Stability in legislation and administration: R&D and innovation this Federal Budget

Rebecca Archer  
Welcome to Navigating the New Normal, Grant Thornton's podcast exploring trends in business and the marketplace. I'm Rebecca Archer, and today I'm joined by Rebecca Iwanuscha and Sukvinder Heyer – Partners in the Innovations Incentives team at Grant Thornton. Today we're talking about the Government support to business, and what we expect to come out of the Federal Budget in this space. 

Federal Budgets have many goals – of course, sometimes those are competing. On the one hand, incentives can be seen as a cost; on the other hand, they have it boosted the economy and helped companies to grow. 

So, what is currently on offer in this country? And what do we need to see from the Government in the May Federal Budget? 

Welcome to you both Rebecca and Sukvinder!

Sukvinder Heyer
Thank you, Rebecca.

Rebecca Iwanuscha
Thank you, Rebecca.

Rebecca Archer 
So, what's currently offered in this space? And do you anticipate it will change significantly in the May Budget?

Rebecca Iwanuscha
I guess three key initiatives probably come to mind when we're talking about what's on offer around support – particularly for innovation. The first one would be the Export Market Development Grant (EMDG), which really is a program and an initiative to provide funding to encourage Australian businesses to seek export opportunities for their goods and services offshore. It does work by allowing businesses to access the program for around eight years and around $770,000. So that does sound fantastic, but I guess, round three of the program recently just closed, and we haven't heard any word yet from Austrade and the federal government on when we can expect any future rounds on that one. So, in the upcoming Budget for the Export Grant program, we are looking for the government to really boost this program, I would say. Rounds that have previously been opened, closed within four weeks, which is a really short timeframe, and we would love to see them broaden that scope and make it a longer runway, so businesses actually have a chance to access this program. 

The second area, which I think is a great initiative, is the National Reconstruction Fund (NRF), which is a $15b commitment by the government to help diversify and transform Australia's industry – clear focus on sustainable and economic growth, which is fantastic. We do expect to hear a little bit more shortly on how these funds, which is a lot of money, will actually be allocated and managed after the NRF Bill recently passed the Senate. 
And I think the third initiative that's really critical as well, is the R&D Tax Incentive. Now, that is the Federal Government's flagship innovation program to support R&D here in Australia, on shore. It's self-assessment based, and it can offer you generous tax benefits – sometimes cash – which is fantastic. We know ‘cash is king’ for business, and it's a great incentive. The key with the R&D program is certainty. So in lieu of any expansion of the program in the upcoming May Budget, we really look for that certainty to be maintained at a minimum. And I guess, look, I should also note, there are obviously many other grants and incentives available, and a lot of them come from State Governments as well. 

So, they come and go and grant programs are very short – sometimes without opening frame. So that's what we're looking for, but they're the three key initiatives, I think, that we’re looking to see more about in the upcoming Budget.

Rebecca Archer 
Rebecca, can you tell us about the importance of research and development within business?

Rebecca Iwanuscha
I mean, it's probably no surprise right that we know innovation is key to supporting economic growth and creating jobs. It's hard to really see that, you know, global events, like the pandemic, we've had that in the last three years. If businesses did not supercharge their R&D, and their innovation – thinking about, you know, vaccines, masks, hand sanitizer – that had to happen in order for the world to open up. So, that's where incentives like the R&D program, and that support for innovation is absolutely crucial for Australian businesses, really, firstly, to develop and invest in new technologies and future capabilities here on shore in Australia, but also, innovation is becoming more and more critical to the economic performance of our country, job creation and standards of living. I mean, cost of living crisis is huge right now, and so, innovation is one way to help us get through that. 

I mean, Government data also suggests around 12,000 registrants claim to the program for the R&D incentive in 2021, which is fantastic, and this is coupled with the fact that there's similar programs like the R&D incentive all around the world, which really shows there's a great appetite and support for investment in innovation and R&D by business. And therefore, Governments, much like our Federal Government here in Australia, need to continue to support these incentives to foster that sovereign capability.

