Do you know what happened 4,279 days ago today?
Something happened 4,279 days ago that changed the relationship between government and industry significantly. Do you know what it was?
In order to answer that question, you need to know some history.
You need to have a sense of the budget deficit inherited by the brand new coalition government in 1996. You need some understanding of the lengths they needed to go to in order to balance the books. In fact, we need to go back a little further.
28 days earlier…
4,307 days ago the government achieved a major limitation to the types of claims under the R&D tax concession by simultaneously introducing:
- the obligation for companies to offset their expenditure on feedstocks processed or transformed in R&D against any products derived,
- changes to the arrangements for interest, pilot plant, and core technology; and
- a clarified definition of R&D.
On 23 July 1996 these changes were set in place.
And these changes were understood
The business lobby had played a significant role in the coalition’s victory, and clearly understood from the outset that it would need to give something up in order to help balance the budget. Through a process of consultation and discussion these areas were identified and agreed, the merits of change debated and the benefits weighed against the costs, and the R&D tax concession was amended.
But 28 days later, at 7.30pm on 20 August 1996 the government acted unilaterally to slash the R&D tax concession from 150% to 125%. This change broke the trust and certainty around the R&D tax concession that had slowly allowed it to enter into corporate long range planning at a rate where it could change project economics. This trust taken time to establish, and was crowned by the permanent extension of the R&D tax concession in 1992/93.
Why does this history lesson matter?
Fast forward to budget time 2008. Just as in 1996 a new government is at the reins. Just as in 1996 there is a need for prudent fiscal judgement. And just as in 1996 a process of consultation around R&D, innovation and tax is underway (www.innovation.gov.au/innovationreview).
The economic picture looks different this time: it is now the surplus that is the problem, and the spectre of inflation the issue. But what’s similar is that the government is putting the final touches on a budget with a clear need to make cuts.
It’s all about the consequences…
In 1996 the drop in R&D investment was immediate and significant, and it came at a time when the economy really needed industry to be making counter-cyclical investments. Instead of R&D changing due to market forces what happened was that the certainty that industry needed from the R&D tax concession had disappeared.
In fact, 12 years later the 125% rate continues to have an impact with few project capital proposals before Australian boards taking into account any permanent cash saving from the concession. At 7.5% it doesn’t significantly change project economics.
Further, the 175% incremental concession (aside from its practical challenges) is still “new” to industry. It has not yet been bedded down and fully accepted, and given that the introduction of the 175% international tax concession came at a time before the 175% incremental concession was settled in the mind of industry this change adds up to uncertainty and risk on the planning horizon.
What are the similarities between 2008 and 1996?
But surely this is just scaremongering. Although there are some similarities, such as the change in government, the budget challenge, there is consultation going on. And the Cutler Review’s website suggests that over 600 submissions have been received (although from those on the website at present, few are from industry. Australia’s powerful science lobby is in full flight). Innovation is at the front of mind at the moment.
After all, we’re in the middle of the National Innovation Festival.
But there is always the seed of doubt, a grain of uncertainty, the germ of an idea at that at budget time what is a powerful, market driven R&D tax concession could be seen as a form of industry assistance for incremental innovation. But that of itself is not a bad thing.
At the level of benefit currently derived by the majority of program participants, the R&D tax concession is a vital business environment variable that has some level of certainty around it.
Conclusion
This is the time for government to listen to industry’s submissions, to learn from the mistakes of that first Howard-Costello budget in 1996, and to address all industry R&D and innovation programs from a position of consultation and vision, rather than applying the spending scalpel to cure a patient still ravaged by the unnecessary and imprudent cut 4,279 days ago.
Visit www.innovationisindustrypolicy.com and vote on the level of after-tax benefit you would need to put R&D tax benefits into your company’s capital and project planning processes.
And if you’re already using the benefit of the program in your approval calculations let me know!
Comments
2 Responses to “Do you know what happened 4,279 days ago today?”
Great article. Suspect they’re not reading it unfortunately. Cheers, Pete.
I know what you mean, Pete. But we’ve got to keep pushing the message out there.