'Punitive' changes will force a choice between 'R&D and manufacturing'

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The pharmaceutical and medical technology sectors along with non-government Senators have slammed proposed cuts to the R&D Tax Incentive at a hearing of the inquiry into the enabling legislation.

The proposed changes are budgeted to reduce the level of payments under the R&D Tax Incentive program by $1.8 billion over four years. They include the introduction of an 'intensity' measure under which payments will be impacted by how much an organisation invests in R&D as a proportion of its total annual expenditure.

ResMed chief financial officer Brett Sandercock told the hearing the changes mean the company would be worse off by at least $1 million every year.

He said the new 'intensity' measure would disadvantage companies with Australian-based manufacturing because cost-of-goods sold are excluded in the calculation of the 'intensity' measure.

Mr Sandercock said the changes would make Australia less attractive as a destination for investment compared to other countries, particularly in terms of advanced manufacturing.

"In the current environment, the government should not be passing laws that discourage local manufacturing, it just doesn't seem right," he said.

He said the perverse extent of the impact is evident given the company's response to the COVID-19 pandemic. The company re-purposed its manufacturing to ventilators in response to a federal government request.

According to Mr Sandercock, the proposed changes mean the company's response to the request would reduce its 'intensity' and therefore payments under the R&D Tax Incentive program.

"We need to do better, as a country," he said, adding the policy should not be changed so that the R&D Tax Incentive program effectively favours companies that manufacture overseas.

Mr Sandercock said the program should be designed to ensure it contributes to the creation of an 'eco-system' that supports investment in innovation and the development of new global companies to match ResMed, Cochlear and CSL. He described the proposed changes as a"speed-bump" in that goal.

Medicines Australia told the hearing it is not opposed to changes in the R&D Tax Incentive program but that they should be driven by the goal of increasing investment.

Chief executive Liz de Somer said the federal government has provided "no new evidence" to support the changes that were considered by a previous Senate inquiry before the 2019 election.

That inquiry recommended the changes should not proceed without further investigation of the potential negative impact on R&D spending.

Ms de Somer said, if anything, the program should be changed to recognise the impact of the COVID-19 pandemic and the renewed focus on the need for Australia to maintain a domestic manufacturing capability.

She described the proposed changes as "punitive" in such a way they will act as a disincentive for companies to manufacture and also engage in R&D. "If you do one, it disincentivises the other," she said, adding the changes could result in a significant decline in the industry's investment in Australian clinical research.

Ms de Somer said the changes seem to be based on the incorrect assumption the industry's current investment will occur regardless of any policy incentive. "Our members can invest anywhere in the world," she said, pointing to countries that offer significant financial incentives to relocate clinical research.

"It seems counter-intuitive to introduce changes that disincentivise R&D and manufacturing, particularly at a time when we are looking to grow domestic capability," she said.

"If you do R&D and want to manufacture, then you are disincentivised under the changes in this Bill," said the association's Peter Komocki.

Non-government senators slammed federal government officials at the hearing over the proposed changes, specifically in relation to the lack of consultation with industry over the potential negative impact on investment and employment.