The government’s research and development tax incentive is “counterintuitive” to innovation because it fails to focus work into Australia’s areas of strength and provides support only after the work is completed, according Advanced Manufacturing Growth Centre head Dr Jens Goennemann.
Speaking at the InnovationAus Capability event this week, Dr Goennemann called for a less “egalitarian” approach to the scheme, with incentives focused on defined areas of national interest and awarded ahead of R&D rather than as a tax subsidy.
The research and development tax incentive (RDTI) encourages Australian businesses to innovate by providing a tax offset for their R&D work, under the theory the companies might not otherwise conduct it due to risk or uncertain returns.
The subsidy is based on the size of the company and the intensity of their R&D, and is awarded as an offset to their tax bill up to 18.5 percentage points above the claimant’s company tax rate.
Small changes to the RDTI were introduced this financial year after the Coalition government walked back its planned $1.8 billion cut to the scheme. Larger reforms are expected next year when legislation underpinning the popular program sunsets in April 2022.
On Tuesday, Dr Goennemann described the scheme as “counterintuitive” to Australian innovation.
“R&D tax incentives are counterintuitive to innovation because they don’t focus. You get an R&D tax incentive for [almost any] innovation,” he said.
“But the nation needs to decide what are the areas of our strength. We can’t do everything a little bit, we need to focus.”
Dr Goennemann also questioned the “additionality” of the scheme, which reduces tax bills rather than directly funding R&D.
“Would the innovation have happened otherwise anyway? I I think the money can be spent in a sharper way, in a more focused way counterintuitive to our egalitarian society that everybody should get a little bit,” he said.
“We need to focus and we need to scale. And that, I think, will do the trick.”
Dr Goennemann is the managing director of the Advanced Manufacturing Growth Centre (AMGC), a government funded project representing over 47,000 Australian manufacturers and tasked with driving innovation, productivity and competitiveness across the local industry.
The growth centre head said scale remains a big challenge for local manufacturers, 85 per cent of which employ less than 20 people, and Australia as a nation, making focused policies more important.
“If we try to do everything a little bit, we achieve nothing. And that’s the idea of the growth centres — to say they are areas of particular strengths. This is [also] the idea of National Manufacturing priorities — we say focus on these areas of strengths and back continue doing that, we will punch above our weight in the areas where it really matters,” Dr Goennemann said.
The RDTI scheme has also been criticised for its unsuitability to tech companies, with calls for an additional software specific program.
At the same Capability event, fellow growth centre head Adrian Beer, of the Mining Equipment, Technology and Services (METS) Centre, said Australia needed to recapture its software leadership.
“I think we forget that we used to be a world leader in software. And it’s not actually about an emerging potential opportunity, it’s actually one that we lost in the past and we need to learn lessons from,” he said.
Mr Beer pointed to the Australian-made but now foreign owned software platforms being used today by Australian military and infrastructure organisations, the Chilean Navy, and US government departments.
“All of these organizations — big industrial processes – are operated with software that was developed here in Australia but is now owned by overseas companies. So, we proved that we can do it, we proved that we can develop it and we can commercialise it. But, we then lose it,” Mr Beer said.
“And I think the focus [should be] about bringing it back, onshore and supporting the businesses that are commercialising those technologies.”
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There should not be one program for all. The R&D tax incentive has its place: It is much more efficient than a grant-based system and it does not require a government committee or government-appointed committee to determine which industries, businesses or projects get the support. This means it can reach many more businesses without the politics behind picking a winner. The R&D tax incentive is good for encouraging the small start-up or the established business, large or small making systematic improvements to their products and processes where this requires more than just applying a known solution in a known way. It works well for all industries including software and IT despite moves for special treatment by some in the IT industry. However, it should not be virtually the only solution. There used to be more R&D or commercialisation related grants. There could be technology adopter loans for those facing a hurdle in adopting a new but developed technology. It is about the mix – The R&D tax incentive for “kaizen” and larger progressive and incremental improvements, grants for the strategic paradigm shifts or to get the either of these to market and methods to reduce the hurdle of entry to adopt new technologies.
Focused means focused in areas that suit him and his agenda. The idea that some policy wonks, or politicians influenced by industry lobbyists should decide where Australia should focus its innovation is an anathema to innovation itself. The biggest innovation with the biggest financials returns come in newly defined markets. By definition Dr Goennemann wants to restrict innovation to already defined markets, thus ensuring Australia misses out on any new big emerging market. Talk about counter-intuitive to innovation!
There is little evidence that placing the decision making responsibility with expert or technocrats to allocate resources is the best strategy. Pricing carbon through a market mechanism is favoured by many economists because evidence is showing that works better than technocrats setting a price.
I agree with Dr Goennemann that the R&D scheme is being rorted and use as a mechanism to deduce tax not drive invention, innovation and science commercialisation. The scheme should be changed but in such away that helps manage and reduce risk early stage investments. Requiring research teams, business entrepreneurs and government to collaborate to get access to research data and inventions by removing friction in that system would I think be a better R&D strategy.