It is one year on from the Government’s increased focus on domestic manufacturing and fortunately we are starting to see investment paying off as business conditions in the manufacturing sector are improving. Now in our third year of living with COVID-19, the issues previously raised in the manufacturing sector are even more important as the pandemic has placed a microscope on the industry and its major challenges. The arguments remain the same – we need more investment and policies to make domestic manufacturing viable.
In this year’s Federal Budget, the Government has allocated $1 billion to the manufacturing sector to supercharge investment with a focus on seven key areas. With increased funding available to boost on-shore manufacturing in the areas that are suffering from supply chain pressures the most, the manufacturing sector can grow exponentially and help to uplift the economy.
The Government has highlighted the need for these products to be manufactured in Australia as a matter of national interest:
- Semiconductors– Examples include computer chips and high-grade silicon wafers used in electronics, computing and automotive. Global supply has been drastically affected by the Russian war in Ukraine.
- Agriculture chemicals– Examples include fertilisers, pesticides, herbicides, rodenticides as well as chemical compounds like urea or ammonia used in products such as AdBlue.
- Water treatment chemicals– Examples include chlorine or any chemicals used to disinfect or purify water.
- Telecommunications equipment– This could include hardware used for mobile phone networks, including routing.
- Plastics– Examples include packaging, piping, construction or medical products made from Polyethylene, polypropylene or PVC.
- Pharmaceuticals– Common and specialist drugs and medicines as well as ingredients needed to make them. The scarcity of COVID-19 vaccines in 2021 illustrated the need to produce these vaccines locally.
- Personal protective equipment– Examples include gloves, masks and other products that have been used in the fight against COVID-19.
The Budget announcements included $250 million over two years from 2022‑23 to extend the Modern Manufacturing Initiative (MMI) to support businesses in National Manufacturing Priority sectors to deliver high‑impact projects. Also another $53.9 million over four years from 2021‑22 to extend the Manufacturing Modernisation Fund to support technology adoption in National Manufacturing Priorities.
Investing in automotive and innovation for a cleaner future
In the lead up to the Federal Budget, the Government already announced $243 million for critical minerals manufacturing. In the Budget, Government announced a further $200 million over five years from 2022‑23 for the Critical Minerals Accelerator Initiative which will provide grants to assist Australian critical minerals’ producers advance projects through the planning, design, pilot and demonstration phases.
These funds have been awarded in grants to manufacturing projects that support the rise of electric vehicles in Australia, and reduce the global reliance on China for rare earth materials required to make them. This is supportive of the need for innovation and backs Australia’s unique position to create renewable energy resources from start to finish. For example we can mine the lithium required to make the batteries used for solar energy power.
These grants are part of the $1.3 billion MMI and specifically, the $800 million MMI Collaboration Stream. The total funding was shared across only a small number of applications which although consistent with expectations, means that unfortunately a large number of highly compelling applications did not result in support via Government funding. Pleasingly, one of the successful MMI Collaboration Stream recipients was a $120m grant awarded to Pure Battery Technology’s pCAM plant in partnership with Poseidon Nickel, a proposal Grant Thornton was fortunate enough to be a part of.
The Government will also carve out $247.1 million over five years from 2021‑22 (and $300,000 per year ongoing) to support increased private sector investment in low emissions technologies including hydrogen, the continued development of a hydrogen Guarantee of Origin scheme, and the development of a Biodiversity Stewardship Trading Platform to support farmers to undertake biodiversity activities ahead of the introduction of a voluntary biodiversity stewardship market.
Following the huge investment in 2021, where is the manufacturing sector one year on?
With the announcement of the successful Collaboration Stream applicants, the $1.3 billion Modern Manufacturing Initiative is almost fully allocated. Two rounds of funding for MMI Integration Stream and Translation Stream were offered: Round 1 funding has been allocated; and Round 2 results are pending.
