Half of our R&D would be ineligible for the R&D Tax Incentive

Half of our R&D would be ineligible for the R&D Tax Incentive

The Research and Development Tax Incentive reform, under its current exposure draft wording, would mean a halving of eligible R&D for Harrison.

Treasury is consulting now on changes due to start on 1 July 2028. The stated aim is to simplify the scheme and encourage more business investment in R&D, but for manufacturers like us the draft as written would do the opposite.

We lodged our submission this week.

Harrison has set itself a target of reinvesting 5% of gross revenue in R&D by 2030, up from a base of 1.4%, which would move us towards the levels of Korea and Israel, two of the most research-intensive economies in the world. Australia as a whole sits at 1.68% of GDP, well under the OECD average of 2.7%.

We are the kind of company the incentive exists to reward. We make greases and lubricants for heavy industry and we are constantly working on new formulas and products to get that extra bit of performance out of large machines.

The problem in the proposed R&D Tax Incentive (R&DTI) reforms, comes down to one change: removing so-called “supporting activities” from tax incentive eligibility and narrowing the incentive to core experimental work. Supporting activities include the “development” side of R&D.

In a university laboratory, the proposed activities distinction might make sense. In a factory, it doesn’t. When we develop a new grease, the experiment is only the beginning. Then comes the development: formulation work, plant trials, scale-up, testing, validation, quality assurance, and production support. This is where most of the cost and risk exists, because it is where you find out whether a good idea survives a real production line and a real customer.

Take one of our own projects. Harrison SPARC, our dedicated research company, has committed $3.9 million to a new lithium frother technology that increases the yield of lithium refining. The value to Australia only arrives when the technology is proven at scale in a processing plant. Much of the lithium frother work would probably not be eligible under the new R&D rules.

The same goes for the bio-based and biodegradable lubricants we are developing at Harrison Manufacturing, and the fully synthetic heavy-vehicle grease we invented and developed at a customer’s request. None of these products would exist if we had stopped at the experiment.

The proposed new “age test” also frustrates me. The draft applies an age test that means the R&D tax offset for firms under ten years old is refundable but for firms over ten years old, the offset is non-refundable. The proposed law change “looks through” to connected entities. So, our Harrison SPARC business – our designated R&D business unit – is four years old, but because it sits inside a 103-year-old group, it might be treated as an old business rather than a young one. A stand-alone start-up doing identical research would be assessed differently. So, I ask this question: what does the age of a parent company have to do with the value of the research its newest venture is conducting?

Established companies incubating new ideas in-house is a strength, not a loophole. We have the capital, the plant, and the people to take research to market. That is precisely where an incentive could be applied.

Manufacturing has fallen to under 6% of GDP, down from 25% in the 1960s, yet it still employs close to 900,000 Australians and generates more than $124 billion a year in value-add. That is a serious base on which to build sovereign capability. Sovereign capability comes from turning research into products we make here, and then applying those innovations in productivity-building industrial work.

If eligibility tilts away from applied R&D, the outcome will be one of two things: either more of the nation’s research effort relies on government and universities, with less of it reaching commercial outcomes; or the applied work moves offshore to countries with broader definitions. Neither scenario helps Australia.

Our submission asks Treasury to restate supporting activities so commercial development remains eligible, to apply the age test to the entity actually doing the R&D, and to align our definitions with the OECD countries we say we want to compete with.

I’m encouraged that the government is consulting, and I’d urge other manufacturers to put their own numbers on the table. If you don’t ask, you don’t get answers. If you run R&D in a manufacturing business, I’d like to hear how these changes land for you.