World’s economic malaise gut-punches Australian R&D as new bill gets tabled

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World's economic malaise gut-punches Australian R&D as new bill gets tabled

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Australian companies continue to increase their investment in research and development, but the growth rate has dropped dramatically, according to figures from the national Bureau of Statistics.

In the latest numbers available, companies pumped $16.86 billion into R&D in 2008-09. That’s a 13 percent increase over 2007-08.

However, the 2007-08 and 2006-07 R&D investment figures were 18 percent and 21 percent higher than their previous years, respectively. So even though the raw numbers are on the rise, it appears the world’s economic malaise gut-punched R&D as well.

The investment drop was even more dramatic when expressed in chain volume. R&D growth over the previous plunged from 21 percent in 2006-07 to 9 percent in 2008-09.

Innovation Minister Senator Kim Carr put a positive face on the most recent numbers for business expenditure on research and development (BERD) while acknowledging the burden of the global recession.

“To have such a significant growth in BERD,” Carr said, “especially over a period that covers the global financial crisis, is a testament to the resilience and confidence of the business community. It demonstrates that businesses understand that innovation and R&D are critical to their long term planning and prosperity.”

According to the statistics bureau figures, BERD as a percentage of GDP increased to 1.34 per cent in 2008-09 from 1.26 per cent in 2007-08. This growth lifted Australia from 14th to 11th among the 30 Organisation for Economic C-Operation and Development countries.

The data also shows:

  • Business expenditure on R&D for pharmaceuticals reached $1.024 billion in 2008-09, a growth of 12 percent over 2007-08.
  • Large businesses continue to dominate BERD at almost $12 billion or 71 percent of the total. Growth in SMEs’ business R&D was 9 percent.
  • Manufacturing accounted for the largest share of BERD at almost 26 percent.
  • Human resources devoted to R&D in business increased 5.3 percent during 2008-09 with the total person-years of effort reaching 53,556. High-skilled jobs such as researchers and technicians accounted for more than 83 percent of this total.

R&D Tax Credit: What does this mean?

Carr used the R&D numbers as an opportunity to tout the re-engineered research and development tax credit, which faces heavy scrutiny in Canberra after two new amendments were tabled in the House of Representatives last week.

The first amendment confirms that activities during the development phase used to acquire new knowledge in the form of improved materials and products or services will be eligible as R&D. The second amendment confirms experimental activities can be classed as R&D and that factory floor R&D will be included in the tax credit.

This, however, does not solve the two main criticisms levelled at the bill earlier this year.

According to Anthill’s James Tuckerman, the legislation was heavily criticised for not being clear on the meaning of its ‘dominant purpose test’ and also for ambiguity over its start date.

“Lack of clarity on what activities constitute R&D is a real problem. When devising their R&D strategies, companies need consistency and clarity above all else. Most international reports about promoting R&D point out that companies are less concerned with the percentages. They just need to be able to plan if any R&D is to happen at all,” said Tuckerman.

“But the absence of a clear start date is likely to be equally unpopular. Any retrospective tax is likely to be a burden on business. Senator Carr has made it clear that he supports a retrospective start date but industry is pushing for a June 2011 start.”

Image by Justin Grimes

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3 comments
John Haining
John Haining

For many smaller companies there is a distinct benefit to the announced start date (depending on R&D spend, turnover, etc), but it is not good policy implementation and is not consistently fair to taxpayers. The existing R&D tax concession program remains on foot until this legislation is passed - it is not as generous for many companies, but has over twenty years of program certainty, conceptual analysis and administrative, legislative and judicial guidance as to its delivery and results. The Senate Economics Committee Inquiry received many submissions (http://goo.gl/Ku6z) that addressed the failings of the previous legislation, most of which have not been addressed. Some of these reflect fundamental shifts in interpretation between the current (known) program, and the announced (unknown) program. The unknowns are partly about the legislative drafting, but mostly about how the policy and legislation will be applied by auditors and assessors. Finally, two independent MPs voted against the legislation when it passed the House in the previous Parliament. It will be interesting to see whether this tests their resolve on supporting the minority government or their commitment to sound legislation.

Collin Li
Collin Li

A retroactive start date makes no sense. This kind of legislation is supposed to affect economic incentives. A retroactive start date, affecting businesses that have already made their decisions, is not a valid way to introduce the bill.

R&D SmartTax
R&D SmartTax

Agree totally. At this late stage it really should be left to start next year on 1 July 2011. Give time for companies to get their heads around how exactly it is supposed to benefit them the most and where they should be directing their resources. James Tuckerman's comments about the "dominant purpose" test are also valid - the government really needs to know that it is not realistic to expect small businesses to devote scant resources to non-commercial activities. There will always be this duality and practicality to Australian R&D. Unless this is cleared up the BERD rates are going to continue to drop off GFC or not.