RSM Australia

National Innovation and Science Agenda

A detailed analysis of what you need to know about Prime Minister Malcolm Turnbull's highly anticipated $1.1 bn innovation strategy

The Federal Government has released its much anticipated Innovation Agenda but what does this mean for business and individuals. 

The framework of the government’s innovation policy focuses on four key pillars:

  1. culture and capital
  2. collaboration
  3. talent and skills
  4. government as an exemplar

 

The following table is RSM’s overview, commentary and analysis of the Innovation Agenda and what it may mean for you.

You may also want to read further commentary on the hits and misses of the Innovation Agenda here

Taking the leap = Culture and capital Summary Commentary
Tax incentives for angel investors

From 1 July 2016, investors in innovative start-ups will receive a 20% non-refundable tax offset based on the amount of their investment capped at $200,000 per investor per year, as well as a ten (10) year capital gains tax exemption provided the investment is held for three (3) years . The incentive will be available for investments in companies that:

  • undertake an eligible business (scope to be determined in consultation with industry)

  • were incorporated during the last three income years

  • are not listed on any stock exchange

  • have expenditure and income of less than $1 million and $200,000 in the previous income year respectively

The measure will be welcomed by investors who already invest in start-up companies but it is unlikely to affect the investment decisions of investors who are risk averse and invest in property, cash etc. Many private investors in start-up companies invest via their superfund, which are taxed at 15%. Super funds may not gain the full benefit of the 20% incentive unless the unutilised portion can be carried forward to future years. Many start-up companies fail and a majority of investors may not benefit from the capital gains tax exemption.
Access to crowd sourced equity funding (CSEF)

CSEF legislation was introduced by the government on Thursday December 3rd 2015. The legislation is limited to companies that become unlisted public companies and:

  • have gross assets or revenue less than $5 million

  • they are limited to raising $5 million a year, and

  • investors are limited to $10,000 investment for each start-up per 12 month period

Companies that become an unlisted company in order to access crowd-sourced equity funding will receive a holiday of up to five years from some reporting and governance requirements.

It has been a significant area of discussion for several years and while it is a positive start there have been concerns that it has not gone far enough for simplification of reporting requirements and too limited in the funds that can be raised per individual and too restricted at the $5m turnover and assets cap.
New arrangements for venture capital investment A 10% non-refundable tax offset for capital invested in new Early Stage Venture Capital Limited Partnerships (ESVCLPs) will be available, and increasing the cap on committed capital from $100m to $200m for new ESVCLPs. The aim is for legislation to be prepared and passed in 2016. Has the potential to increase some investment into venture capital and also the increase in the cap may provide scope for larger investments that are critical for scaling up commercialisation.
Access to company losses The ‘same business test’ will be amended to introduce a more flexible ‘predominantly similar business test’ will allow a start-ups to bring in an equity partner and secure new business opportunities without worrying about tax penalties. The current 'Same Business Test' (SBT) is extremely narrow and requires a company to maintain essentially the same business and prevents it from entering into a new transaction or a new business. The measure will make it easier for start-up companies to undertake a new or different direction. No amount has been budgeted for this initiative in the Innovation Agenda. Few start-ups get to the stage of generating profits and utilising their losses. Start-ups would benefit from a scheme to convert these losses into cash, for costs not captured from an R&D Tax Incentive claim. The loss recoupment rules were introduced prior to the introduction of the capital gains tax regime and company loss recoupment testing should be relaxed as shareholders in loss making companies suffer a quarantined capital loss.
Intangible asset depreciation Rules that limit depreciation deductions for some intangible assets (like patents) to a statutory life will be removed and instead allow them to be depreciated over their economic life as occurs for other assets. This is intended to be available for assets acquired after 1 July 2016. Currently only certain intangible assets are able to be depreciated. This measure will potentially bring forward depreciation deductions for all businesses on patents, copyrights, registered designs and some licenses. The measure is likely to assist established businesses rather than Start-up companies, as accelerated deductions are only likely to create more losses for start-ups that may be compromised as capital is raised and new business directions explored. It will also not apply to any existing intangibles.
CSIRO Innovation Fund

The new CSIRO Innovation Fund supports the early stage commercialisation of innovations from CSIRO, universities and other publicly funded research bodies. It will have two parts:

  • an early stage innovation fund of about $200m to support co-investment in new spin-out/start-up companies products and services created by Australian research institutions. The fund will comprise $70m in new government funding, as well as private sector investment and new revenue from CSIRO’s WLAN programme.

  • A $20m expansion to CSIRO’s Accelerator programme to include other publicly funded research organisations to more rapidly prepare their research for commercial adoption.

