Tax incentive overhaul ‘will spur research collaboration’

A recommended reorganisation of a multibillion-dollar tax break scheme could help matchmake the estranged worlds of business and academia, Australian research advocates believe.

Two proposed segments of the R&D Tax Incentive (RDTI) programme – a “premium” stream for fast-growth firms, and a voucher scheme for less innovative enterprises – could persuade business to treat universities as research and development partners.

The suggestions are part of a complex RDTI overhaul recommended by the Strategic Examination of R&D (Serd) panel. The RDTI provides some A$4.6 billion (£2.4 billion) a year in tax deductions and offsets, eclipsing allocations from the three main sources of competitive research grants – the Australian Research Council, National Health and Medical Research Council and Medical Research Future Fund – combined.

But over its 15 years, the RDTI has not significantly increased Australian businesses’ R&D expenditure, which languishes at 0.89 per cent of GDP compared with an Organisation of Economic Cooperation and Development average of 1.99 per cent.

Just 4 per cent of Australia’s “innovation-active” firms cooperate with higher education institutions to create new products, services and processes, according to OECD data covering 38 advanced economies. The average is 9.3 per cent, with Australia equal lowest.

Chennupati Jagadish, president of the Australian Academy of Science, said too many beneficiaries had used the RDTI to help bankroll “normal” activities like upgrading their computer systems. “The current system of RDTI has not been really working effectively,” he said.

Under the Serd recommendations, start-up-style businesses with “high growth potential” would qualify for a “premium” version of the RDTI. They would attract tax offsets five percentage points higher than the most generous currently available, paid in advance in three-monthly instalments.

To be eligible, companies would have to pass a 100-point test. Collaborating with universities would be one way of earning points.

University groups have been calling for a “collaboration premium” in the RDTI for years. Universities Australia CEO Luke Sheehy said the Serd proposal was a step in the right direction.

Sheehy said another of the panel’s recommendations – that companies with up to A$50 million turnover should qualify as small and medium enterprises (SMEs), up from the current A$20 million limit – would also help significantly. SMEs attract refundable tax offsets under the RDTI, while bigger businesses get less generous tax deductions.

“Anything that incentivises SMEs to engage in R&D is going to be good for our sector,” Sheehy said. “SMEs generally don’t have as much research expertise or capacity as big business. If they’re being incentivised to innovate, that will automatically encourage collaboration with universities, regardless of any direct requirements to collaborate.”

Under another Serd recommendation, companies that cannot access the RDTI – usually because they spend too little on R&D – could apply for “vouchers” of up to A$150,000 to support collaborations with universities or research institutions.

The voucher programme would apparently be financed through savings from yet another tweak to the RDTI rules, which would restrict eligibility to companies that spend at least A$150,000 a year on R&D – up from the current A$20,000 “floor”.

Business groups have “baulked” at the higher threshold, according to the Australian Financial Review. “Nothing’s ever going to be perfect,” said Ryan Winn, CEO of Science and Technology Australia.

“We’ve had a good conversation around [R&D], and I think this could work. We’ve got to give it a crack. Staring at our navels and saying how terrible this is for another 12 months is not a good outcome either.”

Winn said the vouchers could help equip businesses with doctoral know-how. “A start-up that employs…a PhD graduate is nine times more likely than a normal business to have a patent. A patent doesn’t necessarily mean a product, but it’s the pathway to it. If we are getting universities working closer and tighter with businesses and start-ups, that’s a great outcome.”

A voucher system would also rebalance Australia’s reliance on indirect tax incentives through the RDTI, by adding a new stream of direct grants. Experts say a good mix of direct and indirect incentives is ideal for fostering innovation.

The Serd proposals also include sweeteners for big business, including the removal of the current A$150 million annual cap on tax deductions. Businesses could also attract favourable treatment by passing a points-based “corporate citizen” test. They could earn points by collaborating with research institutions or hiring PhD graduates, among other things.

The panel also made suggestions to simplify the administration of the RDTI, which is currently “funding a lot of consultants to do application forms”, Winn said. “If an R&D system creates a plethora of companies to fill in paperwork, then we’ve got something wrong.”

john.ross@timeshighereducation.com