The BERD in the Hand: Supporting Business Investment in Research and Development
Study finds proposed scheme supports better R&D
The Australian Business Foundation today released The BERD in the hand: Supporting Business Investment in Research and Development by Dr Nicholas Gruen CEO of Lateral Economics. Both Narelle Kennedy of the Australian Business Foundation and Nicholas Gruen were members of the Cutler Review which proposed changing the existing R&D tax concession. The paper argues that the government’s proposed scheme is a big improvement on the status quo. It is likely to boost R&D undertaken by small businesses and it gives Australia more value for money from its R&D spend.
“Assistance rates have fallen from 24.5 to just 7.5 per cent since the scheme’s introduction in the mid 1980s. Over nine tenths of the R&D qualifying for the current concession would have been done anyway. So the existing scheme probably generates more administrative, compliance and revenue costs than it does R&D benefits.
“By doubling the rate and bringing forward payments – sometimes by years – for small firms, the new scheme will generate substantially more additional R&D” Dr Gruen said.
Higher assistance is funded from the abolition of several sub-schemes within the existing concession and by focusing the assistance more tightly on R&D activity, rather than production activity which was not for the dominant purpose of supporting R&D.
“I explored the issue with an open mind, but ended up impressed with the way the Treasury proposed dealing with the problem of excessive claims on production,” Dr Gruen said. The new scheme distinguishes production undertaken with the dominant purpose of supporting R&D (which remains eligible) from other production which is ineligible even if it has some direct relation with R&D (which becomes ineligible).
Because this change has a negative impact on some businesses, political debate and possible compromise has focused on softening this feature of the new arrangements, for instance by capping claims on production or allowing incidental production for small firms, but not large ones. But Dr Gruen argued that if those seeking amendments wanted to maximise the policy impact on R&D, they would focus their energies on trying to get money for smaller firms sooner, and if there’s money left over, lifting the rate of assistance to smaller firms.
“This is much sounder policy because it ramps up assistance where we know it can generate more R&D. This is at the cost of assistance for production that isn’t being done for the dominant purpose of supporting R&D which would, pretty obviously, take place with or without assistance” Dr Gruen said.
The report also proposed that the threshold for small firms be reviewed and indexed for inflation every three years and that tax confidentiality be waived to improve the evidence base for evaluating and optimising the scheme over time.
Dr Gruen expressed concern that further delay in passing the new legislation could cause small businesses to put off their R&D, which is not in the interests of boosting Australian business innovation.