Requiring the matching funding is a good way to select projects as it adds commercial due diligence to the decision making process.  Top line budget of $200m is not the actual government spend on this initiative and the funding estimates table only includes $15m.
Biomedical Translation Fund** A new $250m independent body that will invest in promising biomedical discoveries and assist in their commercialisation. It will do this by drawing on fund managers selected through a competitive process. Those fund managers will bring at least matching funding from the private sector for investment. This is a promising initiative that may increase investments and bring commercial decision makers into the process of selecting projects. There is confusion on whether this is completely new funds or a redirection of Medical Research Future Fund. The funding estimates table includes $10m, not the promoted $250m.
Incubator Support Programme

The Incubator Support Programme will offer competitive matched funding to:

  • support development of new incubators and accelerators in regions or sectoral areas with high innovation potential

  • boost the effectiveness of high performing incubators including support to expand their services and engage a Commercialisation Adviser to help them access other government services and programmes

  • provide access to top quality research and technical talent through three to 12 month secondments of national or international expert advisers, and

  • coordinate and promote support for entrepreneurs and startups through the Australian Innovation Network—an online portal will help entrepreneurs to access information on startup support opportunities, activities and events across Australia

It will be a new component of the Entrepreneurs’ Programme aimed at opening from 1 July 2016 with a budget of $8m.

Incubators and accelerators have been successfully established across Australia and it is positive to have this program initiated to continue the good work they have started. Combining it with the Entrepreneurs Programme is a good idea and we look forward to the details. 

The funding is very limited and particularly as it needs to be spread across Australia. We hope that this is a test for the potential benefit that this program can achieve and if it is successfully deployed further funding maybe available.

Improve bankruptcy and insolvency laws

Reform of the insolvency laws:

  • reduce the default bankruptcy period from three years to one year

  • introduce a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a professional restructuring adviser to develop a plan to turnaround a company in financial difficulty, and

  • ban ‘ipso facto’ contractual clauses that allow an agreement to be terminated solely due to an insolvency event, if a company is undertaking a restructure

Reducing the default bankruptcy period to one year:

  • the proposed change makes sense and if properly crafted will be beneficial. It is not a panacea. Bankrupts will still lose their homes as most SME business loans are secured by the family home. However the changes must protect the market from rogues

The director safe harbour:

  • the insolvent trading regime is frequently claimed to discourage entrepreneurship, investment by angel investors and the participation of professional directors in business startups. The proposed change will provide a safe harbour for directors from personal liability for insolvent trading by engaging a restructuring adviser to formulate a turnaround plan

  • we consider a broader changes are required to encourage entrepreneurship, facilitate the survival of businesses and increase outcomes for all stakeholders

  • removing personal liability from company administrators for debts incurred during a voluntary administration

  • considering the changes made to secured creditor rights in UK insolvency law said to have encouraged the development of a turnaround culture

Unenforceability of ipso facto clauses:

  • this change is welcome and highly likely to increase the survival rates of businesses subject to the voluntary administration regime

Employee Share Schemes Existing employee share scheme (ESS) ASIC disclosure rules will be relaxed allowing companies to offer shares to their employees without having to reveal commercially sensitive information to their competitors. The aim is for legislation to be introduced in the next 6 months. The government sought to reverse the 1 July 2009 tax treatment of ESS from 1 July 2015 and introduced specific treatment for shareholders in start-up companies. This measure only deals with the ASIC disclosure requirements and will protect disclosure of confidential information as well as reduce compliance for start-ups.
Working Together = collaboration Summary Commentary
Critical research infrastructure

This initiative is to provide funding for research infrastructure, which is critical to maintaining world-class research capability and capacity for innovation in industries. In 2016, Australia’s Chief Scientist will chair an expert group to undertake a road-mapping process to identify specific future research infrastructure capability requirements.

It provides $459m of funding.

This program is more funds for existing initiatives:

  • National Collaborative Research Infrastructure Strategy (NCRIS)

  • the Australian Synchrotron, and

  • the Square Kilometre Array (SKA)

New research funding arrangements for universities

New research funding arrangements for universities that aims to give equal emphasis to success in industry and other end-user engagement as it does to research quality.  It provides an additional $127m to university research block grants over the forward estimates.

These new arrangements will replace the current suite of six research block grants with two programmes. The new arrangements will commence on 1 January 2017.

It is positive to aim to increase research-industry collaboration and the programme includes more funds for projects with these objectives.
Global Innovation Strategy

$36m over five years to:

  • establish five ‘landing pads’ in global innovation hotspots Silicon Valley, Tel Aviv and three other locations to support entrepreneurial Australians. Supported by an Austrade coordinator, landing pads are an operational physical space in which Australian market-ready start-ups can access entrepreneurial talent, mentors, investors and a wider connected network of innovation hubs

  • Provide seed funding to assist Australian businesses and researchers to collaborate with international businesses and researchers, and

  • reduce barriers to regional collaboration and promote an open-market approach to industry-research collaboration, including Asia-Pacific workshops, multilateral projects and mobility support

Funding is aimed to be available from 1 July 2016.

