Footnotes

Chapter 1 - Introduction

[1]        Journals of the Senate, no. 7 of 2013–14 (5 December 2013), pp. 244–46.

[2]        Terry Cutler, Cutler and Company, and Department of Innovation, Industry, Science and Research, Venturous Australia: Building strength in innovation, August 2008, www.innovation.gov.au (accessed 22 January 2014), pp. 101–02; and Ms Maryann Quagliata, General Manager, Innovation Policy Branch, Department of Industry, Proof Committee Hansard, 21 February 2014, p. 21.

[3]        The current arrangements were introduced by the Tax Laws Amendment (Research and Development) Act 2011 and the Income Tax Rates Amendment (Research and Development) Act 2011. For more information about this legislation, refer to the relevant report of this committee: Senate Economics Legislation Committee, Tax Laws Amendment (Research and Development) Bill 2010 [Provisions] and Income Tax Rates Amendment (Research and Development) Bill 2010 [Provisions], 15 June 2010.

[4]        Income Tax Assessment Act 1997, ss. 67-30 and 355-100. Under the priority rules for tax offsets in the ITAA 1997, a refundable R&D tax offset is applied after all other tax offsets (except the tax offset arising from the payment of franking deficit tax) and if there is an excess the R&D entity is entitled to a refund. A non-refundable R&D tax offset is applied before refundable tax offsets but after all other tax offsets. If an amount of the offset remains, the R&D entity may carry it forward to a later year subject to the tax offset carry forward rules. See Income Tax Assessment Act 1997, divisions 63, 65 and 67.

[5]        'R&D activities' are defined in the ITAA 1997 to consist of 'core R&D activities' or 'supporting R&D activities'. Essentially, a core R&D activity is an experiment conducted using the scientific method conducted for the purpose of generating new knowledge. Supporting R&D activities are 'activities directly related to core R&D activities'. The definitions of core R&D activities and supporting R&D activities both include examples of activities that do not fall within the respective definition. See Income Tax Assessment Act 1997, ss. 355-20, 355‑25 and 355-30.

[6]        The remaining categories of notional deductions are: a balancing adjustment for R&D assets; earlier year association R&D expenditure; a decline in value of R&D partnership assets; balancing adjustment for R&D partnership assets; and cooperative research centre (CRC) contributions. Income Tax Assessment Act 1997, s. 355-100.

[7]        However, expenditure incurred in relation to R&D activities performed by a research service provider and contributions to a CRC are not subject to the $20,000 minimum expenditure threshold. Income Tax Assessment Act 1997, s. 355-100(2).

[8]        The explanatory memorandum notes that an R&D entity may not register its Australian core R&D activities with Innovation Australia because it considers it will be ineligible to claim the incentive. However, if the entity conducts overseas R&D activities that may be eligible for the R&D incentive in the future, these activities need to be sufficiently related to at least one Australian core R&D activity that is registered. According to the explanatory memorandum, the consequential amendments focus on 'whether the Australian core activities would be reasonably likely to have been registered if the $20 billion aggregated assessable income test were disregarded'. See Explanatory Memorandum, paragraphs 1.19–1.23.

[9]        The Hon Steven Ciobo MP, House of Representatives Hansard, 14 November 2013, p. 291.

[10]      The Hon Wayne Swan MP and the Hon Greg Combet AM MP, 'Targeting small and medium sizes enterprises for R&D Tax support', Media Release, 17 February 2013.

[11]      Australian Government, 2013–14 Budget: Budget Paper No. 2, May 2013, p. 21.

[12]      The proposed measures were contained in schedule 1 to the Tax Laws Amendment (2013 Measures No. 4) Bill 2013.

[13]      Human Rights (Parliamentary Scrutiny) Act 2011, s. 7(a).

[14]      Parliamentary Joint Committee on Human Rights, Examination of legislation in accordance with the Human Rights (Parliamentary Scrutiny) Act 2011: First Report of 44th Parliament, December 2013, p. 82.

Chapter 2 - Views on the policy underpinning the bill

[1]        Swanson Reid, Submission 7, pp. 1, 3–4. Swanson Reid suggested that resources could be redeployed to the customer service area of AusIndustry.

[2]        KPMG, Submission 1, p. 1.

[3]        Telstra, Submission 14, p. 2.

[4]        For example, see Medicines Australia, Submission 2, p. 1; and University of New South Wales, Submission 17, p. 2. The December 2013 Mid-Year Economic and Fiscal Outlook provided the following assessment of the government's fiscal position: 'Budget deficits totalling $123 billion are now expected across the forward estimates, with a $47 billion deficit expected in 2013-14—3.0 per cent of Gross Domestic Product (GDP). Without policy change and taking no remedial action, budget deficits would be projected in each and every year to 2023-24'. Australian Government, Mid-Year Economic and Fiscal Outlook 2013–14, December 2013, p. 1.

