In Shift, Australia Would End R&D Tax Breaks for Big Firms to Fund New Innovation Networks

Innovation shift. Australian Prime Minister Julia Gillard wants to redirect money spent on R&D tax breaks to new innovation networks.

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The Australian government is proposing to spend AUD $500 million over 4 years to establish and support up to 10 "Industry Innovation Precincts" that will create collaborations between academic, government, and industry researchers to commercialize promising discoveries. At the same time, however, the government wants to cut AUD $1billion from research and development tax breaks for large firms, a move that could hit up to 20 of the nation's biggest companies.

Both proposals are part of a jobs and innovation package worth AUD $1 billion over 4 years announced on 17 February by Prime Minister Julia Gillard. The new precincts, or geographically based R&D networks, will "generate economic benefits for Australian industry," she said.

The problem, analysts say, is that although Australia produces its share of the world's scientific articles in proportion to its population size, its track record on commercializing discoveries is relatively poor.

"What's been missing … is industry and research integration and collaboration on the scale needed to extract the maximum value and impact of Australia's research effort,'' said Belinda Robinson, chief executive of Universities Australia, the umbrella body for 39 universities. The group likes the direction of the plan, she added: "Universities have long promoted the need for a closer relationship between the research community and industry to take full advantage of innovative Australian research."

To date, the government has announced the creation of two precincts. The first is a defense-oriented manufacturing precinct to be based in both Adelaide and Melbourne. The second, which will focus on food production, manufacturing, and potential overseas markets, will be headquartered in Melbourne. Both reflect, in part, the success of Melbourne's existing biotechnology industry hub, says Michelle Gallaher, chief executive officer of BioMelbourne Network, an industry forum.

If Parliament approves the plan, the remaining precincts will be selected by a competitive process this year and established in 2014. An independent National Precincts Board will advise the government on the selection.

The government is also proposing to fund an online innovation network, similar to the BioMelbourne Network, using funds generated by the R&D tax concession. It also plans an Industry Collaboration Fund, which will build to AUD $50 million per year. The new precincts would be able to compete for money from the fund, which aims to bring innovative practices to Australia, deploy new technologies, and build global partnerships. Precincts will also be able to tap into the Australian Research Council's AUD $236.3 million Industrial Transformation Research Program and have access to an initiative to support small- to medium-sized enterprises (SMEs) with high growth potential.

Funding for the new networks, however, will take a bite out of tax breaks for corporate research efforts. The plan calls for corporations with more than AUD $20 billion of annual transactions in Australia to lose access to the R&D tax credit, which is equivalent to a 133% tax deduction. Large mining companies, including Rio Tinto, Caltex, and Shell Australia, are among those expected to be hit by the tax change.

The cut could make Australia less attractive to international investors, warns Mitch Hooke, chief executive officer of the industry group Minerals Council of Australia, because it will "add to concerns … regarding the stability and predictability of Australia's taxation arrangements."

However, large overseas investors and SMEs will retain access to the tax credit, Gillard emphasized, arguing that smaller firms, such as biotech startups, make better use of the tax breaks. "Existing poorly targeted subsidies to highly profitable firms can be converted into evidence-based assistance for the small to medium sector," she said.

That's "a tough call, but a fair one," says BioMelbourne's Gallaher. "I'm relieved that the big end of town will lose the R&D tax credit instead of the little guys in biotech."

The government is expected to introduce enabling legislation into Parliament next month, ahead of federal elections scheduled for 14 September.