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Funding of grants not the answer to falling innovation problem

Publication date: 26 Nov 97 | Source: THE TAX INSTITUTE

Funding of grants not the answer to falling innovation problem

It is evident from the long delay by the Government in announcing its industry policy initiatives that the best means of providing Government assistance for research and development is still an issue, according to Mr Graham Carew spokesperson for the Victorian Research and Development Group of the Taxation Institute of Australia and Director of Deloitte Touche Tohmatsu.

"The anecdotal evidence emanating from clients of our Group's members shows that companies are investing less in R&D in 1996/97 than in 1995/96," Mr Carew said.

"This is a direct consequence of the reduction in the rate of the concession in the August 1996 Budget and stresses the need for Government support for R&D to enable Australian companies to remain internationally competitive."

Recent press reports (Australian Financial Review of 18 November) indicate that the Government is considering an increased level of support for innovation in its long-awaited industry policy statement. There is considerable concern in the TIA Group that the Government is only considering the token gesture of putting more money into the START program rather than the wider reaching R&D tax concession.

Ian Jeffrey, a member of the TIA group and a partner at Coopers and Lybrand said that the TIA Group considered the START program had basic flaws as an industry support scheme and would not result in an overall increase in R&D activities.

"The START program targets too few companies, whereas the tax concession applies across the whole spectrum of Australian industry. Not only does START try to 'pick winners', it also has an onerous application procedure with restrictive criteria," Mr Jeffrey said.

According to Mr Carew, up to 1 July 1985, Australia provided its assistance for research and development entirely by way of discretionary grants.

"At that date, Australia was among the OECD's worst performing nations in business investment in research and development. This performance was turned around rapidly by the introduction of the 150% tax deductibility from 1 July 1985."

It is the Group's view that the best method to increase R&D in Australian industry is through the R&D tax concession. Restoration of the rate of tax concession to 150% would be both a clear signal of support and would be the simplest to implement. Most companies are familiar with the operation of the tax concession and restoration of the higher rate will act as an immediate incentive for companies to return to the program of investment in innovative technology that has been shelved at this time.

The recommendations of the Mortimer Report into industry support also offer an avenue to increased levels of R&D support, however, the recommendation to exchange the extra 25% tax deductibility (under the current 125% R&D tax concession) for R&D expenditure for a 14% rebate on the innovative part of R&D expenditure requires careful implementation to ensure that the actual level of support is not decreased. Mortimer's recommendations are very broad and would only provide more support for R&D if the criteria for expenditure were not changed from the present tax concession scheme.

"The need for action by the Government is imperative as industry is currently working in a vacuum and the lack of a clear, long term innovation support program is affecting many investment decisions," Mr Jeffrey said.