The Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, as Senator Conroy has so eloquently pointed out, has some measures in it that Labor is able to support, but we oppose two schedules and seek their deletion. I would like to concentrate on the first of these matters.
The passage of this bill in its current form would further degrade the R&D Tax Incentive, which is one of the most important mechanisms available in the taxation system to foster innovation.
The incentive has already been undermined by the passage of the Tax Laws Amendment (Research and Development) Bill 2013, which restricts its operations to outlays of up to $100 million.
The current bill seeks to reduce the Incentive by 1.5 percentage points, supposedly to preserve its value relationship to the company tax rate.
I understand there has been some speculation as to whether the government is intending to reduce the company tax rate, but that is an aside.
The government has reneged on its promise to cut the corporate tax rate. If that is in fact the case — and I am waiting for an announcement on that, but I understand that is the government's position — it will demolish the justification for this bill.
Anyone wondering just how this bill and its predecessors can be rational innovation policy need not bother.
The reality here is straightforward.
This bill and its predecessor are a farrago that has nothing to do with innovation policy.
The government is using these changes to the R&D Tax Incentive to gather savings, not to make the Incentive more effective.
This is typical of the way in which this government has failed to understand the crucial role of innovation in an advanced industrial economy.
This is an economically myopic government. It is intent on a short-term cash grab, even at the expense of longer-term growth.
The government likes to talk a great deal about its need to reduce the deficit, but it has embarked upon a course of action that will slow growth down and, along with it, the revenue streams that the government requires.
In advanced industrial economies — I think the argument is well worked — innovation is the chief driver of increases in productivity.
Without a strong innovation system, Australia cannot build a more diverse economy, and if we do not build a more diverse economy we cannot protect living standards and we cannot ensure that prosperity is spread throughout our population.
Without a more diverse base, future growth will be unreliable, fluctuating with booms and declines in commodity exports. This is understood by industry stakeholders and their representatives.
The government should heed the advice of the Australian Industry Group in its 2015-16 budget submission, which calls for a reconsideration of further restrictions on the R&D Tax Incentive. Ai Group argues in its submission:
“The budget will only see a sustainable improvement when revenues improve, and for this to occur we must see strengthening in industries across the economy from the anaemic pace of growth in recent years. Only when businesses lift their sales and profits and grow their workforces will there be a sustained pickup in revenues.
Consequently, Ai Group believes the Federal Government should continue with sensible programs of investment in infrastructure and skills and training”
And I emphasise here—
“As well as targeted programs to lift the rate of innovation among Australian businesses and encourage businesses to develop export opportunities.”
The government, of course, is doing precisely the opposite, even though there is hard evidence for the case that Ai Group has made.
According to the Australian Innovation System report, innovation 'almost doubles the likelihood of productivity growth in Australian businesses'. Firms that innovate are '78 per cent more likely to report increases in productivity' from their previous year's output. And firms that collaborate with research organisations and universities are almost two-and-a-half times more likely to report increases in productivity.
In the 1980s, Labor introduced the R&D tax concession, making Australia one of the first countries in the world to foster innovation through the use of taxation measures such as this.
In 2011, another progressive Labor government updated the measures of the R&D tax incentive and converted the concession to a credit, doubling the benefit for smaller firms and raising it by a third for larger firms.
This was a landmark reform, and the effect was immediate. The amount invested by business grew by 20 per cent, and registrations have continued to increase.
As of 30 September last year, more than 12,000 companies had registered $20.53 billion of R&D spending for the 2012-13 income period.
This was an increase of more than 1,600 firms engaged in R&D over the previous year. More than 3,000 companies are new to the program —growth in the innovation system that the government is apparently willing to put at risk.
When Labor was in government, the national innovation agenda — set out in the document Powering ideas, which was a 10-year comprehensive innovation strategy — explained the relationship of the R&D tax incentive to the wider tax system.
Powering ideas stated that the aim of the change from the former concession to the incentive was 'to increase certainty by uncoupling the level of R&D support from the corporate tax rate'.
The change proposed in this bill undermines that uncoupling, even though the expected cut in the corporate tax rate is no longer guaranteed.
It creates an expectation that when there is a change in the corporate tax rate the incentive will be adjusted accordingly. But multinational companies, in particular, often need to make large, periodic investments in R&D capability if they are to undertake their R&D in Australia.
I know in some quarters there is a view that you should not support large companies investing in R&D in this country.
But they are the major drivers of R&D investment in this country and the major drivers of capability extensions in this country, and moving against them in terms of their R&D investments is an incredibly short-sighted attitude.
To attract those investment decisions, Australia must provide an investment environment that offers certainty, transparency and international comparability.
The measures proposed in this bill, however, will only erode certainty and transparency.
