Posted: 24 Mar. 2017 15 min. read

Will innovation and science play a role in the Federal Budget?

Although we can expect housing affordability to be front and centre in the 2017-18 Federal Budget, it is possible the Prime Minister’s preoccupation with innovation may play second fiddle.

In recent years, Australia has been vocal in its desire to evolve to a tax system and broader economic policy that is profoundly pro-innovation; quite rightly, given the acknowledged contribution of innovation to growth and productivity. Problematically, although we are a country that ranks well on knowledge creation, it is also widely acknowledged that Australia ranks badly in both collaboration between science and business, and commercialisation.

This week at the National Press Club, in his first major speech as Australia’s Minister for Industry, Innovation and Science, the Hon. Arthur Sinodonis affirmed the crucial relationship that exists between innovation and parliamentarians, and his desire for collaboration to become the hallmark of his efforts in the portfolio.

Although the speech gave little away in terms of specific policy proposals, it left the audience in no doubt collaboration between government, industry and universities will be at the forefront of future policy and investment plans.

Such policy-making intentions align with the second recommendation of the 2016 Review of the R&D Tax Incentive to introduce a collaboration premium of up to 20% on the non-refundable R&D tax offset and the cost of employing new STEM PhDs or equivalent graduates in their first three years of employment. It is likely such collaboration policies, in one form or another, will see the light of day when the Government present their long awaited response to the Review and/or in the Federal Budget in May.

The Minister, in recommitting the Government to an innovation-centred policy focus, also addressed how the National Innovation and Science Agenda (NISA) which was launched in December 2015 has driven this change in culture so far. To date, early stage innovation companies, crowd-sourced funding, VC partnership structures and relaxed loss utilisation rules have been the main focus of the tax-related changes, together with STEM and science-related funding measures.

The next ‘waves’ of NISA are signalled to be around infrastructure spend, reduce unnecessary regulation and help businesses prepare for technological disruption. The Government also needs to formally respond to the recommendations of the R&D review. It is possible some of these policy announcements could form a part of the Federal Budget in May.

Aside from collaboration, of the other five measures recommended by the review of the R&D Tax Incentive, it is likely a cap on the refundable R&D tax offset is being considered given Australia’s increasing fiscal deficits, but it may be put forward at a higher threshold than the $2m proposed by the Review. Carve outs from such a cap for R&D projects subject to specific advance findings or approved R&D intense clinical trials would also ensure Australia could still retain key R&D investment onshore, and continue to attract offshore R&D investments.

Responses to the suggested intensity threshold were overwhelmingly negative based on the practical and inequitable issues that would arise. Stability for forward planning and budgeting for R&D activities is critical, thus it is to be preferred the recommendation is not favoured.

Given the Minister’s undoubted commitment to innovation, it is also to be hoped the benefit of the R&D Tax Incentive regime is diluted no further – with a program only six years old, and which has already undergone reviews and cuts, providing little sense of certainty in eligibility, interpretation or financial benefit – it is critical that business can start to have confidence in and the program and its longevity.

Generally, it is clear the subsequent ‘waves’ of NISA must seek to drive ideas to improve the transferring of and application of knowledge. Arguably a contributing factor towards Australia’s evident failure to transfer and apply knowledge is the lack of a patent or innovation box regime to complement the existing R&D regime. Globally, many jurisdictions have introduced IP incentives such as patent boxes, providing support across the R&D and commercialisation stages of innovation; is this an innovation policy Australia should at least consider?

More about the author

Sergio Duchini

Sergio Duchini

Partner, Tax

Serg Duchini is the National Practice Leader of the Global investment and innovation incentives (Gi3) Group, a member of the Deloitte Tax Executive and the Deloitte Australia Board. He is also a member of the Global Deloitte R&D Executive.