Cutting $2.5 billion out of the research and development tax break and returning the savings to general revenue to balance the budget was a “mind-numbingly stupid” thing for the Turnbull government to do, according to one of Australia’s highest-profile venture capitalists Daniel Petre.
Mr Petre is a co-founder of AirTree Ventures and a colleague on the board of Innovation and Science Australia with chair Bill Ferris and Chief Scientist Alan Finkel, who recommended that savings from tweaking the R&D tax break should be ploughed back into innovation via direct R&D grants because they are more effective.
But Jobs and Innovation Minister Michaelia Cash told The Australian Financial Review Innovation Summit 2018 on Monday that the government decided to pocket the savings because it wanted to balance the budget.
Ms Cash said she would be willing to discuss the creation of a new program of direct R&D grants for a future budget, an olive branch that Mr Ferris welcomed.
But Mr Petre told the summit on Tuesday that the $3 billion-a-year R&D tax break was critical to start-up founders because it helped them stay in control of their business for longer rather than being forced to give up control to venture capital firms – a circuit breaker that he said was in turn critical for the innovation “ecosystem” in Australia.
Don’t ‘f— up’ R&D tax incentive
Stressing that he wasn’t speaking as an ISA director and that he didn’t have a problem with the general direction of Mr Ferris and Dr Finkel’s recommendations aimed at larger corporations’ R&D deductions, Mr Petre said the government should leave the system for small start-ups alone.
“The government shouldn’t f— up the R&D TI [R&D tax incentive] – it’s critical for start-ups and critical then for founders to retain equity. That is really what is happening,” Mr Petre said.
“It’s where start-ups can claim a percentage of their expenditure as a tax refund in cash. The more cash they can get that way, the less cash they have to get from venture capital firms, which means the less dilution for founders.”
Mr Petre said if the system changed “it will come back to venture money the founders will get diluted earlier and it’s not good for the ecosystem”.
“They shouldn’t take $2.5 billion out of R&D to stick in general revenue and make the budget balance. At a time when China is investing trillions of dollars and OECD countries like the UK are investing billons of dollars – for our government to take money out of R&D and put into the general surplus is mind-numbingly stupid,” Mr Petre said.
The budget changes reduced the premium tax break for companies that spend less than 2 per cent of total expenditures on R&D to 4.5 per cent from 8.5 per cent, but increased it on a sliding scale to 12.5 per cent for “high intensity” companies that spend more than 10 per cent of expenditures on R&D.
These changes apply to companies with revenues in excess of $20 million but the system for smaller companies – a 43.5 per cent deduction on R&D spending, which can be taken as a cash refund – remains unchanged.
Mr Ferris and Dr Finkel led a review of the R&D tax incentive scheme that recommended a shift in emphasis from the tax incentive, which they found didn’t stimulate a lot of R&D from large companies that wouldn’t have otherwise been done, towards direct grants used by top innovation countries such as Germany, Sweden and Israel.