Month: December 2015

By Mark Morris

It’s not often that I intuitively align the laborious machinations of industry policy deliberations in Canberra with the wise intonations of the Rolling Stones but that is exactly how I responded after I digested the Federal Government’s National Innovation and Science Agenda report issued on Monday 7 December 2015.

As Mick and Keith once sagely wrote ‘You can’t always get what you want but if you try sometime you find you get what you need.’ This pretty much sums up the overall impact of the myriad of changes announced which collectively makes Australia a far more attractive place in which to invest in innovative businesses. This is the case even if the report falls short of the cutting edge vision of economies like the United Kingdom.

On the plus side it is clear that the Federal Government has commendably adopted a multi-disciplinary approach to improving research and development (R&D) and related commercialisation. It has done this by proposing measures that enhance access to venture capital, drive closer collaboration between universities and industry, improve educational outcomes in science, technology, engineering and maths, ensure digital by default delivery of government services and capitalises on the growth of big data and the need to leverage it for the benefit of the economy through advanced data analytics.

As such the Federal Government is seeking to apply a more holistic view on innovation policy along the lines championed by the Cutler Review of the National Innovation System way back in 2008. This was before the Global Financial Crisis derailed the process to the point where we did not need a Minister for Science as if that distracted us from the fixation of repairing the Budget Deficit.

Crucially the tax settings of the new innovation regime are also a considerable improvement over the status quo. Tax incentives are not only available for companies undertaking R&D but also for investors who provide the venture capital to fund the commercialisation of any resulting R&D.

Accordingly, the Federal Government has finally recognised that tax breaks need to be provided over the life cycle of a business to encourage entrepreneurs to conduct and invest in risky projects which may ultimately not be viable especially in the new rapidly dynamic and volatile digital economy.

As a case study to the Report highlights the retention of the existing refundable R&D tax offset allows start-up companies to leverage tax credits to help finance eligible research and development. This is so, even if it appears that the offset will be retrospectively cut from 45% to 43.5% from 1 July 2015).

This has been augmented by new tax breaks which allow individual investors a 20% non-refundable tax offset for investments in certain start-ups, and a capital gains tax exemption where investments held in such companies are held for more than three years but less than 10 years. In addition, partners in early stage venture capital limited partnerships (ESVCLP) will get a 10% non-refundable tax offset on capital invested in the partnership which can now raise funds of up to $200 million in early stage development of eligible activities.

Taken collectively there is therefore much to be praised in the new package.

So where does it fall down?

Firstly, the Report flags that there will be yet another review of the efficacy of the R&D incentive by the newly created Innovation and Science Australia Board. This concession has been around in various forms since 1985 and has had almost as many reboots or variants as the James Bond franchise. The last thing that an innovative entrepreneur wants to see is uncertainty as to whether it will still be around to help finance their initial R&D so let’s hope it is enhanced and not diminished.

Secondly, the take up in ESVCLP has tended to be relatively low as high wealth investors with surplus cash want some control over their venture capital investment. This is not the case with this investment vehicle where your investment is generally capped to a maximum 30% interest. I do not see that radically changing because of the prospect of a 10% non-refundable tax offset. And the proposed rules on other investors are typically over-restrictive.

Thirdly, and perhaps most importantly, the Report does not address our internationally uncompetitive corporate tax rates of 28.5% and 30%. Additionally, the demarcation between those tax rate regimes can itself be a practical nightmare to navigate.

How does this compare to the United Kingdom’s 18% corporate tax rate to apply from 1 July 2020, and particularly to royalties and capital gains arising from intellectual property subject to their patent box regime which will likely be subject to further concessional tax treatment?

I would suggest not that well even if it is not an apple to apple comparison.

It’s true that businesses don’t do things solely because of a tax break but a whopping differential in tax rates could be a deciding factor in a mobile digital world as to where you want to invest your capital in innovative products and processes.

However, even if the proposed changes fall short of addressing all facets of our international competitiveness they do signal that our Federal Government is finally serious about instilling an innovation mentality and culture in our businesses, universities and the broader community.

Which leads us back to Mick and Keith.

Maybe the announced changes are not what we ideally want in becoming an international trendsetter on innovation but maybe it’s what we need to allow us to nationally lift our head and embrace being part of the new innovative digital economy.

And given where we have been perhaps that is enough at this point.