Assisting innovators to reach global markets is an important initiative. It will be important to assess this program particularly to ensure the administrative costs don’t outweigh the innovator benefits.

The benefits of the programme however could be difficult to measure as it will mainly be about the connections and relationships that are established, not just financial benefits.

Cyber Security Growth Centre

Establish a new industry-led Cyber Security Growth Centre to grow and strengthen Australia’s cyber security industry.

It will be a $30m program aimed to be operational by mid 2016.

Growth centres have yet to be a proven concept and is very specific industry to be targeted for development.
Innovation Connections programme

To connect more small and medium businesses with researchers, investing $18m in a component of the Entrepreneurs’ Programme, for a new Innovation Connections initiative. The Innovation Connections programme will:

  • provide more Facilitators so more businesses can access Australia’s innovation infrastructure, particularly in regional areas

  • make matched grants available to support graduate and postgraduate researchers placements in businesses

  • make matched grants available to support business researchers to be placed in publicly funded research organisations, and

  • identify opportunities to access research and development and testing facilities and develop specialised training options by working more closely with the vocational education and training sector.

The Entrepreneurs’ Programme is currently running and will progressively offer these expanded services from 1 January 2016. The Entrepreneurs Programme has been a successful program and its expansion is welcome news.
Quantum computing $26m over five years to support the development of silicon quantum computing technology in Australia by the Centre for Quantum Computation and Communications Technology (CQC2T), headquartered at the University of New South Wales. CQC2T is a global leader in silicon-based quantum computing research, and our investment in its work will help fund the development of a silicon quantum integrated circuit—the first step in developing a practical quantum computing system. This is obviously a very specific technology pathway that the government believes worthwhile to support.
Measuring impact and engagement in university research

Assessing and reporting on how government investments in university research translate to tangible benefits for Australia will help show where collaboration with industry and other partners could bolster and more quickly deliver these benefits.

In 2016 the government will work with the higher education research sector, industry and other end-users of research to develop quantitative and qualitative measures of impact and engagement.

A pilot assessment will take place in 2017. The first national assessment and reporting will take place in 2018.

It would be beneficial to have quantitative analysis on the return of investment for university research, but it must be mindful of the need for long time frame analysis.
ARC Linkage Projects Scheme This is a change to ARC Linkage Projects scheme, where it will be open to continuous applications, rather than the existing annual selection process. It would be beneficial to bring a more commercial timeframe to ARC approvals.
Innovation in agriculture and regional areas The government has put agriculture and regional areas as important to the innovation strategy. There is no specific funding, many of the other programs and initiatives have agriculture and regional aims.

Best and brightest =

talent and skills

Summary Commentary
Embracing the digital age

Digital Technologies, this initiative will ensure both students and teachers have access to the tools they need to enhance their digital literacy to form a workforce skilled to meet Australia’s innovation agenda.

It is a $51m package over five years that includes:

  • online computing challenges available nationally for Year 5 and 7 students

  • ICT summer schools for Years 9 and 10

  • annual ‘Cracking the Code’ national competition for Years 4 to 12

  • support for teachers to implement the Digital Technologies curriculum through online learning activities and expert help, and

  • support for school leaders to drive digital literacy and partnerships to bring scientists and ICT professionals into the classroom

The programme proposes a $51m package, however there is no budget included in the funding estimates table. We can assume that perhaps the table is incorrect as the STEM initiative below is over calculated in the table as compared to the agenda statements.
Opportunities for women in STEM

$13m is budgeted over five years to encourage more women to choose and stay in STEM research, related careers, startups and entrepreneurial firms. It will cover:

  • supporting the expansion of the Science in Australia Gender Equity pilot to cover more Australian science and research institutions

  • establishing a new initiative under the ‘Male Champions of Change’ project to focus on STEM-based and entrepreneurial industries, and

  • partnering with the private sector on initiatives to celebrate female STEM role models and foster interest in STEM amongst girls and women

This initiative will emphasise successful female role models in Australia’s STEM and innovation sectors, prompting more female participation in STEM study and careers.

