Telstra fears it could be 'punished' by pending R&D laws

The telco is concerned that the current Bill could prevent it from undertaking vital R&D that could come at the cost of network performance.
Written by Asha Barbaschow, Contributor on

Telstra has raised concerns that under Australia's pending research and development (R&D) laws, it would be financially punished for conducting large-scale R&D that could reduce network performance.

The Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 was introduced into the lower house in December, with a handful of revised measures that were asked for in February 2019.

Read more: Senate committee asks R&D tax incentive Bill be refined before it's passed

At the time, the committee asked that the Bill be taken back to the drawing board, saying it recognised the need for government to maintain public confidence in the integrity and financial sustainability of the R&D tax incentive, but that it was not confident the introduced measures would provide exactly that.

The Bill remains mostly unchanged, with minor tweaks to premium offsets.

If passed, it would permanently increase the R&D expenditure threshold from AU$100 million to AU$150 million; link the R&D tax offset for refundable R&D tax offset claimants to their corporate tax rates, plus a 13.5 percentage point premium; cap the refundability of the R&D tax offset at AU$4 million per annum; and increase the targeting of the R&D tax incentive to larger R&D entities with high levels of R&D intensity.

"We believe if the Bill is passed in its current form it could result in discouraging additional R&D expenditure in Australia for many claimants (particularly large businesses)," the telco wrote in a submission [PDF] to the Senate Standing Committee on Economics and its probe into the Bill.

Telstra raised two main concerns with the Bill: The proposal to implement an unyielding intensity measure based on qualifying R&D expenditure as a percentage of total accounting operating expenditure; and the cap level of AU$150 million.

Capping it at AU$150 million would mean Telstra will be permanently ineligible for any net benefit beyond the first tier -- 4.5% net benefit -- due to its "high Australian cost base".

"The intensity measure punishes claimants who have an inherently high Australian cost base, such as the telecommunications industry, which is capital intense and has a large Australian employee base," the telco wrote.

"This capital intensity is borne out in the fact that the telecommunications industry had the second highest investment rate in the Australian economy, with 70.5% of total industry value added invested in 2017-18 (approximately $18.3 billion)."

Telstra said this measure highlights that the industry allocates a significant amount of resources to improving existing infrastructure, research, and deployment of new technology to the market.

"The intensity measure therefore has the effect of penalising the telecommunication industry's high investment in infrastructure, which is critical to Australia's economy and society," it said.

"It also provides a relative competitive advantage to foreign multinationals who have a low Australian cost base."

See also: Ombudsman calls for reforms to R&D tax incentive processes

The proposed intensity measure would introduce a three-tiered incentive designed to encourage R&D expenditure.

"The imposition of a AU$150 million cap ensures that businesses with expenses greater than AU$3.75 billion can never get beyond the first tier -- 4.5% net benefit -- regardless of how much we actually spend on eligible R&D activities," the telco continued.

"Further, even if a business has sufficient intensity expenditure to progress beyond the first tier, unabated by the cap, only the incremental expenditure benefits from the higher rates provided in the upper tiers.

"This would undermine the current approach in which, in many cases, large Australian corporates undertake R&D work that is not viable for smaller corporates, e.g. by connecting numerous parties to collaborate for a scalable and national solution."

Although Telstra conceded the R&D Tax Incentive is not the sole motivator to undertake R&D activities, it said it does influence its decision to undertake the R&D activities in Australia.

It said the proposed intensity measure would increase the after-tax cost of conducting R&D.

"Consequently, we would need to make choices between reducing overall R&D spend or maintaining/increasing the R&D spend at the expense of other elements of operational expenditure, such as network performance," Telstra said.

Keeping safe

From Monday, Telstra's office-based staff will be working from home until the end of March, in the wake of the COVID-19 coronavirus outbreak.

See also: Telstra pledges to help 'vulnerable customers'

The new policy includes the cancellation of all events and meetings of more than 25 people and the grounding of staff unless business essential travel is approved by a group executive.

With the move backed by the Communication Workers Union of Australia, Telstra has also agreed to provide additional paid leave entitlements to employees, including casual employees, who may contract, or be exposed to confirmed cases of, COVD-19.

Up to 14 days paid leave will be provided where an employee is required to quarantine or self-isolate; doesn't have sufficient, or any, carer's leave; or where they're caring for a child if their school or childcare is closed and unable to work from home.

Telstra said more than 90% of its workforce will have access to the new flexible working conditions.

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