Rebecca Archer
So, what do we want to be seeing from the government in terms of supporting R&D? What are some ‘hard and fast’ things that they can do to really support and boost this particular sector?

Sukvinder Heyer
Oh Rebecca, I wish it could be ‘hard and fast’ and that there was a silver bullet, but unfortunately, we know, that's just not the way the world works anymore – things are very complicated and interrelated. But, you know, the refrain, as it has been in the past few years to support R&D is, as Bec's already said, to provide stability and certainty in the environment. 

Now, obviously, at a macro level, there are many things happening globally and locally, which are impacting on business, you know – things like interest rates, supply chain issues, but to name a few. So having a definition of R&D which is understood, and the level of support of the R&D Tax Offset, should remain as it is, but, you know, supporting R&D and Government showing their support for R&D is actually much broader than just the R&D tax incentive and the other incentives that we've mentioned. It's also, you know, maintaining the different ways of funding R&D. So, you know, what I mean by that is, there's always a lot of debate around direct support versus indirect funding. And we think there's an important role for each, and it's important for Government to maintain that holistic role of how these sources of funding can it can assist companies. So, when we talk about indirect funding, that is things like the R&D Tax Offset, which allows companies to be responsive to market needs, market opportunities, and market demands, and again, we've already had the great examples about, you know, COVID, and the investment that companies were able to direct to meet those demands. 

But we also have some great direct funding programs from the Government, particularly things like, you know, the CRC, you know, Cooperative Research Centres. And more recently, you know, the CRCP programs, which give Government the opportunity and, to sort of, direct activities and funding to particular critical areas that they've identified. Funding can range from things to in medicine, in infrastructure, cryptocurrency, the environment – and it almost allows the movement from that basic research to that next step, but not quite to commercialisation. And what we've seen with many of our clients that are accessing both the indirect through the tax offset, but also being part of CRC programs is, you know, progressing their projects at a much faster rate than they otherwise would have been able to. So, it's really important for the Government to think not just about the rights of support, but you know, that broader infrastructure and R&D environment. 

The second way of supporting R&D actually comes back to that idea of certainty and stability, and that's actually in relation to the administration of the program. Now, the program has, you know, companies claiming around I think it was $14b Bec, somewhere in around that? Bec’s nodding. 

Rebecca Iwanuscha
Yes. 

Sukvinder Heyer
So, you know, they're significant amounts of money that is being directed towards R&D, and it is a broad-based program, which – as we said – allows companies to decide what R&D they’re going to do. But the administration of the program is equally important in providing that stability and certainty. 

Now, certainly within the current parameters, you know, AusIndustry and the ATO have listened to participants in terms of some of their needs, and requests, certainly around speeding up processes around registration, and advance, and overseas finding – and that's been great. But where the system currently could do with improvements is what falls under that integrity regime. So, we have an incentive, which is part of tax legislation. So necessarily, there will be reviews and audits and companies should expect those. We all want our taxpayer funded money to be going in the right places, and for the right reason – so, no argument there. But the time taken both, you know, in terms of expended time, and certainly the time and resources of companies, as part of these reviews, you know, can get quite long. And we do see companies that are going through reviews, they really feel it and they feel it's a distraction to the R&D that they would rather be doing. So absolutely a necessary part of the process. 

But to give you, sort of, an extreme example of what can happen is that recently, the Federal Courts in early May handed down a decision in a case called Ultimate Vision Inventions Pty Ltd. I'm not going to go through the particulars of the case but to share with you that this matter started back in 2016 – 2016, and we are now in 2023. And the broad process was that in 2016, AusIndustry said that the activities weren't eligible, which is under its remit to do so, and the company – as it was able to do so – exercised its review rights and went to the AAT in March 2017. 