A number of industry associations have been proactively addressing the diversity gap and they should be widely consulted and engaged in this initiative.
Inspiring all Australians in digital literacy and STEM

To inspire Australians—from pre-schoolers to the broader community—to engage with STEM in society and participate in further study the Government will invest $48 million over five years in:

  • expanding the Prime Minister’s Prizes for Science to recognise the efforts of youth and early career research excellence in STEM

  • supporting Australian students in competitions, such as the International Science and Mathematics Olympiads, and hosting the 2019 Asian Physics Olympiad

  • developing play-based learning apps and science and mathematics resources for early childhood educators, and

  • supporting and expanding community engagement initiatives, including Inspiring Australia and citizen science projects

A $48m budget is positive, however as per the digital age comments above, their appears to be confusion in the funding estimates table.
Support for innovation through visas

Changes to current visa system through:

  • a new entrepreneur visa for entrepreneurs with innovative ideas and financial backing, and

  • pathways to permanent residence for postgraduate research graduates with STEM and ICT qualifications will be enhanced. Australian doctorate-level and masters by research qualifications in STEM and specified ICT or related fields will be awarded extra points under the Points Tested Skilled Migration programme to strengthen their pathway to permanent residence

Measures to reverse the brain drain are welcomed.
Leading by example = government as an exemplar Summary Commentary
Data61 Data61 is the merger between National ICT Australia (NICTA) and CSIRO’s digital research unit, creating one of the largest digital research teams in the world and, outside of the Department of Defence, Australia’s leading capability in cyber security research.

$75m is being budgeted for this to:

  • use data analytics to connect disparate government datasets and publicly release them on open data platforms

  • improve industry cybersecurity and develop new cybersecurity architectures

  • build a Data Research Network to link business with data researchers, and

  • deliver data analytics training to improve the data literacy of Australian businesses

The factsheet contains some big ambitions to, push technical boundaries to develop and apply ‘leap ahead’ technology.

It will be important to understand how innovators can be involved in this and what greater commercial gains can be leveraged from it.

Business Research and Innovation Initiative

The Business Research and Innovation Initiative will operate in three stages and will launch on July 1:

  • work with Innovation and Science Australia to nominate five national policy and service delivery challenges

  • innovative businesses will be invited to submit proposals to address those challenges and the winners will receive grants of up to $100,000 to test their ideas over three to six months of development, and

  • the most successful ideas may be eligible for a further grant of up to $1m to develop a prototype or proof of concept over the following 18 months.

An interesting initiative to identify issues, facilitate and fund innovative solutions, while also encouraging the development of commercialisation outside of government need.

We look forward to seeing how the pilot program progresses and more importantly how the programme develops and improves over time.

Digital marketplace

The digital marketplace will be an online directory of digital and technological services for government agencies to procure ICT solutions from small to medium sized enterprises.

As part of the programme:

  • the directory will break down large scale ICT requirements into individual components which scales down the procurement and allows for greater scope for innovation solutions

  • business suppliers of ICT software and hardware will be able to join the directory easily

  • government buyers will be able to easily search for services, identify suitable suppliers and procure the best value option for the project, and

  • user-centred design methodologies and iterative development will be key

This is a good initiative but unsure of how it fits into the innovation agenda, given it has no comments regarding procurement being focused on innovative solutions.
Innovation and Science Australia

Innovation and Science Australia (ISA) will be a new independent body responsible for strategic whole of government advice on all science, research and innovation matters.

ISA will establish strong and extensive business and community stakeholder links to audit the performance of the innovation system and develop a long term 15 year plan. ISA will publish its research and advice to promote public discussion, and will publicly advocate reforms on key issues such as:

  • innovation investment

  • innovation, collaboration and skills

  • delivering and operating research infrastructure, and

  • how to better plan and use Australia’s investment in research and development

“As one of its first tasks, ISA will review the R&D Tax Incentive to identify opportunities to improve its effectiveness and integrity, including by sharpening its focus on encouraging additional R&D spend.”

There is significant concern that before ISA even begins it is being directed towards cutting back the R&D Tax Incentive. Focusing and sharpening a broad based programme is not supportive of it continuing to be broad based.  And requiring R&D tax to drive additional R&D spending negatively implies that the base level of R&D that companies currently spend is not sufficient.

Reducing the scale of the R&D Tax Incentive will undoubtedly result in R&D activities shifting offshore.

The first task of ISA should be to reassess how treasury currently models the cost of the R&D Tax Incentive. Our calculations of the proposed $3bn a year cost is more like $2bn per year cost.

The second task of the ISA should then be to carry out a quantitative analysis (not qualitative) of the R&D Tax Incentive.

With these tasks completed, the ISA will have a true cost versus benefit analysis from which it can carry out logical modifications to R&D tax if required.  Making changes to the R&D tax programme without the cost and benefit analysis is very unscientific.

Public data strategy

Releasing more non-sensitive public data for private sector innovation, and use the data to improve service delivery and to inform policy. This will involve:

  • making appropriately anonymised and non-sensitive public data openly available by default so the private sector can use it to create new products and business models

  • providing free access to public data, with fees only applying for specialised data services

  • ensuring there’s a central place for all government data at data.gov.au

  • overcoming existing barriers to sharing data holdings across government to improve service delivery and policy analysis and evaluation, and

  • making a nationally significant geocoded address database available

As we know, big data and data analytics are important issues and opening up data sources could provide innovators with and commercially valuable opportunities.

 


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