Innovation in Australia – changes affront

The FMCG industry is innovating at a rapid pace, with new products and processes regularly being developed, as Australian business tries its best to remain internationally competitive.

To date, many FMCG corporates have relied upon both the R&D Tax Concession and grants as key government support measures to further their innovation.

Such measures have, however, come into question in recent years. The value of the tax concession has fallen due to a reduced corporate tax rate and the cessation of available grants, such as the Food Industry Grants, which has caused much concern surrounding the continued level of support.

Following the September 2008 release of the Federal Government’s Innovation Review, authored by Dr Terry Cutler, ‘Venturousaustralia – Building Strength in Innovation’, the industry can now contemplate positive change. Of particular note is the review of the R&D Tax Concession program which acknowledges the need to strengthen and increase the programs available to support innovation in Australia. Corporations of all sizes within the FMCG industry will be interested in the opportunities which this may help to secure.

The key recommendations stemming from the review included suggestions to:

  • 1. Replace the current R&D tax deduction programme with a two-tiered tax credit.

    The aim of this is to disassociate the Concession from the tax rate, such that a drop in the tax rate will not continue to erode the after tax benefit stemming from the Concession.

    A 40% tax credit for companies with a turnover of greater than $50 million, and 50% refundable tax credit for small to medium enterprises (SMEs), is recommended to replace the R&D tax deduction. In addition, the 50% tax credit for SMEs will be paid quarterly which will certainly assist such companies with their cash flow and investment in innovation and R&D.

    To date SMEs have only received cash assistance in the form of a tax offset where their group turnover is less than $5 million and their spending on R&D is less than $1 million per annum. The low thresholds associated with the tax offset have not acknowledged the large number of growing companies within the food and beverage industry who, in order to grow and innovate, are in need of financial support.

    Raising the threshold, which will define SMEs for the purposes of the tax concession to $50 million will aid the many FMCG corporates who are in need of a regular cash injection to assist them with funding their innovation.

  • 2. Increase the effectiveness of the support from the Government.

    The new tax credit program is aimed at moving Australia into line with modern economies offering tax-based support for innovation. The treatment of R&D expenditure as non-deductible for tax purposes, however, effectively reduces the actual rate of support to 10% for corporates with a turnover over $50m and 20% for those with turnovers less than $50m. This effective rate of support is still on the low side compared with Australia’s major trading partners and the Asia Pacific region.

  • 3. Remove the requirement that IP be effectively owned by Australian companies.

    This would enhance Australia as a location for R&D activities and, all other things being equal, would align Australia with 19 countries globally who offer tax-based incentives for R&D.

    To date limited funding has been available for R&D where the ownership of the resulting IP rests overseas. This has posed difficulties for some multinationals in the FMCG industry. This recommendation will support the R&D which is being undertaken within Australia and may encourage further international investment in the same.

The Innovation Review is also aimed at reprioritising national innovation priorities. The food, beverage and agriculture industry is understood to be high on the list. With a significant industry contribution to GDP, this is critical.

The proposed recommendations will provide the FMCG industry with a strengthened footing on which to continue to build its platform of innovative products and processes. This, coupled with an additional investment in Australian-based resources and education, will certainly enhance the ability to conduct viable R&D projects within Australia.

Karen Stein is a specialist R&D Tax Partner at Deloitte and also leads Deloitte’s FMCG R&D industry group.

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