So, from 2017 to 2023, we've had the company arguing various points of law in relation to its R&D activities. Now, the decision of the Federal Court was to send the matter back to the AAT – what are we up to? Eight years – the company still doesn't know if it's done eligible R&D activities. Now, I will grant that that's a rather extreme case, but it sort of shows you that, you know, on the one hand, we have a program to incentivise – to share almost that risk of doing the R&D. On the other hand, we do have a regulator that's charged with the integrity of the program, and that's fine. But you know, there's got to be a better way for companies to be comfortable that what they're doing is the right thing. 

And again, we've got some, you know, guidance – both the ATO and AusIndustry put out – which is great, but you know, we'd really want the government again, to take a bigger picture view of the ecosystem for its R&D and thinking about, you know, whether we need more resources for the regulators to properly administer the program, or, you know, do we find different ways of resolving matters that perhaps on which there is a bit of contention? Or is it indeed, you know, just more guidance material, you know? 

So, again, while the Government's not going to do that directly, it's certainly within its remit to be allocating resources to these various Government departments that do take carriage of that support. So, I guess in summary, again, its stability in legislation, stability and administration, and using all the levers that are available to it – both the direct and indirect – to actually create that R&D ecosystem.

Rebecca Archer 
I'm interested to know your thoughts on what it means if the Government doesn't commit to more funding in this space? What will that actually mean for our economy? And you've already alluded to this, but you know, obviously, more is needed beyond funding. How does Australia fare in comparison to other countries when it comes to research and development as well?

Sukvinder Heyer
Oh, I’ll kick off there. I mean, certainly, you know, Minister Husic has already called for Australia's rate of R&D to increase. Back in November 22, it was around 1.8 per cent of GDP and the Minister has set a target of 3 per cent of GDP. So, it's bringing through the themes that Bec has already touched upon the you know, the link between innovation, and growth, and growth brings jobs. So, you know, these are well established parameters that apply, you know, across the world, and the fact that we are at 1.8, I think globally is quite low. And, you know, when we think of comparable economies, or, you know, comparable countries, Israel and Singapore, and others always sort of come to light. But I think that the Minister, you know, even before the election, was saying that the rate of R&D needs to be lifted, because of those acknowledged knock-on effects. 

I think the second part of your question there, Rebecca, is, you know, do they need to do more beyond just for funding? And I think the short answer to that is, yes. When we look at R&D, the bulk of the investment rests in people – it’s labour cost, it's salary and wages, or its contractors. So, you know, it's the people doing the R&D. And, you know, it's not going to surprise you, but there are shortages of suitably qualified people to be undertaking R&D in Australia to get those percentages that we're looking at. So, the push for STEM graduates or STEM immigrants, you know, is still very much, very much there. 

The other thing we note when we talk to our clients is that, yeah there are good people in the market, but you know, one company just ends up taking it from someone else. So, you know, we kind of move the problem for want of a phrase around but you know, that we don't have enough of a bench of people that we can be calling upon to do the R&D. Another thing that's, you know, worth considering about is, you know, infrastructure. You know, the R&D ecosystem, which I keep talking about, and I thought I'd show that to you by an example, as a comparison. So right now, there's great momentum around EV. You know, we have car manufacturers setting goals. We have consumers wanting products, but how many times have we heard the story but there's not enough charging stations? You know, I live in a flat; I can't charge my car; I drive to work; there's only so many, you know, charging ports. 

And R&D operates much the same way of you know, that right now there are things that a whole lot of people want to do, or that there's ideas that you know, where collaboration should be taking place. So, I think it would be great if governments both at the Federal and State level actually got together and started considering more critically, you know – Innovation Hubs and Centres of Excellence – because R&D these days is not just about, can we do it, will we do it? But, how fast can we do it?

R&D in Australia is really focused on not R&D, for the sake of R&D, you know, we absolutely have some groundbreaking things that have come out of you know, CSIRO and universities, you know, and a lot to be proud of there. But the commercial R&D that businesses are doing are really focused on creating new products, creating new services. So, the end goal is that commercialization; the commercialisation which creates the growth, which creates the jobs, and that's where industry is really focused. So yeah, the Government does need to go beyond just that funding aspect. And really think critically about the infrastructure all undertaking R&D in Australia.

