Advantage Australia

The Innovation Review proposes refashioning the concession as a tax credit. This brings it “above the line” for accounting purposes, improving its visibility to company decision makers and protecting the incentive from dilution from any future company tax reductions (which we strongly supported).

For all Australian firms with a turnover of under $50 million, we proposed a 50 per cent refundable tax credit. For each dollar they spend on R&D, firms would get 50 cents from the government. But they’d lose the ability to deduct their R&D spending from their profits. So profitable firms would keep 20 of the cents - up from 7.5 cents today. But at current corporate tax rates of 30 per cent, the other 30 cents in each R&D dollar spent would be returned because - being unable to deduct their R&D - their profits would be one dollar higher.

But here’s the thing. Because the tax credit is refundable, instead of having to wait for their money, tax loss firms would be given extra money until they become profitable. The 50 cents goes straight to their bottom line. As with profitable firms, 20 cents is theirs to keep. But the loss of deductability only hurts them after they become profitable. So they keep the additional 30 cents until then. In place of the firm giving the government an interest free loan until it becomes profitable, under our proposal, it gets one.

This neat policy detail tips the playing field back towards the most innovative firms.

Next stop, a grasscourt on Rod Laver Arena.