Given the MMI featured in the last Budget, as well as the $2 billion allocated for Research & Development incentives in 2021, we did not expect any new Government support of any real scale for the sector in the 2022 Budget. The supply chain issues of the pandemic have shown us that ‘Made in Australia’ is so important, a fact the Government has now finally publicly recognised. The MMI has been a great initiative for sovereign industry, however is only a first step in genuine Government support for manufacturing in Australia.
Patent Box
Following its announcement in the 2021-22 Budget, during the initial consultation, industry has been questioning why Patent Box was limited to only two sectors. It appears these questions have been heard, with the 2022-23 Budget announcing that the Government will expand the patent box, currently before Parliament, to support practical, technology-focused innovations in the Australian agricultural sector and the Government’s technology-focused approach to reducing emissions in line with the Government’s target to achieve net zero emissions by 2050.
More specifically in relation to the Agriculture, the Government will provide concessional tax treatment for corporate taxpayers who commercialise their eligible patents linked to agricultural and veterinary (agvet) chemical products listed on the Australian Pesticides and Veterinary Medicines Authority (APVMA), PubCRIS (Public Chemicals Registration Information System) register, or eligible Plant Breeder’s Rights (PBRs); and also to corporate taxpayers who commercialise their patented technologies which have the potential to lower emissions.
Eligible corporate income will be subject to an effective income tax rate of 17 per cent, for patents granted after 29 March 2022 and for income years starting on or after 1 July 2023. Eligible income will be taxed at the concessional tax rate to the extent that the research and development of the innovation took place in Australia.
The Government has also expanded the 2021-22 Budget measure Patent Box – tax concession for Australian medical and biotechnology innovations. It will now allow patents granted or issued after 11 May 2021 to be eligible for the regime. This will incentivise further research and development (R&D) to be undertaken in Australia on medical and biotechnology patents, much of which occurs after the patent application. The Government will also now allow standard patents granted by IP Australia, utility patents issued by the United States Patent and Trademark Office (USPTO), and European patents granted under the European Patent Convention (EPC) to be eligible. This will remove regulatory barriers to accessing the patent box regime for Australian developed innovations patented in the major overseas jurisdictions with equivalent patent regimes. However, taxpayers will still only benefit from the concessional tax treatment under the patent box to the extent that the R&D occurred in Australia.
From local innovators to global challengers
Australian manufacturers compete in a global market, and have shown true resilience throughout the pandemic. However our manufacturers continue to be challenged with margin pressures, including ever-increasing energy costs, and unfortunately, the 2022-23 Budget contains no measures that provide any meaningful downward pressure on energy costs.
Manufacturing initiatives do not operate within silos. We need staff to work in manufacturing and innovation, and we need trade policies that support domestic manufacturing making it more attractive to produce goods on-shore. Currently the MMI does not go hand-in-hand with the Government’s trade policies as a lack of tariffs on imports keeps the cost of imported goods so low that domestic manufacturing is still expensive.
To decrease costs for local manufacturing, there also needs to be a significant investment in technology and robotics to increase automated manufacturing, this will also help Australia to compete on a global scale to produce end-to-end finished products.
To support the Australian companies looking to expand their presence in global markets, the Government will provide $267.1 million over 4 years from 2022-23 (and $4.4 million per year ongoing from 2026-27) to modernise and improve Australia’s trade system and support Australian exporters. Funding includes:
- $127.4 million to continue and expand the Digital Services to Take Farmers to Market initiative to transform the delivery of Government agricultural export systems
- $80 million to provide additional support for small and medium export businesses to re-establish their presence in overseas markets through the Export Market Development Grants program
- $48 million to upgrade Australia’s trade system, reduce the regulatory burden on exporters and to identify opportunities for further reforms
- $7 million to expand the Trade Information Service to provide exporters with a single source of online information to facilitate access to international markets.
However, some industries are arguing what was once a global economy is taking a step backward as a result of COVID-19, by turning inward and focusing on a local manufacturing model. Typically it has always been costly to manufacture goods in Australia, and even with the supply chain in a woeful state, it is still probably cheaper to import than to manufacture locally. Another factor dampening the local manufacturing initiative is that we still need to import materials to create the finished goods, so the local industry will require considerable support to combat supply chain issues.
