current form will pass the Senate, because it actually sends things in the wrong direction. We have declining R&D, and none of the companies are in support of it. It is flawed policy,” he said.

“I don’t think you can salvage what is there. It appears to me that the prime motive is to save money, and particularly in post-COVID circumstances that is absolutely the wrong thing to be doing.

“They’re trying to chase this surplus when in actual fact we need to be absolutely supporting Australian companies, particularly in terms of the development of IP.”

At a public hearing for the Senate inquiry into the legislation earlier this week, Senator Patrick questioned many companies and industry groups on the “stickiness” of their IP in Australia, and how easy it would be for them to move it offshore.

He said the hearing raised further concerns about the impact of the RDTI changes on the incentive for companies to develop and keep IP in Australia.

“Every one of the witnesses was from what one might call the traditional Coalition supporter base, and if the Coalition Senators participating in the inquiry didn’t walk away with a sense of unnerving, a sense of concern, then they must have been sleeping,” Senator Patrick said.

This issue of requiring IP to remain in Australia has been considered by the Coalition and Labor in recent years. Last year Treasurer Josh Frydenberg hinted that the government was considering the introduction of a patent box scheme, where companies would get a tax break for profits obtained from IP kept in Australia.

Labor’s election campaign last year included a new multinational royalty tax which would have cracked down on companies funnelling IP royalties to lower-tax regions.

This policy was estimated to save $2.3 billion over the next decade, and would have denied tax deductions for companies using patent boxes or tax havens in other jurisdictions.

This royalty integrity measure would have hit tech companies like Uber, and companies utilising the patent box scheme in countries such as the UK. All Labor election policies are now under review, but it’s understood this policy still has support within the Opposition.

The Coalition had been said to be mulling its own patent box scheme in Australia, with Mr Frydenberg saying he would have a “close look” at the concept in June last year.

“We need to have a tax regime around intellectual property to attract companies and maintain their investments in Australia,” Mr Frydenberg said in the UK last year.

“I’m happy to have a close look at what they do, because we certainly should not be only trying to protect intellectual property but also accelerate it.”

A patent box is a tax break scheme aimed at encouraging companies to keep IP locally by providing a reduction in company tax. In the UK, companies have their company tax rate halved for profits generated from IP.

But such a scheme would not be effective in Australia, according to a Chief Economist report in 2015, as Australia’s comparatively high tax rate would mean that companies would still not be incentivised enough to keep IP in Australia, while firms that would have done that anyway would receive a tax break.

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