Australia: Labor’s R&D tax reform a boon for business and innovation

A federal Labor government will reform Australia’s R&D tax incentive (RDTI) system in a move aimed at increasing public-private expenditure on innovation and promoting collaboration. 

Unveiled just over a week before polling begins, the election pledge has seemingly increased Labor’s popularity among Australia’s research and higher education communities who have been urging for clarity on the fate of the scheme.

According to Labor’s announcement, businesses that collaborate with universities and government scientists to “create new knowledge” will be given a 10 percent premium R&D tax incentive.

Specifically, the premium can be claimed by companies that:

• Team up with a university or the CSIRO to develop an innovative product
• Embed industry researchers within a university facility
• Employ PhD graduates within their first three years of employment
• Hire PhD students to conduct industrial research with a company

Labor committed to kicking off the collaboration concession from July 2019, should it come to power after the May 18 vote. According to budget estimates, the tax offset will cost the government AU$170 million across four years.

Driving home the party’s commitment to raising Australia’s profile as an innovation nation, shadow minister for industry Kim Carr said a federal Labor government would change RDTI’s program objectives so that improving business collaboration with research institutions would be an “explicit target”.

Today, Labor has announced that we will change the program objectives of the R&D Tax Incentive scheme so that improving Australian business collaboration with research institutions will an explicit target. #R&D

— Kim Carr (@SenKimCarr) May 7, 2019

As a percentage of the GDP, business R&D in Australia has been in decline for over a decade, according to Universities Australia. At just 1.88 percent of GDP currently, Australia lags far behind most of its peers in the OECD, as well as the OECD average of 2.38 percent. Despite a hard push for more collaborations by the country’s universities, without budgetary and tax commitments from the government, the local startup and SME sectors have had little incentive to participate.

With the R&D tax incentive revamp, however, Labor’s hopes to encourage the private sector to innovate more and ultimately lift combined public and private investment in R&D to 3 percent of GDP by 2030.

“Labor understands that in the 21st century, only nations that invest in knowledge and innovation will create new industries, jobs and opportunities for all their people,” Carr said in Australian Financial Review.

In addition to reforming the RDTI, the Opposition also said it would launch a six-month review on Australia’s research sector, the first such review in 30 years. It will also establish innovation councils in industries such as food and fibre, electric vehicles, steel and built environment.

The party did not say whether it would repeal caps placed on rebates for small cap companies, a subject of major concern for Australia’s tech and startup sector. However, Carr and shadow minister for digital economy Ed Husic did last month confirm they would look into exempting early-stage tech companies from changes to the RDTI.

“Labor absolutely and fundamentally recognises the powerful place occupied by the RDTI in the minds of the Australian startup community, and we do not want to make changes that affect the startup community’s ability to access the incentive,” Husic had told InnovationAus.

“It’s been diabolical the way the Coalition has messed around with the R&D support for startups, and Labor has stood firm against a lot of these reforms,” he said.

“I’m absolutely adamant that the Australian startup community should not be affected negatively by reforms to this incentive, which they have consistently said to me is the most important form of government support for their work.”

“We’ve got to ensure that there is the maintenance of the integrity of the program, but we also want to make sure that people aren’t treated unjustly,” Carr told the Australian Financial Review.

In July last year, the federal Liberal government revealed plans to cut AU$2.4 billion from the RDTI scheme through a number of unpopular measures. These included capping annual cash refunds at AU$4 million and lifetime claims at AU$40 million for companies with annual turnovers of less than AU$20 million. The government also proposed an “intensity threshold” to determine refunds for larger firms.

The changes were put on hold in Parliament this year, however, following several recommendations for amendments. The legislation now remains in Parliament, with no confirmation from the government on what it plans to do with the proposed changes if re-elected.

In the 2019/2020 budget announcement in March, the Liberal government did not provide clarity on the scheme, unveiling a spending plan that instead suggested a AU$1.35 billion cut over the budget forward estimates.

On top of that, the conservative leadership also did not offer fresh allocations for research grants, earning criticism from Australia’s funds-started research universities. Australia’s academic and startup communities said although there were funding boosts for women in STEM and the country’s space sector, these allocations were eclipsed by continued cuts to key research agencies and programmes.

Labor’s tax revamp, however, has earned high praise from Australia’s higher education and scientific communities.

We welcome Labor’s commitment to reforming the R&D tax incentive, particularly the inclusion of a collaborative research premium to foster industry/academy research links. https://t.co/4A6azMARPE

— Australian Academy of Science (@Science_Academy) May 8, 2019

Universities Australia Chief Executive Catriona Jackson said the commitment to a 10 percent premium was a positive development, noting the university sector has made the case for a premium rate in recent years.

“Since 2015, Universities Australia has advocated for a premium tax concession for businesses collaborating with our nation’s universities on research and development,” she said.

“A premium tax concession would boost the number of businesses that tap into the wealth of expertise inside universities and enhance innovation in Australia.”

Universities are major contributors to Australian research and innovation, with 90 percent of Australian university research rated as world class or above in a recent Australian Research Council report.

The ARC also found that 88 percent of university research has a medium to high positive impact for the wider community.