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Business warned that R&D incentives are not set in stone

Publication date: 08 Apr 99 | Source: THE TAX INSTITUTE

Despite a commitment from the Industry Minister, Mr Nick Minchin, to maintain the 125% R&D tax incentive for Australian business, industry commentators have warned that the R&D issue is firmly on John Ralph's agenda and they may have to fight to retain the R&D incentive.

"There is a real possibility that many supporters of the R&D incentive are not actually aware that Mr Ralph is now considering this issue, as Mr Ralph's recent report did not specifically address R&D," said Mr David Gelb, Director KPMG and Chairman of the Taxation Institute of Australia's R&D Group.

"However, recent comments by John Ralph have clearly put the onus back on business to vigorously defend the retention of the R&D tax incentive."

"That means that companies have only one week remaining to advise the Ralph Review that the 125% R&D tax incentive should not be abolished," said Mr Gelb.

The R&D tax incentive has operated effectively in Australia for fourteen years. The incentive has improved Australia's R&D spending in the OECD community and has contributed to employment creation, revenue generation, competitiveness, export enhancement and import replacement.

"Business should not forget the severe cuts to the R&D incentive scheme in 1996. Those cuts surprised the business community, which had relied on Government industry policy statements supporting the R&D incentive. As a consequence, there was no real opportunity for business to defend the incentive," said Mr Gelb.

"Business should not be complacent and allow the events of August 1996 tobe repeated," he said.

The Taxation Institute's R&D Group recommended that companies should unequivocally convey their views to the Ralph Review and the Government that:

It is inappropriate to evaluate the effectiveness of the R&D incentive in the context of the Review of Business Taxation. This review is subject to the constraints of revenue neutrality and is not the appropriate forum to demonstrate the net economic and social value of the R&D incentive,which the Industry Commission concluded after its exhaustive review in 1995.

The business community should work closely with Government and the research community to restore the R&D incentive to 150%. This is necessary to ensure that the present value of the R&D incentive of 45 cents in the dollar is maintained, if the corporate tax rate is reduced to 30%.

"Information concerning business expenditure on R&D shows that the 1996 cuts to the R&D incentive have contributed to a decline in R&D spending. In addition, significant R&D projects have been abandoned or moved offshore," Mr Gelb said.

"Australian business cannot afford this episode to be repeated. It is now critical that businesses advise the Ralph Review that our country's future demands that the R&D incentive should not be compromised," he said.