[00:00:00] Host – Grace Jennings-Edquist: Australia has no shortage of smart ideas, talented entrepreneurs or innovative businesses. But turning innovation into long term growth and productivity remains a core challenge. In this week’s episode, Kate Whitehead from avant Group explains why the research and development tax incentive remains one of the most important tools available to Australian businesses, and what the proposed changes could mean for innovation, investment and Australia’s slowing economy. Then leadership expert Kylie Paatsch explains why so many businesses are struggling with low ownership and disengaged teams, despite investing heavily in engagement strategies. From SoundCartel, I’m Grace Jennings-Edquist, and this is Business Essentials.
What the R&D tax incentive changes mean for innovation
When it comes to productivity and commercialising innovation, the data shows Australia is still falling behind, as demonstrated in the June announcement of a low annual rate of growth at 2.5%, with the GDP forecast to continue to decline through 2026. Kate Whitehead, founder and managing director of avant Group, says the R&D tax incentive remains one of the most important tools available to Australian businesses investing in technology and future growth. So how significant are the proposed changes to the R&D tax incentive, and what impact could they have on innovation in Australia? Kate explains to Nicole Goodman.
[00:01:36] Kate Whitehead: Look, it’s interesting timing because obviously GDP per person back in 2002 was projected to grow to 90% over 40 years. But by 2023, that projection had fallen to 57%. And that was a report that was released by the Strategic Examination into R&D. So that just shows we’ve got a productivity issue with this economy. And unfortunately it’s getting worse. So one lever that you can obviously always pull as a government is the R&D tax incentive. So it is a large, broad based program that is designed to encourage R&D. And look, some of the levers being pulled are positive, but then some of them are also negative. So proposed changes have included things such as raising the refundable offset to companies with a turnover under $50 million, which is great because a lot of global companies, when we’re looking at turnover and refundability, it aggregates their global turnover. So at least then that means it should hopefully encourage more investment domestically into R&D. But one of the big problem areas is this cap to ten years of refundability. So if an organization is over ten years old, they will no longer be able to avail themselves of refundable offset. So that’s going to have a strategic impact on where businesses decide to do R&D. But more so, it’s actually really problematic for businesses, which R&D cycles take longer than ten years, such as biomed. So those organizations rely on the R&D tax incentive to keep them funded, so without having a refund event at the end of that ten year window, they just won’t make the investment domestically. Holistically, I think R&D is a lever, but it’s not the only lever. There really needs to be more broad based tax reform in order to encourage more domestic investment in Australia. And unfortunately, I feel that the budget probably fell flat. Of that.
[00:03:22] Nicole Goodman: Australia has historically struggled to commercialise innovation at scale. How important is the R&D tax incentive in closing that gap?
[00:03:32] Kate Whitehead: So look, it is important. And you know, Australia at the moment unfortunately ranks 105th out of 145 nations in the Harvard economic complexity rankings. So we’re actually sandwiched in between Botswana and the Ivory Coast. So what that says is that our GDP is really from digging stuff up and exporting it. It’s not actually from value added activities. So we really need to be encouraging activities that value add to the economy domestically in order to close that gap. Overall, I feel that, you know, unfortunately, as I mentioned earlier, the budget’s not quite hitting that mark. Our commercialization gap is very well documented. We rank 25th globally for firms that introduce novel products, and 32 out of 36 OECD countries for industry collaboration with researchers in universities. You know, the R&D tax incentive is our largest format for support to encourage R&D. But we’re also seeing an ongoing decline in business research investment. And I think that it’s a general broader economic indication of where we’re heading. It costs money to invest in R&D, and businesses need to make a strategic decision in a high cost economy, whether or not you would do it domestically. And unfortunately, we’re seeing this decline because I think, you know, we’re one of the highest corporate tax jurisdictions in the world. And then now we’re seeing additional disincentives with, you know, the CGT rates up to 47%. It feels like a bit of a pressure cooker that’s going in the wrong direction.
