Second Reading Speech
Senator Ian Macdonald (Minister for Regional Services, Territories and Local Government)I table a revised explanatory memorandum relating to the bill and move:
That this bill be now read a second time.
I seek leave to have the second reading speech incorporated in Hansard.
Leave granted.
The speech read as follows-
This bill contains changes and additions to the research and development tax concession. These were announced by the Prime Minister on 29 January 2001 in the Backing Australia's Ability package. The package includes the introduction of a refundable tax offset for small companies who expend money on research and development; and a 175 per cent premium research and development tax concession for additional investment in research and development. The package also includes streamlining changes to research and development plant and to the definition of research and development.
This package was based broadly on the recommendations contained in the Innovation Summit report, which assessed the strengths and weaknesses of Australia's innovation system, and the report of the Chief Scientist who reviewed the effectiveness of Australia's science, engineering and technology base in supporting innovation.
These measures are designed to give effect to the Government's strategy to encourage investment in business research and development.
One aspect of the measures is the change to the definition of `research and development activities'. This change has been made to address weaknesses identified through past Federal Court and Administrative Appeals Tribunal decisions that have unintentionally broadened the scope of the concession beyond its intent. An important element of the change is the inclusion of an objects clause which will aid in the interpretation of what is eligible research and development.
The Government is adopting a fairer and more balanced approach to the treatment of expenditure on plant items used for research and development. The system includes the removal of the `exclusive use' test and the introduction of 125% effective life write-off for research and development plant. Also, a retrospective amendment to the definition of plant expenditure will limit the time that research and development plant must have been used exclusively for the purpose of carrying on R&D activities to an initial period only. This will bring the interpretation of exclusive use into line with commercial practice.
The removal of the `exclusive use' test will enable companies to obtain the research and development tax concession on plant which is not used exclusively for research and development. Therefore companies, particularly smaller companies, who cannot dedicate plant for use on research and development activities for a whole year, will be able to receive concessional deductions for the period during which the plant is used for research and development.
To assist small companies, especially those in tax-loss, a refundable tax offset will be available. To be eligible for the tax offset a company must have an aggregate research and development amount greater than $20,000 and the group with which it is associated must have research and development expenditure of $1million or less. The company and the group with which it is associated must also have an annual turnover of less than $5 million. This will give small companies, in tax-loss, access to the cash equivalent to the research and development tax concession. This initiative will foster the growth of these companies by providing them with timely support. A tax offset can also increase the cashflow of such companies when they most need it - during their initial growth phase.
A premium research and development tax concession of 175% will apply for firms that undertake `additional' investment in research and development.
Since the Government announcement of these measures in January this year, consultation has occurred with tax agents, research and development consultants companies and industry groups. Largely as a result of this consultation, the Government has decided to change the announced use of a research and development intensity model, to determine the available premium, to a research and development expenditure model.
Accordingly, the premium will apply to any increase in research and development expenditure above a base level established by a three-year registration and claim history. The model chosen to deliver this will induce additional research and development whilst reducing compliance costs. Furthermore, it increases certainty and access for companies.
Without a measure to prevent or minimise manipulation, the premium could be targeted by taxpayers seeking to maximise their benefits under it. This could take the form of companies understating, manipulating or shifting research and development activity across years, for the purpose of reducing their three year average of research and development expenditure. This would increase the value of the concession beyond its policy intent. Accordingly, the package contains integrity measures to address these situations.
The amendments do not exclude particular industries, for example the software or automotive industries, from access to the R&D tax concession. As part of its administration of the research and development tax concession, the Industry Research and Development Board will monitor the impact of the new measures on the capacity of business and industry sectors to claim the concession to ensure that there are no unintended consequences.
The changes to the definition of `research and development activities' and to plant expenditure are to apply from 12.00pm on 29 January 2001, the date of the Prime Minister's announcement. The premium tax concession rate and the refundable tax offset are effective from the first income year occurring after 30 June 2001. The retrospective changes to the claiming of plant expenditure are to apply from 1 July 1985 until noon 29 January 2001.
The Government considers the consultation process involved with this measure to have been a very positive and worthwhile process. I would like to thank all those involved in that process for their effort in contributing to the development of this bill.
Full details of the measure in the bill are contained in the explanatory memorandum.
I commend the bill and present the explanatory memorandum.
Debate (on motion by Senator Ludwig) adjourned.