Thursday, 6 October 2016

Using tax offsets as a principal funding device to encourage self-assessing corporations to conduct research and development. What could possibly go wrong?

Providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form. [C’wealth Income Tax Assessment Act 1997 - SECT 355.5]

What could possibly go wrong when a federal government primarily funds business research and development (R&D) by offering private corporations tax offsets for conducting such activities, while at the same time allowing them to self-assess whether they are eligible for these tax incentives and whether their research is genuine?

Well for a start, the companies involved tend to employ less science, technology, engineering and mathematics graduates to conduct their R&D.

Given that on 15 June 2016 The Australian reported that; the Productivity Commission says STEM graduates fare poorly in the job market, apart from those who have studied healthcare, mining engineering and surveying. The outlook for mathematics and computer science qualifications are only slightly below average, however there are big gaps for graduates in life sciences, chemistry and the physical sciences. Employment outcomes improve three years after graduation, but 20 per cent of people with bachelor degrees in natural and physical sciences have still not got a job. Of those who do get work, many are in an unrelated field. About a quarter of people with science degrees say their qualifications are not relevant to their employment, one has to wonder why business and industry in Australia are not availing themselves of these qualified graduates.

Then there is the fact that it appears that this government program is not always well targeted.

Another flaw in this system is that voters have no way of knowing which companies are receiving these tax incentives and how much they are receiving, or of assessing what government foregoing so much tax income annually actually achieves as outcomes for the economy.

If science actually matters to the Turnbull Government it should matter not just in universities and identified research institutes but in all its aspects – including allegedly market-driven R&D.

One has to suspect that a little more academic discipline in business research and development might lead to better outcomes.


Dept. of Industry, Innovation and Science, Review of the R&D Tax Incentive (Ferris, Finkel and Frasier) 4 April 2016:

The R&D Tax Incentive (the Incentive) is the largest component of Australian government support for innovation, with around 13,700 entities performing $19.5 billion of R&D at an estimated cost to government of $2.95 billion in 2013-14. The Government commissioned this review to:
‘identify opportunities to improve the effectiveness and integrity of the R&D Tax Incentive, including by sharpening its focus on encouraging additional R&D spending.’

Reviewing the programme against these terms of reference involves the evaluation of the programme against its objectives, weighed against the costs, to measure the net social benefit.
The objectives, as stated in the programme’s legislation, are to ‘encourage industry to conduct research and development activities that might otherwise not be conducted…to benefit the wider Australian economy’. In other words, the Incentive seeks to encourage additional R&D (additionality) that benefits others (spillovers).

Most OECD countries have incentive schemes for R&D. Australia and most other countries use tax incentives as part of their public support, but Australia, Canada and the Netherlands are unusual in having tax measures as the principal form of support for business R&D. Countries such as Finland, Germany and Sweden are examples at the other end of the spectrum, in that they do not use tax incentives at all but rather support business R&D through direct measures such as competitive grants.

Overall assessment

The review panel finds that the programme falls short of meeting its stated objectives of additionality and spillovers. There are a number of areas where improvements could be sought in order to improve the effectiveness and integrity of the programme and achieve a stronger focus on additionality.

Based on the best estimates of additionality and spillovers, the panel found that the programme could be better targeted. The areas of improvement identified in this review would be likely to generate greater benefit from the programme for the Australian economy.….

The panel notes that there is a modest amount of collaboration with publicly-funded research organisations (PFROs) within the programme, but it is not an explicit focus. The panel also notes the low employment level of Science, Technology, Engineering and Mathematics (STEM) PhD graduates in Australian industry relative to other OECD countries. This represents a lost opportunity for greater spillovers of knowledge between larger companies, PFROs and the broader marketplace…..

The panel notes that despite the level of coordination between AusIndustry and the ATO, the significant growth in the scale of the programme is placing increasing strain on the administrative and compliance model for the programme. The Government should consider options to improve administration. These could include: adopting a single application process rather than the current separation of registration and claims, introducing a single database for the entire programme, reviewing whether both AusIndustry and the ATO should continue to administer the programme jointly and closer collaboration and streamlining around review and findings. Either or both agencies may require additional resourcing to enable such improvements.

To place the programme into alignment with modern expectations and to allow public visibility of companies receiving public support for their activities, tax secrecy provisions should be adjusted to allow the publication of the names of companies claiming the Incentive and the amounts of R&D they have claimed…..

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