SOME companies will more than double their tax benefit for spending on research and development under a policy revamp being considered by the Rudd Government to reverse the decline in business spending on the breakthroughs that will keep the Australian economy competitive.
The complete overhaul of the tax concession claimed by 7000 Australian firms was recommended in the Government's innovation review, which also called for a massive boost of up to $2.2 billion a year in extra public spending on research at universities, co-operative research centres and the CSIRO.
Innovation Minister Kim Carr, who will deliver a policy response with Treasurer Wayne Swan by the end of the year, said the report's valid ambitions had to be "measured against the funding the Government has available".
"The review provides an honest appraisal of Australia's innovation effort and concludes that while our global competitors have been increasing their innovation efforts, our performance has been falling ... we all have to lift our game," Senator Carr said.
The report says the Government should scrap the current research and development tax concession, which delivers most firms a tax benefit of about 7.5c per dollar spent on research and development and has been criticized as poorly targeted.
It advocates replacement with a two-tiered tax credit worth up to 20c per dollar spent for firms with a turnover under $50 million and up to 10c in the dollar for firms above that threshold.
Although the new scheme appears substantially more generous than the old one, Senator Carr said he had advice it could be delivered within current budget outlays for the research and development tax concession by cracking down on exemptions and loopholes that had emerged in the system.
"It may be possible for us to provide greater value for money within the costs now budgeted for if we close off some exemptions and loopholes," Senator Carr told The Australian.
Under the forward estimates, spending on the R&D tax concession is scheduled to rise from $700million a year to $920 million by 2011.
The review, conducted by a panel headed by consultant Terry Cutler, called on the Government to stamp out huge research and development claims for one-off mines or civil engineering projects, saying this is not what the scheme was designed for.
It also advocated that universities should get full funding for their research, rather than having to cross-subsidise it from other revenue sources, like fees from foreign students.
The review said this should not be done by funding fewer projects.
Senator Carr said he had departmental advice this recommendation alone could cost up to $300million a year.
"It is an idea I am obviously very attracted to, but again the cost has to be measured against the available resources," he said.
Professor Ian Small, director of the Centre of Excellence for Plant Energy Biology, said while the prospect of full funding was likely to draw the most applause, the review was full of similarly worthy suggestions. "The insistence on distributing research funding based on performance will make a difference, too," he said.
"I'm also pleased to note the report's emphasis on the importance of international collaboration and the recommendation that the Government increase student stipends."
The review acknowledges that funding the full cost of research "will require significant additional funding over time" but says "because there has been a significant decline in the level of government support for research as a share of GDP over the past 12 years, the extra funding would do little more than allow 'catch-up' with other OECD countries".
A recommendation that funding to all public research agencies (universities, CRCs and CSIRO) should be returned to 1990 levels would take the annual bill to $2.2billion, Senator Carr said.
The review says the Government should bring in a tax credit of 50 per cent for companies with a turnover of under $50 million and 40 per cent for those over that threshold.
The scheme would "introduce a bias back into the system towards small business", Dr Cutler said.
Research and development spending would no longer be tax deductible under the new system. But the 50 per cent credit for smaller firms could be delivered as a cash refund. Foreign-owned firms would be eligible for the 40 per cent tax credit, but not the refundable 50 per cent tax credit.
Business responded positively to the review's findings, with the Australian Industry Group describing them as "ambitious" and the Business Council of Australia welcoming its "key elements".
But some business advisers were cautious about the mooted crackdown on eligibility.
"We are concerned large innovative projects might suffer depending on how the eligibility mechanisms are put into place," PricewaterhouseCoopers partner Sandra Mason said.
Source: Lenore Taylor, National correspondent The Australian