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Senate inquiry right that R&D cuts are wrong

"The Government should listen to the unanimous recommendations of the Senate Standing Committee on Economics, and the widespread warnings from industry, and rethink its proposed cuts to the Research and Development Tax Incentive (R&DTI)," Australian Industry Group Chief Executive Innes Willox said today.

"The Senate Inquiry into proposed legislation to effectively and substantially cut the R&DTI has recommended that the Bill should not proceed until the serious impacts raised by industry have been reconsidered.

"Innovation remains central to Australia's prosperity. It is an essential plank in the national pathway to stronger, more stable and more inclusive economic growth.

"The Research and Development Tax Incentive (R&DTI) has been heavily and repeatedly amended over the past decade, to the point where it has become so unstable and unreliable that it is growing more difficult for it to have its intended effect of underpinning sustained increases in innovation investment.

"In the 2018-19 Budget the Government proposed a major net reduction in financial support for innovation, to be realised through two major changes to the R&DTI. One is a cap on the annual cash refund payable to smaller claimants in a tax loss situation, a sensible and broadly supported step, albeit with scope for refinement. The other introduces new brackets and rates for claims under the non-refundable incentive, which varying according to the intensity of the claimant's innovation spending as a share of their total cost base.

"The effect of the latter change is that the small minority of claimants spending more than 13.5% of total costs on innovation may see an increase in the value of the incentive, while the overwhelming majority of businesses with R&D intensity below this level will see the value of their claims cut by up to half. The intensity steps between brackets are so large that most businesses would have to make impractically large increases in their research budgets to qualify for a higher rate. Businesses that are successful in commercialising innovation and growing production and sales will naturally see an increase in these parts of their cost base, reducing their R&D intensity.

"As a result the proposed system does not provide positive or effective incentives. Overall, it is simply a reduction in support for innovation.

"Ai Group welcomes the recommendation of the Senate Standing Committee on Economics, endorsed by Senators from all sides of politics, that the intensity-based stepping formula should be refined and its effects reconsidered, and that the legislation should not proceed further until this has been done.

"While a premium rate for the most innovation-intensive businesses can have value, an intensity-based stepping formula should not result in an overall reduction in support for innovation. We recognise the importance of ensuring that support is well targeted to genuinely innovative activity – an objective that the intensity steps do not advance since they reduce the value of most claims irrespective of merit. The Government should develop a more sophisticated approach to screening and checking R&DTI claims for innovative merit. This could involve modern data analytics and artificial intelligence technologies to, for instance, compare claims in detail against Australian and global research databases," Mr Willox said.

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