This time of year, it’s all about the messaging

December 23, 2015 Kris Gale

We think it’s fair to say that people may have got a touch overexcited about what might have been in the Prime Minister’s recent Innovation Statement. There was talk of new funding for competitive grant programs for industry, a radical overhaul of the R&D Tax Incentive (the Incentive) and the like. As we saw, the announcement was a modest one in terms of new innovation funding but it did establish a very positive tone about the attitude of the Turnbull Government to the innovation challenge. And it did (yet again) remind us that there has never been a better time to be alive as an Australian.

The future of the Incentive

The Innovation Statement highlighted the fact that the Incentive is under review and that this exercise will be picked up by Innovation Science Australia after its formation in mid-2016.

We believe that the review needs to get the messaging right.  It is important to know the parameters and objectives of what is being assessed. In our opinion, the two critical parameters are the long term value that the program creates and the cost of the program (the latter being the sum of the net revenue forgone plus the cost of administration). In this, it is important that it can be established that the cost of the program be less than the value it creates.

We know that the cost of administering the program is relatively very cheap. It is far more efficient than any other grant-based program administered by the Federal Government. The cost of the revenue forgone, however, is harder to measure.

Under the previous R&D Tax Concession (the Concession), the revenue forgone was easily identified. Its last year provided support of around $1.8 billion. However, with the Incentive involving gross claims, followed by grant clawbacks and feedstock adjustments that can occur years after the R&D expenditure is claimed, it is very difficult to work out what the cost of the new program is. AusIndustry began to quote a figure of $2.4 billion but, since then, the largest R&D businesses have had their expenditure capped at $100 million per annum and we have experienced a slump in the resources sector. Yet recent Treasury estimates are indicating that the program cost is now approaching $3 billion! We suggest that those responsible for the review pay careful attention to the basis of the $3 billion cost figure. There is every chance that Treasury is including the cost of claimed feedstock expenditure, almost all of which is ultimately clawed back and which should not be counted in determining the program’s true cost. The Treasury messaging in the review needs to be carefully examined.

More importantly, this is only half the information required to make a sensible decision on the appropriate level of support provided by the Incentive. Any review needs to take into explicit account the value to the economy of the new and improved products, processes, materials, services and devices developed by the R&D activities supported by the Incentive. The social value of the Incentive also needs to be measured because the program is not just about funding specific R&D projects, activities or tasks. It is about creating a culture whereby businesses are more focused on R&D so that R&D is part of business as usual. It remains continuously surprising when the program administrators keep wanting to characterise R&D as distinct from business as usual activities. Surely the ideas boom is about making R&D a routine part of the way that Australian companies conduct their business. At a time when we are seeking to transform our economy and tackle issues such as climate change, we need to focus at least as much on the benefits encouraged by the Incentive as on the cost, especially when the cost of losing these benefits will have such an impact on future Budgets.

A moment’s reflection

We are excited about the upcoming year and the improved prospects for all those wanting to be part of the Australian ideas boom. We relish the chance to debate the form and design of the Government’s innovation support programs over the coming months. But for now, we would like to take a moment and reflect on the challenges and opportunities offered in the previous 12 months. It has been a heady ride and one that sees us ready to take up the challenge clearly set out in the Prime Minister’s words at the launch of the Innovation Statement.

And now to our final message of the year. Simply, all at MJA would like to wish our clients, partners and collaborators all the very best for Christmas and an Innovative New Year! See you soon for a booming 2016!!

Should you wish to discuss this matter further, please do not hesitate to contact Kris Gale directly on email kris.gale@mjassociates.com.au