Budget 2009: Interview with Kris Gale
You might also be interested in Kris Gale’s first hand account of the Innovation Policy announcements as part of the budget.
The audio player below will stream the 6:43 audio file.
Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.
Please feel free to give us any feedback you have by posting a comment below.
Budget 2009: Innovation Policy Announced
R&D tax credits to offer higher rates of benefit to broader range of companies
MJA’s Managing Director, Kris Gale, was invited to attend a budget lock down hosted by the Minister for Innovation, Industry, Science and Research, Senator Kim Carr and the Minister for Small Business, Craig Emerson. The highlight was the announcement of a new R&D tax credit system which, along with a range of other initiatives, is a positive response to the Cutler Report. At the same time, the government released a new white paper, Powering Ideas: An Innovation Agenda for the 21st Century (PDF).
In an overall sense this is a pro-innovation and pro-business budget
In an economic environment that has required some cuts to some government programs, balanced with appropriate stimulus activities, innovation investment has clearly been recognised for its economic benefits.
The government has announced an R&D tax credit with two levels of assistance:
- a 45% refundable credit for companies with turnover of less than $20 million (we assume that this will be calculated on a group basis, similar to the current R&D tax offset), equivalent to a 150% tax concession; and
- a 40% non-refundable credit for companies with turnover of more than $20 million and for companies with foreign-owned intellectual property arrangements that conduct R&D in Australia. This is equivalent to a 133% tax concession.
Reacting to these announcements, MJA’s managing director, Kris Gale reflected, “in meeting with Senator Carr, he said he wanted an R&D tax program with ‘winners with no losers’, and that’s essentially what’s been delivered.”
R&D tax credit announcements
The new R&D tax credits take effect for income years commencing after 1 July 2010. Of particular significance, the change to an R&D tax credit system means that the rate of support will be decoupled from the corporate tax rate, whether that increases or decreases in future.
In addition, there will be a review of the program eligibility criteria in developing the new legislation and a consultation paper will be released in the next few months. This is a positive process, and we welcome the fact that changes to eligibility were not a part of tonight’s announcements.
One of the strengths of the current R&D definition is that it is based on industrial concepts of R&D. MJA looks forward to working with government to preserve this critical feature of the program.
Groups with turnover less than $20 million
Where a group’s annual turnover is less than $20 million, companies will be eligible for a 45% refundable credit. This is equivalent to a 150% tax concession which is double the rate of support currently available under the base 125% program. This is a significant increase, as the current refundable offset has a group turnover limit of $5 million, and Aggregate R&D Expenditure capped at $1 million.
For the R&D tax credit the turnover limit has been increased to $20 million, and the cap abolished.
As a transitional measure, for the 2009/10 income year, the Aggregate R&D Expenditure cap will be lifted to $2 million to provide more support and flexibility for organisations that currently do not qualify.
The government estimates that 5,500 firms will benefit under these new arrangements.
Groups with turnover great than $20 million
Where group turnover is over $20 million, companies will be eligible for a 40% non-refundable credit, equivalent to a 133% tax concession, again one-third higher than the current basic rate of support.
Further, companies conducting R&D in Australia where intellectual property rights are held offshore (as for the current international premium R&D concession) will also able to access this credit.
Reform to existing programs
Both the current 175% premium and international premium will be abolished in line with the introduction of the new credit system, and the 2009/10 income year will be the last for claims under those programs. It appears that the government definitely reacted to feedback that these programs were unpredictable, didn’t dramatically influence new projects or provide a compelling reason to locate foreign-owned R&D in Australia.
No new competitive grants
In an overall sense the value of the support under these announcements is approximately $1.4 billion, however there were no new announcements in relation to competitive grants for R&D. Whilst there are initiatives for other areas (Commonwealth Commercialisation Institute and Clean Energy), there is no replacement for Commercial Ready and no commentary on additional funding for Climate Ready.
This means that discretionary grant-based R&D funds for classic projects appear to be at an end under the current government.
What questions do you have?
It’s always helpful to have your feedback on the articles we prepare, and the approach we’re taking in dealings with the government. This is particularly the case with a time-sensitive announcement such as the outcomes on budget night.
You can help us by filling out a Comment below this article on our website, and giving us any feedback you have on this initial summary of innovation policy as it relates to the 2009/10 federal budget.
If you post a question relevant to the area we’ll do our best to answer it in the more detailed analysis we will be preparing over the next 24 hours.
Innovation Commentary on 2009 Budget
MJA’s managing director, Kris Gale, will be attending the 2009 Federal Budget innovation briefing, at the invitation of the Minister for Innovation, Industry, Science and Research.
We will bring you news of the highlights (and any lowlights) as they relate specifically to innovation policy, R&D tax concessions (or credits), grant funding and other government incentives shortly after the lock-up has completed at 7.30pm.
You can look forward to an MJA Update Article and email (if you’re a subscriber) tomorrow night, followed by a more detailed look at the changes within 24 hours of the budget.
Our initial reactions have been written up here: http://mjassociates.com.au/mja-update/budget-2009-innovation-policy-announced/
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!