[00:04:59] Nicole Goodman: And of course, if we talk about the risk of increasing complexity around eligibility and compliance. This can also discourage the very businesses that the policy is trying to support. Right?
[00:05:09] Kate Whitehead: That’s exactly right. So 86% of the applicants elect to use a research and development tax incentive advisor. The legislation is so complex that most accounting practices don’t advise on it either. So there are specialist firms such as avant Group that exists purely to deal with this complex legislation. And every time something gets tweaked and changed, it adds to the complexity. It doesn’t decrease the complexity. And we’ve seen that with these changes that have been proposed. And the other thing is that it’s a dual administration. So it’s administered by two separate government departments being Disa and the ATO. Again, adding more complexity. It’s not a simple program, unfortunately.
[00:05:49] Nicole Goodman: Kate, if innovation is ultimately the engine of long term productivity growth, are we investing seriously enough as a country?
[00:05:57] Kate Whitehead: I think no, and the numbers are pretty unambiguous. Our productivity growth is at a 60 year low. Business R&D is R&D spending is falling, and it’s roughly half of that of our peer OECD counterparts. So that is as a combined data. Just saying that we’re definitely not doing a good job of it. Total government R&D investment is up in nominal terms, but as a share of GDP it’s barely moved. So that’s showing that Australia is not a country that’s attracting investment for people to undertake R&D. We do have some really strong niche capabilities in certain sectors, such as the medtech sector. Clinical trials is a key area for us domestically in Australia, and it’s one that we do a really good job of. But we’re just seeing overall a lack of R&D expenditure across businesses more holistically. And, you know, that is impacting our productivity. And it will have flown negative impacts on our quality of life, our quality of living over the next couple of decades. And the third report that was released, it really was a wake up call saying, we’ve got a problem, we need to change the dial. And unfortunately, we’re just not seeing the policies at a broader perspective, encouraging that we’re seeing them being pulled back. We’re seeing caps changing. We’re seeing Refundability changing. It’s coupled with, you know, capital gains tax implications. It does feel like a bit of a pressure cooker, unfortunately.
[00:07:13] Nicole Goodman: And lastly, what do you see as the solution then to the issues around R&D?
[00:07:18] Kate Whitehead: It’s probably a few different things. So simplification I think is always pretty key when it comes to any amendments to tax legislation. And I know it’s easier said than done. Of course, it’s not an easy task trying to make these changes at a government level. But, you know, the grandfathering of tax laws makes complication inevitable within the way that you interpret and administer tax law. So Australia is really complex tax legislation. So simplification I think is pretty key. The other thing I’d be doing is I would administer it within one department rather than two. So it should be a dual administration. The upfront eligibility process should be faster and easier as a small business, if you elect not to use an R&D advisor, you should be able to do that and it should be easy for you. But to be able to interpret tax law and run the risk of penalties if you get it wrong. Seems a little unfair. So having an upfront process that would enable people to apply upfront for a quick eligibility check and just get a bit of a nod around, yep, this would comply with the legislation. I think that’s pretty key and it’s a really easy thing to do. I would also decouple the global aggregated income for Refundability. We’ve got clients that are subsidiaries of overseas companies, and their domestic revenue might only be 1 or $2 million. But the parent co and say the UK has domestic revenue over there of, say, $80 million, and that means they’re not in a refund position.
[00:08:42] Kate Whitehead: So what they do is then they weigh up their investment and say, well, should we be employing smart engineers in Australia to do the R&D, or should we be doing them domestically in the UK, where it’s a little bit easier because there’s no real advantage and we’re seeing the R&D go offshore. So decoupling the revenue from global aggregated turnover, I think would be pretty key because that will drive that investment. But I also think, as I said, it’s one lever out of a bunch of levers that need to be pulled, you know, holistically. We need to be looking more broadly around how we encourage innovation across organizations. And R&D is one area, but the other things are looking at the CGT, looking at the corporate tax rates, even to the point of looking at employee tax rates as well. You know, it does need a broad range approach to the way that we tax in this country. That’s my personal opinion. And I think that if we did that, it would certainly work well. We can model what we’re doing in overseas counterparts as well. So you see models in, say, the UK, Canada, even in Germany with the Fraunhofer Institute catapult in the UK, they’ve got some really strong innovation and growth centre investments, and they’re working really well at commercialising. So emulating and looking globally at what’s working and putting that into the Australian jurisdiction is always another option that we could be looking at to encourage that broader investment.
