Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014: Submission to the Economics Legislation Committee on the Proposed Reduction in the R&D Tax Incentive

This submission to the Senate Economics Legislation Committee opposes Schedule 3 of the Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, which would cut the rates of the Research and Development (R&D) Tax Incentive by 1.5% from 1 July 2014. The Government presented the cut as preserving the incentive’s value relative to a proposed reduction in the company tax rate to 28.5% from 1 July 2015, yet the Budget Papers estimate a $620 million gain to the Budget over the forward estimates. Research Australia maintains that the incentive is an industry support measure, not a tax measure, and that it helps address the shortage of risk capital for innovative firms, citing Australia’s low share of high-tech manufacturing, strong growth in medical instrument and pharmaceutical exports, and ABS data showing lack of funds is a barrier to innovation for 20% of businesses. The refundable component provided $4.96 billion to companies with turnover under $20 million in 2011–12 to 2013–14, two thirds of the total. Because many of these start-ups pay little or no tax, a lower company tax rate would not offset the cut, as examples such as Sementis, Bionomics and Pharmaxis illustrate. Larger companies would also lose out once the Paid Parental Leave (PPL) levy is applied, and neither the PPL scheme nor the tax cut had been legislated. Research Australia recommends that the Senate reject Schedule 3 or, at a minimum, that it be withdrawn until the company tax cut is introduced.