The R&D Tax Incentive has to be "assessed" to ensure its ongoing effectiveness given rapid growth in the cost of the programme, according to a new issues paper released by the chairs of a Government initiated Review.
The Government initiated the Review as part of its National Innovation and Science Agenda announced late last year. The review is jointly chaired by a Panel comprised of Innovation Australia Chair, Mr Bill Ferris AC, Chief Scientist Dr Alan Finkel AO and Treasury Secretary Mr John Fraser.
The issues paper says spending on the R&D Tax Incentive has been significantly more than forecast, rising from $2.5 billion in 2011-12 to almost $3 billion in 2013-14.
"Despite a moderation in growth in 2014-15 and 2015-16, which may reflect the introduction of the expenditure threshold and the announced reduction in rates, costs are forecast to grow further to around $3.5 billion in 2017-18," it says.
In addition to outlays, the issues paper questions the effectiveness of the Incentive in encouraging collaboration between industry and researchers, a stated priority of the Government, and even the cost of compliance to firms in the programme, which it estimates to be around $437 million per year.
On collaboration, which the issues paper describes as "an important channel for R&D to benefit the broader economy", it says just 9.5 per cent of projects registered under the programme involved collaboration between organisations.
"This reflects Australia’s low rates of collaboration between research and industry sectors, which is currently the lowest in the OECD," it says, noting the priority given to collaboration in the National Innovation and Science Agenda.
The issues paper backs the policy rationale for the Incentive, because R&D delivers significant benefits for the wider economy, but says the challenge is designing a "mechanism" that supports additional activity rather than business-as-usual.
Pointing to recent studies and international evidence, the issues paper says the effectiveness of the programme might be improved with a "focus on measures" that promote greater "additionality" but that the associated complexity could add greater cost to its administration and compliance.
On what qualifies as R&D under the programme, it says a principles-based definition gives flexibility as R&D activities change across time. However, it says this can be open to misunderstanding and potential ‘boundary pushing’. A more prescriptive approach has the downside of higher costs and the need to change over time.
"Ultimately, there is a trade-off between flexibility and supporting R&D that is likely to benefit the economy that needs to be considered in the context of the policy objective. The impact of any definitional change also needs to be weighed against the negative impact on programme stability," it says.
On the rates and thresholds, two of things causing significant stakeholder concern, the issues paper says the policy objective of supporting additional R&D activity has to be balanced against the need for financial sustainability.
It cites last year's decision to impose an expenditure claim threshold of $100 million under the programme as an example of limiting its cost but removing the incentive for companies to engage in additional R&D activity.
Stakeholders have until 29 February to provide a submission to the Review Panel. The Review is expected to report by April, in time for this year's Budget.