Tax `disincentive’ to hit ag sector R&D

New R&D tax refund policy leaves agribusiness behind


Agribusiness
Partners Peter and Bob Mac Smith at MSM Milling, in Central West NSW, say innovation research in the high cost agribusiness sector is being penalised.

Partners Peter and Bob Mac Smith at MSM Milling, in Central West NSW, say innovation research in the high cost agribusiness sector is being penalised.

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Cuts to tax refunds will hit a host of agribusinesses from meatworks to regional engineering firms and farmers

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Farm sector research and development spending is likely to take a big hit because R&D tax incentive options for many businesses are set to halve next financial year.

The cuts will likely bite a host of agribusinesses from meatworks to regional engineering firms and even farmers conducting new plant varietal or cropping technique research.

The agribusiness sector estimates planned changes announced in the recent Federal Budget will typically slash current effective tax incentives for research from 8.5 per cent per research dollar spent to 4pc.

Critics say a cut like that will probably leave insufficient incentives for serious new R&D investment, particularly once rigorous compliance requirements in the tax incentive program are accounted for.

“In practice this negative cost signal is likely to penalise and discourage businesses such as those in agriculture and manufacturing,” said incentives and R&D specialist with the BDO accounting group, Nicola Purser.

We’re already committed to some research projects, but anything new will certainly be looked at in a new light - Bob Mac Smith, MSM Milling

She said R&D costs for companies in agriculture were naturally a smaller proportion of their considerable overall operating expenses than for most other businesses doing research to lift productivity or develop new products.

Bigger R&D spenders rewarded

Farm sector research was also, by nature, a relatively long-term and often seasonally restricted process, often stretching over many taxation periods.

“Ironically this tax measure is intended to incentivise companies to dedicate more money to research by giving you bigger tax incentives if you spend more,” Ms Purser said.

In reality, however the new tax offset “intensity test” favoured service industries, including the financial sector, biotechnology and software firms, who generally had far lower operational input costs for the margins they extracted.

Angry equipment makers and commodity processors are suddenly realising the likely cost to their enterprise.

Businesses  ranging from grain processors to crop chemical companies and resellers and livestock handling equipment makers are set to lose out.

Canola oil and stockfeed producer, MSM Milling, is now re-thinking its plans for additional research, despite constantly trying to maximise processing efficiency at Manildra in NSW’s Central West.

“We’re already committed to some research projects, but anything new will certainly be looked at in a new light,” said director Bob Mac Smith.

Big costs, skinny margins

MSM, founded by Mr Mac Smith and his brother, Peter, on their Cudal district farm in 1991, currently spends a considerable “seven figure” sum on research each year.

With about 75 staff, a big investment in capital equipment and energy, and turnover of between $100 million and $200m annually, Mr Mac Smith said MSM’s processing operation, like many agribusinesses, was all about “big costs and very skinny margins”.

“We’re constantly changing and developing our processes to make manufacturing more efficient and competitive, or to develop better feed and food products,” he said.

“We employ PhD graduates. We’ve got guys working on prototype situations with mini-mills.

To disincentive agribusiness R&D investment is counterproductive and makes no sense - Tim Burrow, Agribusiness Australia

“There’s always more value to be added somewhere in the system, and it’s not something any Tom, Dick or Harry can spend time or money doing.”    

What `innovation nation’?

Mr Mac Smith was flabbergasted by the frustration, and irony, of the federal government’s budget decision.

“A year ago the government was talking almost daily about Australia’s innovation future, and we’re always told how valuable agriculture’s exports are to the economy and future trade with Asia,” he said.

“The potential demand for our food and fibre has never been better.

“We want to add value to farm commodity margins on-shore, but it seems we’re discriminated against because we sell canola oil and meal, not whiz bang technology like smartphones.

“Nor are we an IT startup writing computer programs.”

Agribusiness Australia chief executive officer, Tim Burrow.

Agribusiness Australia chief executive officer, Tim Burrow.

The tax policy change, which takes effect from July 1, has unfairly punished capital intensive industries with long-term horizons, said Agribusiness Australia chief executive officer, Tim Burrow.

“To disincentive agribusiness R&D investment is counterproductive and makes no sense,” he said.

The low or irregular profit margins and high operational expenses which agricultural businesses had to negotiate each year appeared to have been overlooked by the new tax policy.

Instead, tax incentives would only really assist businesses spending an extremely large proportion of annual expenditure on R&D.

Mr Burrow said given Australia’s paltry farm sector productivity gains already put the industry under increasing pressure from aggressive export market rivals, the tax policy change had taken the industry by surprise.

Research catch-up needed 

“Agriculture may be our fastest growing export industry and the only truly perpetual resource we have, but Australian farm productivity has, at best, been flat for two decades,” he said.

“We need much stronger R&D efforts to cultivate locally-based innovation and to support cultural change to farming practices.”

He was particularly worried global companies such as those in crop protection and meat processing may divert more research to where they found more encouragement from governments and industry uptake.

As a relatively small and “mature” producer on a global scale, Australian agriculture’s need for a stronger research culture was at risk of losing out to big markets like North America and Europe or rapidly developing regions like Asia or Africa.

“Agribusinesses are now more likely to invest in other areas, or may consider taking their R&D investment offshore if they see can see better bang for their buck.”

Tax specialists say the impact of the new tiered threshold system will be felt hardest by companies with operating costs exceeding $20m a year, although cuts apply across the board compared to when the incentives were introduced in 2011-12.

For companies with turnover of less the refundable tax offset will be worth 13.5pc above the company’s primary taxation rate and capped at $4m.

For those with aggregated annual turnover of more than $20m the government plans an R&D (non-refundable tax offset) benefit tied to a rising proportion of total business spending.

It starts with a 4pc additional incentive above the company’s main tax rate for those whose research represents up to 2pc of their total expenses.

The highest incentive is 12.5pc above the company tax rate if R&D represents 10pc or more of total business costs.

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