Rebecca Archer 
If businesses want to apply for any of the Federal and State programs that we've been discussing today, what exactly should they do? What's the first step, and how do they follow that process through?

Rebecca Iwanuscha
I think the easiest step may well be to actually just seek expert advice, but I probably couldn't stress that enough that it's a minefield of what's available out there, and it's really hard to navigate that. So, you know, speaking to someone like our Innovation Incentives team like Sukvinder and myself – we worked with clients at the very outset of when they have an idea, and that goes all the way through to them making it a commercial reality, which I think is really important, because there's many conversations throughout that piece. 

Government incentives can really help a wide range of businesses grow, and as a Sukvinder alluded to before, it's not just about direct funding, or indirect funding, there's so many mechanisms to do that. But it really comes down to seeking the right advice at the very beginning before maybe you even start doing something.

Rebecca Archer 
And as you said, it can be an extremely lengthy process for the business, but the closing date for the application for a grant, for example, could be really tight. So, I would imagine that having that advice, is going to fast track that process and make it a lot smoother?

Sukvinder Heyer
It's thinking strategically about all aspects of your business, and an R&D should be a strategic consideration, or investments, you know, more broadly, and companies need to have those plans in place. So, when you know grants do drop as they do – at the drop of a hat and close again just as quickly – that they've already got their business case for why government should support this particular company in this particular endeavour, pretty much already sort of scoped out in their mind. Because the thing about grants more generally, that everyone should be aware of is, that it's only from the grant issuance that you can start spending the money. So, you know, governments aren't going to give you money for things that you've already spent. So, you need to be quite clear on your needs and your funding requirements.

Rebecca Archer 
Before we wrap up, I'm just curious about where exactly intellectual property, or IP as it's often called, fits into all of this?

Rebecca Iwanuscha
Maybe I'll jump in here first. I think, as we mentioned, if the underlying policy really behind the R&D tax program is to incentivise R&D and the associated downstream commercialisation to be conducted here in Australia. So that's something you know, Sukvinder and myself and our team here are really proud about is that the innovation that happens here in Australia. 

So having said that though, I guess, for many companies that we work with IP protection is also a blind spot; it's really important that you remember that there are both formal and informal methods for companies to protect their intellectual assets. So that's something that we often see and often have conversations with our clients about. And when we think formal that could be around patents or trademarks. And there's also informal strategies to really managing and protecting your intellectual property; it could be around the documentation process for example. 

I guess the other aspect of intellectual property is making sure that as an innovator, you're not actually infringing on something that's already registered as IP as well, and a great way that you can ascertain this is by conducting a ‘State of the Art Search’. And that really helps you understand what technologies in your area have already been patented. So, that can help you identify potential gaps and potential opportunities, I guess, when you are looking at your innovation plan. And I think finally, maybe my last point would be really from an R&D tax perspective as well, there are particular rules around claiming the R&D incentive if your company's IP is actually held offshore with a subsidiary or a parent entity. So, we call this foreign owned R&D, and it's just something that organisations need to be aware of, because there are additional requirements if you're looking to make an R&D claim. So, the IP piece is a very important part of the conversation Rebecca, and it's really fantastic that you brought it up because it is a blind spot.

Rebecca Archer
If people are wanting to get in touch with you who are listening today and are interested in hearing more, or perhaps learning more specifically about research and development in Australia and how it can benefit their business potentially, how should they find you?

Sukvinder Heyer
We are super easy to find. A quick Google search will quickly bring up the GT website, but certainly we're on LinkedIn as well. Bec, anywhere else?

Rebecca Iwanuscha
No, I think I think LinkedIn and our Grant Thornton website – you’ll easily be able to connect in with Sukvinder and myself, and our Innovation Incentives team.

Rebecca Archer 
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