Analysis: Cutting the R&D tax incentive is no Robin Hood gesture

When Qantas decided to upgrade its check-in system in a bid to cut queues and streamline the process, it turned to the R&D Tax Incentive to help pay for it. The airline did the same when it rolled out iPads for use with a new wireless in-flight entertainment system.

The question is, would it have pushed ahead with these projects if it didn’t have access to the tax incentive?

This week the Government announced it would be cutting the R&D Tax Incentive for companies with more than $20 billion in annual Australian turnover.

The good news for Qantas, which has been accessing the incentive for more than seven years, is going on last year’s revenue of $15.7 billion it will still be eligible.

For the big four banks, Telstra, and all of our big miners, the picture isn’t so bright, and all will be closely evaluating their current R&D programs.

Politically, it makes sense for the Labor Government to cut out the top 15 companies from the incentive – few will feel sorry for companies that earn more than $20 billion seeking a tax credit, particularly when the money saved is being redirected towards promoting innovation through small business and startups.

There’s also the Robin Hood element of the Government’s “plan for Australian jobs” that will see part of the money saved from the cut directed towards the manufacturing sector.

If providing jobs is the ultimate agenda, however, this is a piece of policy that might miss the mark.

Critics of the banks say much of the money they have claimed through the tax incentive has gone to support business-as-usual. But in recent years the Government had already tweaked the rules to exclude core technology expenditure.

At the same time, banks have significantly cut back on innovation programs since the global financial crisis. Funding for new innovation has been piecemeal, as already conservative organisations became even more so.

Deloitte R&D tax incentive practice leader Serge Duchini said the tax incentive has often been the key benefit getting marginal innovation projects across the line, in an environment where competition for project funding within organisations is robust.

“That’s what the incentive is aimed at — supporting additional expenditure.”

Then there are the incentives being offered offshore. Take ANZ, which could very easily shift its research and development activities to Asia. Singapore offers a 150 percent R&D tax incentive. In Thailand it’s 200 percent.

The Government is pushing hard to see greater collaboration between industry and the research sector as part of its broader plan to boost waning productivity levels. But researchers say there’s a direct correlation between the R&D tax concessions and the amount of interaction between industry and universities.

In an ideal world, a funding shift might simply squeeze innovation from one end of town to another, but small business and startups need to innovate to survive. They simply don’t innovate for a tax incentive alone.

Big business on the other hand conducts research and development in order to better compete, or improve existing processes. The byproduct is often something that can be replicated for productivity benefits that are far reaching.

Both are essential for economic growth and jobs and robbing from one to give to the other represents a failure to understand why firms do research and development in the first place.