R&D Tax Incentives and the Innovation Economy

R&D Tax Incentives and the Innovation Economy

How could any of us forget the much repeated 2016 election slogans of “jobs and growth” and “transition to an innovation economy”? 

Following the Coalition’s election win, this narrative continues to be an important basis for the Turnbull Government’s future economic plan. Aside from the politicking, there is a growing national consensus that as the mining boom fades and China’s growth slows, Australia’s future prosperity is linked to growth in a knowledge-based economy, to be driven by innovation, technology and R&D.

With this in mind, The iQ Group Global recently made a submission in response to the review of the R&D Tax Incentive released by the Minister for Industry, Innovation and Science, Mr Greg Hunt. We were pleased to have the opportunity to put forward our views for consideration, and are encouraged by the wide range of discussion about the R&D Tax Incentive – currently the largest component of the Government’s support for innovation.

The biotechnology sector, a critical part of Australia’s innovation ecosystem

The biotechnology sector is expected to be pivotal in the transition of our nation towards a leading knowledge-intensive economy. It is also a sector in which the core objectives of the R&D Tax Incentive programme – encouraging additionality in the form of R&D activities that generate spillovers to the wider Australian economy – are likely to be realised.

Numerous studies have shown that the companies most likely to respond to fiscal incentives (i.e. generate additionality) are early stage R&D-intensive companies. This is certainly the case for Australian biotechnology companies, which can spend multiple millions in R&D over several years to bring new therapies and diagnostics to the clinic and usually re-invest R&D Tax Incentive benefits in further R&D. In doing so, these companies generate significant spillover in the form of quality human capital and knowledge development, idea sharing amongst collaborators and more broadly, benefits to the Australian health system.

Capping the R&D Tax Incentive cash refund to $2m is not the way forward

The review of the R&D Tax Incentive made six recommendations. One of the recommendations was to introduce a cap of $2m on the annual cash refund payable under the R&D Tax Incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against taxable income. We do not support this recommendation because the R&D Tax Incentive cash refund is often a vital source of cash flow assistance to biotech start-ups and small-to-medium enterprises to allow further re-investment in R&D (contributing to the additionality and spillover that the program seeks).

In addition, the review was completed before legislation was passed to cut the tax offset by 1.5 percent, which already contributes to reducing the cost of the refundable component of the program. If the Government decides it’s necessary to further reduce the program cost, we believe a better way would be to introduce a process where refundable offsets more than the cap amount can be pre-approved for activities likely to achieve high levels of additionality and spillover.

Tax incentives are only part of the solution

While cash flow support through the R&D Tax Incentive is important, it is but one factor amongst many that must be considered if the biotechnology sector is to flourish in Australia. As echoed in recent reports (Biopharmaceutical Innovation and How Australia can build a stronger biotechnology industry) a broader focus is required to improve our competitive position globally in relation to market-based instruments including regulatory frameworks, intellectual property protection (particularly in relation to data exclusivity), market access and the unlocking of patient risk capital. It also has a lot to do with people – encouraging our brilliant academics and students to develop commercial skills in addition to technical expertise and to espouse an entrepreneurial mindset.

This will be critical to building the Australian innovation ecosystem, particularly in knowledge-based sectors such as biotechnology. It will improve the sector’s ability to translate quality research into commercial outcomes. After all, that is what will drive the creation of “jobs and growth”.