Committing to the innovation nation: why the R&D tax incentive is so important for Australia

20 Feb 2017

Biotechnology firm managers are no strangers to uncertainty. Uncertainty surrounding the potential payoff of an investment is common for most businesses; but biotech firms are also faced with uncertainty regarding the development of an investment. The time a new biotechnology takes to progress through the development pipeline, the costs involved, and the regulatory approval process all present a biotech manager with considerable cause for uncertainty, and make such investments inherently risky. Tax incentives and other policy mechanisms are provided by the Australian Government to somewhat mitigate these risks, with the intention of stimulating investment in industries and technologies that have a social benefit beyond the financial success of individual firms. 

However, the Government has been the cause of considerable uncertainty regarding the R&D Tax Incentive in recent years. There have been ten reviews or inquiries that have considered the R&D Tax Incentive since 2003; and four since 2014. In September 2016, the Turnbull Government passed legislation to cut the incentive by 1.5 percentage points, hoping to save the budget $1 billion. During the same month, the Government also released the long-awaited Review of the R&D Tax Incentive, authored by Bill Ferris, Dr Alan Finkel and John Fraser. The Review contains six recommendations for the modification of the policy, of which recommendation three is the most pertinent to the biotech industry as it recommends a $2 million cap for the refundable component of the Incentive. All these changes and reviews have led many in the biotechnology industry to feel uncertain about the future of the policy, and the future of the biotechnology industry in Australia.

This report assesses the impact uncertainty for this policy has had on the Australian biotechnology industry. It begins with an introduction to innovation in Australia and discusses the significance of biotechnology to this study and the Australian economy. It then provides a background to the R&D Tax Incentive and a discussion of the academic literature on both the efficacy of R&D Tax Incentives, as well as the impact of uncertainty on investment.

It then presents research that encompasses the opinion of 42 managers and senior decision makers from Australian biotechnology firms on the R&D Tax Incentive. The research finds that the Government has caused a majority of firm managers in the biotech industry to feel uncertain about the future of the R&D Tax Incentive. Although most firms have not yet changed their R&D investment strategy, the industry as a whole is watching developments very closely. Many respondents indicated that further modifications to the policy would result in their organisation reducing R&D expenditure or taking investments offshore to more stable economies. Other respondents thought that further uncertainty would result in fewer international firms investing in Australia.

The Government should be aware of the impact of their actions when announcing reviews and modifying policies that are designed to stimulate investment. Uncertainty caused by such actions is likely to stifle investment; and continued uncertainty may be more difficult to overcome if firms don’t believe the Government when they say this modification is the last one. 

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