SMEs win big from innovation review’s R&D tax breaks

Business groups and tax experts say small and medium businesses will be the main beneficiaries of the recommendations from the National Innovation Review

Business groups and tax experts say small and medium businesses will be the main beneficiaries of the recommendations from the National Innovation Review, which include larger, easier-to-access tax breaks for R&D spending and the establishment of a new $150-million-a-year program to give grants to 200 companies.

The review, which was chaired by Terry Cutler, was released yesterday by the Federal Industry and Innovation Minister Kim Carr in Melbourne.

One of the primary recommendations is the scrapping of the 125% and 175% R&D tax concessions, which Cutler says should be replaced by a 40% refundable tax credit for large businesses and a 50% refundable tax credit for companies with turnover under $50 million.

Cutler says the tax credit system will be simpler for companies to access and easier for governments to evaluate the impact of the system.

The new system would also be much more lucrative. At present, the most-commonly used 125% tax concession represents a benefit of 7.5c in the dollar. But under the new regime, companies with turnover under $50 million would receive a benefit of 20c in the dollar while large companies entitled to the 40% tax credit would get 10c in the dollar.

Serg Duchini, a partner at accounting firm Deloitte who leads its national research and development and tax incentives group, says Cutler has focused firmly on fostering innovation in smaller firms.

“There is a real advantage and skewing for those companies with turnover under $50 million. They are the big winners, particularly in terms of the simplification in the way the tax will be calculated.”

In another win for SMEs, Cutler proposes that the tax credits be paid quarterly to companies with less than $50 million turnover.

“That would make a massive difference because you’ve got a much shorter time frame between spending the money and getting some relief,” Duchini says.

Cutler’s other big-ticket recommendation is the establishment of the Competitive Innovation Grants program, which would seek to assist 200 companies each year at an annual cost of $150 million.

However, the program would not be a free ride – successful firms would need to repay the grants from royalties or revenue streams accruing from commercial success.

Other key recommendations include:

• The establishment of innovation prizes, funded to the tune of $5 million over two years.
• Improvements to immigration policies to ensure Australia attracts human capital.
• Extension of the Enterprise Connect network to include the services sector.
• Full funding of university research programs.
• The extension of the COMET program for another five years and a 25% increase in funding.
• The maintenance of the Innovation Investment Funds, under which the Federal Government matches private sector venture capital funds. Cutler also recommends the establishment of 10 new funds at a cost of $300 million over 15 years.
• The establishment of a committee of web 2.0 practitioners to advise the Government on the use of web 2.0 technologies.

Carr describes the reviews as “a turning point for the future of innovation in Australia” and says the review proves that Australia has slipped behind global competitors and must lift its game.

“We have every reason to be optimistic about our future – but to fulfill our potential we must embrace innovation,” he says.

“This means finding new and better ways of doing things; it means thinking outside the square; and it means researchers, businesses, workers and governments coming together to play their part in the innovation system, all in the national interest.”

Of course, Cutler recommendations remain just that. The Rudd Government has promised to respond to the review before the end of the year and business groups will be watching closely to see just how many of Cutler’s ideas get the funding they need to get off the ground.

The Australian Industry Group chief executive Heather Ridout welcomed the “ambitious” review, which picks up on many of the AIG’s own recommendations.

“The proposed measures are quite extensive and will require the Government to consider the recommendations as part of a coordinated approach to lifting the productivity of Australian industry. This will include measures for the automotive and TCF sectors, along with any proposals arising from the review of trade policy,” she says. “As well, Ai Group research confirms that our skill shortages are undermining our innovation effort and so any measures will need to be complemented by appropriate skills development strategies.”

Ridout particularly welcomed the recommendation to make the 40% R&D tax credit available to multinational companies, which should help Australia attract new R&D talent and facilities.

Duchini agrees, and says convincing multinationals to conduct research in Australia will help all Australian companies.

“Just having the physical activity will have huge flow-on benefits. At the end of day, knowledge and innovation tends to reside in people’s heads, so where they are physically located is crucial.”

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