The effect of the bill will be to discourage R&D investment in Australia.
In particular, the bill punishes small and medium-sized enterprises.
I know there is this fantasy around that if we only attack the big ones then somehow or other there will be a trickle-down effect to the small ones.
On the contrary, what this bill does is undermine the small- and medium-sized enterprises as well, not to mention the universities and all the other supply-chain enterprises that are affected by these proposals
It is the small and medium sized enterprises which rely on the existence of a permanent and stable tax incentive in order to invest in R&D. This is critical to their business case as much as it is to the larger firms.
Senators will be familiar with the name of Cochlear, an Australian company which has been at the forefront of manufacturing innovative advanced medical technology.
More than 250,000 people around the world have become the recipients of Cochlear's implantable hearing devices.
The vast majority of Cochlear's R&D activities are conducted in Australia, where more than 300 scientists and engineers are engaged in this work.
But in a letter to the Senate standing committee on economics, Cochlear's Chief Financial Officer, Mr Neville Mitchell, has explained how this bill and its predecessor are severely hampering the company's global competitiveness.
Cochlear typically spends more than $100 million annually on R&D.
In order to drive innovation, Mr Mitchell writes, the company would normally seek to increase its R&D investment in Australia, but that decision is now being reviewed because the incentive has been capped at $100 million.
So this is one of the early consequences of that fateful decision that the government has made in recent times.
This reduction is counter to the international trend. As Mr Mitchell points out, the United Kingdom, Hong Kong, Singapore, Italy and France have all increased their R&D incentives in recent years.
But Australia, under this government, is going backwards. Under the R&D tax regime that the Abbott government is intent on introducing, companies like Cochlear will be actively discouraged from conducting their R&D in this country.
The consequences of that perverse stance are clear to everyone except the government. As Mr Mitchell writes:
“Ultimately a reduction in the level of R&D undertaken in Australia will result in reduced employment and reduced corporate and individual income taxes.”
Cochlear's concerns about this bill are shared by smaller and medium sized companies, which, as I have said, will be particularly affected by the reduction in the value of the incentive should this schedule be accepted by this chamber.
The founder and technical director of a small engineering company in South Australia has written to me, stating that the bill will have 'a direct and adverse impact' on his company and on industry in Australia generally.
The company is an engineering design consultancy, which for the past 20 years has developed new technologies and products in many industry sectors, including mining, medical, automotive, clean technologies and consumer goods.
Its clients range from small firms of fewer than five employees up to multinational corporations. At both ends of this spectrum, the technical director writes, the R&D tax incentive is in many cases crucial to successful conclusion of their projects.
That plight is not unique to the company of which I am speaking. Smaller companies are frequently starved of development funds.
Many survive on seed funding, which all too often is difficult to obtain in Australia.
For companies in this position, the R&D tax incentive is commonly the difference between whether a project goes ahead or not. Because of the incentive, many of these projects have gone on to achieve commercial success.
They have generated jobs, profits and export income.
This government is evidently intent to see such projects fail, and the jobs and future economic growth that comes with them.
The technical director of the engineering consultancy notes that larger firms and multinationals often have the choice of developing new products in Australia or offshore.
The capping of the incentive at outlays of $100 million, he says, has already made that decision more difficult for them.
The cut in the value of the incentive will have the same effect for many more.
This bill also abolishes two tax offsets: the mature age worker tax offset and the seafarer tax offset. Labor supports the first of these measures. We had begun to phase out that offset when we were in office.
In the 2012-13 budget the then Labor government limited the offset to taxpayers born before 1 July 1957, with an estimated $255 million gain over the forward estimates.
At the time, the government stated that the offset was a high-cost method of encouraging mature-age participation in the workforce.
That aim can be achieved more effectively through direct payments or incentives, so we accordingly have no objections to that measure.
We cannot, however, offer our support for abolition of the seafarer offset. This offset began in July 2012, as part of the Labor government's maritime reform agenda, Stronger Shipping for a Stronger Economy, which we had announced in the 2010 election campaign.
The offset provides a refundable tax offset for qualifying companies employing eligible seafarers, to enable them to gain skills.
This is a very useful measure, and its worth continues to outweigh any financial gain from removing it.
Finally, the bill updates the list of deductible gift recipients, a necessary item of housekeeping that we support.
But the merit of the lesser measures in this bill, such as the abolition of the mature age worker tax offset, does not compensate for the continued damage the Abbott government is intent on doing to Australia's innovation system.
The government likes to boast about its credentials as a great economic manager, but its degrading of the R&D tax incentive and its trashing of the innovation system generally reveal those credentials to be worthless.
What the Abbott government is doing in this bill is an act of economic vandalism, which will leave all Australians worse off.