[5]        Explanatory Memorandum, p. 3.

[6]        Explanatory Memorandum, paragraph 1.6.

[7]        Michael Johnson Associates, Submission 3, p. [5].

[8]        James Dyson, Ingenious Britain: Making the UK the leading high tech exporter in Europe, March 2010, cited in KPMG, Submission 1, p. 5. According to KPMG, Sir Dyson concluded that 'large companies undertaking R&D are likely to engage with academia and smaller companies to collaboratively undertake R&D and generally foster innovation in those around them'.

[9]        Deloitte, Submission 12, p. 4.

[10]      Department of Industry, Australian Innovation System Report 2013, p. 9; cited in University of New South Wales, Submission 17, p. 2.

[11]      Adne Cappelen et al, 'Evaluation of the Norwegian R&D Tax credit Scheme', The Journal of Technology, Management and Innovation, 5:3 (2010); and Dr Dirk Pilat, Head, Structural Policy Division, Directorate for Science, Technology and Industry, OECD, Testimony to the US Senate Committee on Finance Hearing on Tax Reform Options: Incentives for Innovation, 20 September 2011. See Australian Government, A Plan for Australian Jobs: The Australian Government's Industry and Innovation Statement, February 2013, p. 13 (n. 46).

[12]      Ms Maryann Quagliata, General Manager, Innovation Policy Branch, Department of Industry, Proof Committee Hansard, 21 February 2014, p. 19.

[13]      The OECD argued that '[r]eturns on investments in R&D are difficult to appropriate by firms as some of the resulting knowledge will leak out or "spill over" to other firms, to the benefit of society. This leads firms to 'underinvest' in innovation. Policy instruments such as intellectual property rights, grants, and R&D tax incentives can help address this problem'. Dr Dirk Pilat, Head, Structural Policy Division, Directorate for Science, Technology and Industry, OECD, Testimony to the US Senate Committee on Finance Hearing on Tax Reform Options: Incentives for Innovation, 20 September 2011, www.finance.senate.gov/hearings/hearing/?id=ef6a4c10-5056-a032-5212-fbf59e314035 (accessed 17 February 2014), p. 1.

[14]      Dr Dirk Pilat, OECD, Testimony to the US Senate Committee on Finance Hearing on Tax Reform Options: Incentives for Innovation, p. 1.

[15]      Dr Dirk Pilat, OECD, Testimony to the US Senate Committee on Finance Hearing on Tax Reform Options: Incentives for Innovation, p. 7.

[16]      Mr Rob Heferen, Executive Director, Revenue Group, The Treasury, Committee Hansard, Estimates, 5 June 2013, p. 97.

[17]      Mr Ezra Hefter, Partner, Ernst & Young, Proof Committee Hansard, 21 February 2014, p. 9.

[18]      KPMG, Submission 1, p. 6.

[19]      Ernst & Young added that corporations 'in global trade exposed sectors such as pharmaceuticals, oil and gas, [information technology], manufacturing and finance' especially have flexibility in choosing where to undertake R&D activities. Ernst & Young, Submission 5, p. 6. See also KPMG, Submission 1, p. 3.

[20]      Corporate Tax Association, Submission 10, p. 1. Telstra's submission noted that the R&D Tax Incentive 'has been one of the reasons behind Telstra's commitment to undertake the majority of our R&D work onshore, and where we partner with our vendors to undertake R&D on our behalf mandated this requirement with them'. Telstra, Submission 14, p. 5.

[21]      BDO Australia, Submission 16, p. 4.

[22]      Mr Serg Duchini, National Leader, R&D and Government Incentives, Deloitte, Proof Committee Hansard, 21 February 2014, p. 10.

[23]      KPMG, Submission 1, p. 3.

[24]      Specifically, according to KPMG, the United Kingdom has 'increased support for small companies; extended the program to large companies; enabled all companies to report R&D assistance as an 'above the line' benefit; and provided refundable benefits to both large and small companies'. KPMG, Submission 1, p. 3.

[25]      KPMG, Submission 1, p. 4; Ernst & Young, Submission 5, p. 6; Telstra, Submission 7, p. 3.

[26]      David Ramli, 'France offers stable R&D incentives', Australian Financial Review, 12 March 2013, p. 24; cited in KPMG, Submission 1, p. 5.

[27]      Ernst & Young, Submission 5, p. 6.

[28]      Ernst & Young, Submission 5, pp. 6–7.

