In releasing their Innovation Statement today, the Federal Government announced their intent to spend $1.1bn over the next four years to promote research, development and innovation.

Looking beyond the big dollar headline, what is contained in the plan that will create & build an innovation culture?

Firstly, I will focus on the tax measures, given that tax incentives have had a long association with supporting innovation in many countries.  The innovation statement seems to “get” that supporting innovation is not just about startups, which is a good thing as innovative companies need support at various stages of their life cycles including current mid-size businesses & the MSBs of tomorrow:

  • The existing support via measures like the R&D Tax Offset is to be enhanced by providing new tax offsets for early stage investors and a new capital gains tax exemption, which will subsidise the cost of (& thus minimise the risk of) investing in innovative start ups

  • The largest new incentives (20% offset and a capital gains exemption) are only to be available for direct investment in small innovative start ups for which the bar has been set quite low (less than $1m expenditure and $200k income in the previous year)

  • Investment in larger businesses may qualify for a new 10% offset, but this will be restricted to investments in new Early Stage Venture Capital Limited Partnerships (ESVCLPs).  It is understandable that the Government wishes to promote the new ESVCLP regime, but one wonders whether requiring indirect investment through a VC fund will achieve the desired penetration in an era of crowdfunding & other direct forms of accessing capital 

  • raising the cap on committed capital of ESVLPs from $100m to $200m is banking on the additional tax incentive (ESVCLPs investors already attract a conditional exemption from income tax & capital gains) boosting investment volumes.  Removing the need to divest investments once the respective company value reaches $250m will promote more stability & certainty at both investor and investee company levels, which is an important foundation for continued growth

  • Relaxing the “same business test” is a long overdue & welcome reform as the current rule is an obstacle to strategic business growth.  This is particularly important as mid-size businesses with aligned objectives should not be denied access to the losses they have funded as they capitalise on opportunities to enter their next phase of growth

  • Innovation

    is so rapid and IP can quickly get out of date.  So the ability to

    self-assess the effective lives of intangibles will be welcome.  The current approach of having to write IP off over 20 years or more is a disincentive to protect IP, which could harm our ability to capitalise on the investment we are making.

  • What is missing though is some attention to what is currently prohibited from write-off:  The cost of obtaining patents should be deductible or otherwise subject to the same write off mechanism.  The cost of applying for patents currently pending attracts no tax benefit while waiting for a decision

  • Also IP tax write-off is currently restricted to patents, registered designs & copyrights.  The cost of developing valuable trademarks and brands is not deductible.  Such costs can be critical to realising the full commercial potential of our ideas and as such needs to be supported.  

    Overall, the tax components of the Innovation Statement appear to create an environment for stronger support for early phase innovative start-ups, with improved support for other innovative businesses. However, there are some areas that should be enhanced to promote greater innovation.

    Other components of the Innovation Statement include the following:

  • Corporate law reforms to facilitate crowdfunding and establishing employee share schemes

  • Reform of insolvency laws: while the headlines will be taken by the proposal to reduce the default bankruptcy period from three years to one year, some more effective proposals include introduction of a “safe harbour” from personal liability for insolvent trading if a restructuring adviser is engaged to develop a turnaround plan and, importantly, the banning of “ipso facto” clauses that permit contractual termination due to an insolvency event, which may be defined quite widely

  • A range of funded initiatives to promote innovation including: various ideas to encourage STEM education including digital literacy, $36m for a “Global Innovation Strategy” to take ideas to the world, a $22m project with Germany’s Fraunhofer Institute, $75m for Data 61 (the former NICTA) for data research, $30m for a Cyber Security Growth Centre, a new CSIRO Innovation Fund and a new Biomedical Translation Fund

All of these components will assist. The key to creating a culture of innovation is to bring these together in a way that they are accessible and then to be agile to adapt the programmes for changing needs.