Upcoming Mallesons seminarsAll corporations who engage in innovation in Australia, especially those who perform technical R&D, develop software, seek business method patents or provide goods and services to Government.
What do you need to do?Consider the implications of the proposed changes for your corporation and lobby the Government accordingly.
Scott Bouvier
Partner
Scott Bouvier
Partner
T +61 2 9296 2472
Sydney
Patrick Gunning
Kim O'Connell
Richard Snowden
Melbourne
Phillip Davies
Cheng Lim
Wayne McMaster
David Wood
Brisbane
John Swinson
On 9 September 2008, the Federal Government released a major report on Australia’s National Innovation System. The Report was prepared by a panel chaired by Dr Terry Cutler, which included respected economists and research industry experts. This Alert identifies the specific key recommendations and issues raised by the Report which would have a legal impact on major corporations.
The Report is over 160 pages long and contains 72 different recommendations designed to implement a step change to innovation in Australia. The Report recognises that Australia’s innovation policy must focus on strengthening innovation at the point where business enterprises engage with their markets and customers. Key priorities include increased funding of the education and research system, more support for collaboration and information sharing mechanisms, additional Government investment in start-up venture programs and improved innovation within Government. In response, the Government has welcomed the Report and announced that they will take a “close look” at the recommendations and respond before the end of the year.
In the meantime, these are specific key recommendations and issues raised by the Report which would have a legal impact on major corporations.
Major overhaul of the R&D tax concession
The most significant recommendations in the Report relate to a major overhaul of the R&D tax concession. In summary:
- The existing R&D tax concession (the 125% R&D tax concession, the 175% Premium, the R&D Tax Offset and the International Premium) should be simplified and replaced with a tax credit.
- A 40% non-refundable tax credit would be available to large firms with a refundable tax credit of 50% (paid quarterly) available to smaller Australian firms with turnover under $50 million.
- A significant change is to allow R&D expenditure undertaken in Australia by foreign owned firms to be eligible for the 40% non-refundable credit but excluded from the refundable credit. As such the current requirement for the resulting intellectual property to be owned in Australia will be removed and firms undertaking foreign-owned R&D expenditure in Australia would be able to access the non-refundable tax credit. This is designed to encourage more foreign R&D investment in Australia.
- The breadth of R&D activities within the concession should be broadened and in the interim should include shared open source software development. Further, guidelines should be issued to better identify eligible activities and particularly determine whether less technically risky activities involved in innovation in services can be included.
- Aggressive claims for very large one-off projects such as mines or civil engineering projects (where apparently up to 80% of the expenditure has been claimed to qualify) should be “constrained”.
It is hoped that this new approach will make Australia more globally competitive and increase business expenditure on R&D by providing a less complex and more predictable support mechanism. Further, by allowing a refundable tax credit, smaller and start up firms which may be in loss in the early phase of their business may find the R&D concession of greater benefit (as they can get immediate access to the cash benefit).
Other issues
Other specific recommendations and issues include:
- Service industries should be provided with more support for their innovation - However, the only specific relevant recommendation is that the application of the R&D tax concession to service industry innovation should be reviewed.
- Government procurement should accept more innovation and risk - Government procurement processes should place more emphasis on innovation and be open to participating in risk sharing and forward purchase commitments. The Panel criticised the Government’s extreme aversion to bearing risk and the bias that this creates against new market entrants.
- Patents should be harder to obtain and be better defined - The inventive steps required to qualify for a patent should be reviewed to ensure that they are considerable and that the resulting patents are well defined. The Panel was particularly concerned about the burgeoning number of software patents and patents on business methods, and expressly found that the ease with which these patents were being granted was very likely to be hampering innovation.
- Enforcing IP rights is too expensive and major reform is needed - The Panel endorsed the review being undertaken by the Attorney-General in relation to substantially streamlining civil procedure. In addition, the Panel made a specific recommendation that firms asserting or defending IP should have a right to opt out of “appellant double jeopardy”. This would give each party to a dispute the right to elect not to appeal the finding of the court except where the appellant funded the costs of both itself and its opponent. When either side exercised this right, both parties would be bound by it and neither party could appeal without meeting all their opponents’ costs.
In conclusion, other than tax changes, the Report does not contain many immediate specific changes and implications which would have a legal impact on major corporations. However, its key emphasis on improving the quality of Australia’s “human capital” through a more effective education and research system, which is funded at comparable levels to other OECD countries, is undoubtedly correct. With time, this would provide significant commercial advantages to major corporations in Australia. Further, if the Report is implemented, it will have many benefits for start up ventures, research collaborations, the universities and research organisations such as the CSIRO and ANSTO.
If you have any questions in relation to the National Innovation Review and its potential implications, please contact us.