Second Reading SpeechMr Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation)
That this bill be now read a second time.
This bill, together with the supporting bill, the Income Tax Rates Amendment (Research and Development) Bill 2010, introduces a new research and development tax incentive to replace the outdated and complex R&D tax concession.
The bills were introduced in the previous parliament, which was prorogued before they could be debated in the Senate. In response to the report on the bills by the Senate Economics Legislation Committee, minor changes have been made to the lapsed bills to clarify that the new R&D tax incentive supports experimental activities for the purpose of generating knowledge in the applied form of new or improved materials, products, devices, processes or services. This was always the intention of the legislation and the changes make this even clearer.
The new incentive is the biggest reform to the business R&D landscape in the last decade. It is all about boosting investment in R&D, strengthening Australian companies and supporting jobs. It provides for increased assistance for genuine R&D and redistributes support in favour of small- and medium-sized enterprises-the engine room of our economy.
Our intention is to lift Australia's R&D performance by encouraging many more businesses to benefit from the scheme, ensuring Australia's place as a clever country. R&D activities contribute to innovation by creating new knowledge and technologies-increasing productivity, jobs and economic growth, and allowing Australia to respond to present and future challenges.
The two core components of the new incentive are:
- a 45 per cent refundable tax offset for companies with a turnover of less than $20 million; and
- a 40 per cent non-refundable tax offset for all other companies.
The 45 per cent refundable tax offset doubles the current base rate available to SMEs, and the 40 per cent non-refundable tax offset raises the base rate for larger companies by a third.
The tax offsets are calculated on the basis of expenditure on eligible R&D activities and the decline in value of depreciating assets used for eligible R&D activities.
Small innovative firms are big winners from the new R&D tax incentive, with greater access to cash refunds for their R&D expenditure and more generous rates of assistance.
For example, suppose a company with a turnover of $10 million spends $1 million on eligible R&D activities in an income year and is in a tax loss position. Under the new R&D tax incentive, that company will be entitled to a cash refund of $450,000.
Under the existing R&D tax concession, the company will only receive a tax deduction worth $375,000, and there is zero benefit until the company starts to turn a profit. In this way, the new incentive will help small innovative companies when they need it the most.
The new R&D tax incentive better focuses public support towards genuine R&D activities. The key elements of this approach are:
- a clearer definition of core R&D activities;
- a robust test for supporting R&D activities; and
- enhanced administration of the tax incentive.
Recognising the pervasive nature of information technology in a modern economy, the new R&D tax incentive will ensure most software R&D is treated consistently with R&D occurring in other sectors.
Activities that were specifically excluded from being considered core R&D activities have been substantially rationalised to further improve the incentive.
These changes will ensure that the new R&D tax incentive rewards a company's genuine R&D, not business-as-usual, activities.
Importantly, this bill:
- further opens up the new R&D tax incentive to foreign corporations that are resident in Australia and those that carry on R&D activities through a permanent establishment in Australia; and
- ensures the new incentive will be available for expenditure on eligible R&D activities conducted in Australia, regardless of where the resulting intellectual property is held.
This will strengthen the case for companies to conduct R&D activities locally.
The bill ensures that public support for R&D is sustainable. On an underlying cash basis, the new R&D tax incentive is expected to be budget neutral over its first four years of operation.
To ensure a smooth transition to the new R&D tax incentive, the 2009-10 budget provided an additional $38 million over four years for administrative agencies to support companies through the transition.
To improve certainty for taxpayers, AusIndustry will provide comprehensive public guidance material and will introduce a new system of private binding rulings, called 'advance findings'.
This bill also represents a significant step in simplifying the income tax law. In addition to being drafted in plain English, the new provisions to be inserted in the Income Tax Assessment Act 1997 are less than one-third of the length of the provisions they replace in the Income Tax Assessment Act 1936.
The Tax Laws Amendment (Research and Development) Bill 2010 will deliver much-needed reform to public support for business innovation. It will deliver a substantial incentive for companies to conduct R&D in Australia. It recognises that the innovation dividend for the economy will come from refocusing public support on genuine R&D, not routine business activities.
Full details of the amendments in this bill are contained in the combined explanatory memorandum to this bill and the supporting bill, the Income Tax Rates Amendment (Research and Development) Bill 2010.
Debate (on motion by Mr Turnbull ) adjourned.