[29]      Ms Maryann Quagliata, Department of Industry, Proof Committee Hansard, 21 February 2014, p. 18.

[30]      Dr Dirk Pilat, OECD, Testimony to the US Senate Committee on Finance Hearing on Tax Reform Options: Incentives for Innovation, p. 1.

[31]      Mr Serg Duchini, Deloitte, Proof Committee Hansard, 21 February 2014, p. 10.

[32]      Michael Johnson Associates, Submission 3, p. [7].

[33]      Mr Ezra Hefter, Partner, Ernst & Young, Proof Committee Hansard, 21 February 2014, p. 3.

[34]      University of New South Wales, Submission 17, p. 1.

[35]      Mr Hector Thompson, General Manager, Small Business Tax Division, The Treasury, Proof Committee Hansard, 21 February 2014, p. 18.

[36]      The explanatory memorandum confirms that the government will undertake a review of the R&D tax incentive in 2014. See Explanatory Memorandum, paragraph 1.7.

[37]      OECD Directorate for Science, Technology and Industry, 'Maximising the benefits of R&D tax incentives for innovation', October 2013, p. [5], cited in Ernst & Young, Submission 5, p. 3.

[38]      Medicines Australia, Submission 2, p. 1. Medicines Australia noted that its members would not be affected by the bill.

[39]      Mr Matthew Maloney, Manager, Costings and Quantitative Analysis Unit, The Treasury, Proof Committee Hansard, 21 February 2014, p. 17.

[40]      Mr Matthew Maloney, The Treasury, Proof Committee Hansard, 21 February 2014, p. 20.

[41]      KPMG, Submission 1, p. 1.

[42]      Mr Serg Duchini, Deloitte, Proof Committee Hansard, 21 February 2014, p. 5.

[43]      Clause 2 and schedule 1, item 3 of the bill.

[44]      Explanatory Memorandum, p. 3.

[45]      Explanatory Memorandum, paragraph 1.25.

[46]      See Michael Johnson Associates, Submission 3, p. [2]; Ernst & Young, Submission 5, p. 3; Deloitte, Submission 12, p. 7; and Minerals Council of Australia, Submission 13, p. [3].

[47]      Michael Johnson Associates, Submission 3, p. [2].

[48]      Mineral Council of Australia, Submission 13, p. [3].

[49]      Senate Standing Committee for the Scrutiny of Bills, Alert Digest, no. 8 of 2013 (4 December), p. 48.

[50]      Although, this is not always the case: for examples of bills the Scrutiny Committee has requested be amended, see Senate Standing Committee for the Scrutiny of Bills, Final Report: Inquiry into the future role and direction of the Senate Scrutiny of Bills Committee, May 2012, p. 21.

[51]      Senate Standing Committee for the Scrutiny of Bills, Alert Digest, no. 8 of 2013 (4 December), p. 49.

[52]      Explanatory Memorandum, paragraph 1.7.

[53]      For example, see Michael Johnson Associates, Submission 3, p. [2].

[54]      Ernst & Young, Submission 5, pp. 8–9.

[55]      According to the Business Tax Working Group, companies could deduct expenditure beyond that cap under the normal deduction provisions of the tax law, an approach that 'targets the offset more towards smaller companies that are more likely to respond to R&D incentives'. Business Tax Working Group, Discussion Paper, 13 August 2012, www.treasury.gov.au (accessed 7 February 2014), p. 38. Deloitte gave an example $200 million per claimant group as an expenditure cap. Deloitte, Submission 12, p. 8.

Chapter 3 - Technical issues and committee view

[1]        This term is defined in section 328-115 of the ITAA 1997.

[2]        Income Tax Assessment Act 1997, ss. 6-5, 6-10 and 6-15.

[3]        See schedule 1, item 1, proposed new subsection 355-103(2). The assessable income of an entity that is only connected with the R&D entity because both of them are controlled by the same Australian government agency is excluded.

[4]        Explanatory Memorandum, paragraph 1.14.

[5]        Michael Johnson Associates, Submission 3, p. [7]. The Gillard government's policy announcement stated: 'Very large companies with annual Australian turnover of $20 billion or more will no longer be able to claim R&D expenditure under the non-refundable 40 per cent R&D tax offset'. See Australian Government, A Plan for Australian Jobs: The Australian Government's Industry and Innovation Statement, February 2013, p. 13.

[6]        KPMG, Submission 1, p. 6.

[7]        KPMG explained that '[a]ggregated turnover already encompasses any entity which on its own, its affiliates or together with its affiliates controls at least 40% of the R&D entity (whether directly or through interposed parties)'. KPMG, Submission 1, p. 8.

[8]        Mr Serg Duchini, National Leader, R&D and Government Incentives, Deloitte, Proof Committee Hansard, 21 February 2014, p. 5.

[9]        Mr Ezra Hefter, Partner, Ernst & Young, Proof Committee Hansard, 21 February 2014, p. 5.

[10]      Mr Serg Duchini, Deloitte, Proof Committee Hansard, 21 February 2014, p. 5.

[11]      KPMG, Submission 1, p. 8.

[12]      Michael Johnson Associates, Submission 3, p. [7].

[13]      BDO Australia, Submission 16, p. 5.

[14]      The ITAA 1997 specifies that for Australian residents, assessable income is derived from all sources, whether in Australia or overseas. For foreign residents, assessable income is only income derived in Australia and otherwise specified by legislation. See Income Tax Assessment Act 1997, ss. 6-5 and 6-10.

[15]      Australian Academy of Technological Sciences and Engineering, Submission 8, p. 4.

[16]      Michael Johnson Associates, Submission 3, pp. [5]–[6].

[17]      Mr Serg Duchini, Deloitte, Proof Committee Hansard, 21 February 2014, p. 3.

[18]      Ms Maryann Quagliata, General Manager, Innovation Policy Branch, Department of Industry; Mr Hector Thompson, General Manager, Small Business Tax Division, The Treasury, Proof Committee Hansard, 21 February 2014, p. 21.

[19]      Ms Maryann Quagliata, Department of Industry, Proof Committee Hansard, 21 February 2014, p. 21.

[20]      Income Tax Assessment Act 1997, s. 320-1.

[21]      Income Tax Assessment Act 1997, s. 320-15(1)(a).

[22]      Income Tax Assessment Act 1997, subdivision 320-C.

[23]      KPMG, Submission 1, p. 7.

[24]      KPMG, Submission 1, p. 7.

[25]      Caltex advised that it received $4.2 million in R&D tax incentives between 2009 and 2012: Caltex, Submission 15, p. 3.

[26]      Caltex, Submission 15, p. 5.

[27]      Caltex, Submission 15, pp. 1, 5.

[28]      Caltex noted that this instability can also make it difficult to predict its end of income year profitability: 'We have had occasions in the past where we may have had a very large turnover and could end up with almost a loss during the year, and some of our profits could be wiped very close towards the end of the year because of changes to crude prices, product prices and the US dollar exchange rate'. Mr George Chenouda, Manager, Tax, Caltex Australia, Proof Committee Hansard, 21 February 2014, p. 12.

[29]      Caltex, Submission 15, p. 5; Mr George Chenouda, Caltex Australia, Proof Committee Hansard, 21 February 2014, p. 12. Mr Chenouda explained that Caltex considers excise to be part of its ordinary income 'for the simple reason that, it not being a tax, it forms part of the cost of goods. The amount is paid before we sell. As soon as the product leaves our bonded locations, we pay the tax...Therefore it becomes part of our goods, like part of our distribution costs and so forth'. Proof Committee Hansard, 21 February 2014, p, 13.

[30]      Mr Frank Topham, Head of Government Affairs, Caltex Australia, Proof Committee Hansard, 21 February 2014, p. 11.

[31]      Mr Frank Topham, Caltex Australia, Proof Committee Hansard, 21 February 2014, p. 11.

[32]      Caltex, Submission 15, p. 6.

[33]      Mr Frank Topham, Caltex Australia, Proof Committee Hansard, 21 February 2014, pp. 13–14.

[34]      Income Tax Assessment Act 1997, s. 355-5(1).

Labor Senators' Minority Report

[1]        Australian Industry Group, Submission 18, p. 1.

[2]        Mr Glenn Stevens, House of Representatives Standing Committee on Economics Hansard, 7 March 2014, p. 11.

[3]        Telstra, Submission 14, pp. 4–5.

[4]        Mr Serg Duchini, Deloitte, Proof Committee Hansard, 21 February 2014, p. 4.

[5]        Michael Johnson Associates, Submission 3, p. 4.

[6]        KPMG, Submission 1, p. 1.

[7]        Australian Industry Group, Submission 18, p. 1; Michael Johnson Associates, Submission 3, p. 3.

[8]        KPMG, Submission 1, p. 4.

[9]        Mr Serg Duchini, Deloitte, Proof Committee Hansard, 21 February 2014, p. 2.

[10]      University of New South Wales, Submission 17, p. 1.

[11]      KPMG, Submission 1, p. 6.

[12]      Sophie Mirabella MP, 'Industry joins Coalition on R&D Revenue Concerns', Media release, 19 February 2013.