[00:09:56] Host – Grace Jennings-Edquist: That was Kate Whitehead, managing director of avant Group.
Why engagement isn’t your problem – connection is
Now to a problem many businesses are quietly struggling with. Despite investing heavily in engagement initiatives, many leaders still find themselves dealing with low ownership, poor alignment and teams that just aren’t stepping up. Leadership expert Kylie Paatsch patch says the issue isn’t engagement, it’s lack of connection. Her latest book, The Connect Effect, explores why so many engagement strategies fail to deliver real performance. Nicole Goodman starts by asking Kiley, why do so many engagement strategies fail to deliver real results?
[00:10:39] Kylie Paatsch: I actually think that engagement is the symptom. It’s something that we measure. It’s an output and an outcome. And what often happens is leaders will either experience engagement not happening, or perhaps if they work in a business where they have an engagement survey, they’ll get engagement results and they’ll see that they’re not at the standard that they will like, and what they tend to do is then go and quickly react to engagement. So they’ll throw out loyalty programs or rewards or, you know, they’ll brainstorm really quickly on this is what engagement is. We’re not as engaged as we could be. So we need to throw this and we need to throw that at it. And what I often say to leaders is it’s not engagement itself. That’s just the outcome. It’s what’s sitting beneath that. And so usually it’s a lack of trust and a lack of connection.
[00:11:40] Nicole Goodman: Well, you talk about connection in leadership. What does that actually look like in practice?
[00:11:46] Kylie Paatsch: Yeah. So firstly it’s like how you relate right to the people that you are leading. I always say connection is a feeling. So it’s about someone who works for you feeling like they matter to you and that you matter to them. And so in leadership, how you relate to others is first and foremost really, really important. I think what else it looks like in practice is the effort that you put in. So like all relationships, it’s important to be present. It’s important to be respectful and considerate and to give time to a relationship. And the other couple of things are, you know, how you communicate. Are you direct? Are you abrupt? Do you limit your communication? Is it very brief versus being really clear and making the time to communicate? And when you do communicate that you do it with. I like to say compassionate curiosity. So you’re very generous in your thinking and the way that you ask questions, and you inquire in a way that you assume good intent rather than interrogate the other way. So there are a couple of things that I think are really helpful when it comes to connection and leadership.
[00:13:07] Nicole Goodman: For small and medium business owners, then how does a lack of connection show up in their team’s day to day?
[00:13:14] Kylie Paatsch: I think how it shows up is things are a little bit more transactional. So things will just happen on the surface level. People will do the bare minimum. They won’t really sort of lean in or do anything more. They often won’t show as much initiative as you would like. I think it also shows up a lot in behaviour, so you will find that there’ll be a fair bit of defensiveness, dismissiveness. Often there will be a lot of excuses. So I didn’t do that wasn’t my fault. So there’s a fair bit of blame that sometimes comes up and a lack of ownership. And I think what you also find in a business is you’ll have higher levels of absenteeism, people taking time off, and you’ll actually find that you’ll have fairly high levels of staff or employee turnover. And they’re often really good indicators that that’s happening.
[00:14:13] Nicole Goodman: And that has an impact. And so how does stronger connection translate then into better performance. Ownership and accountability.
[00:14:22] Kylie Paatsch: I feel like with performance, we work harder for people that we trust, and we work harder for people that we are connected to and connected with. And so what we naturally see is that there’ll be more loyalty. There’ll be more of an inclination to actually want to help out, to show initiative, to do more. And so we see performance go up when it comes to ownership. Again, when there’s a strong relationship, when there’s trust there. People will be willing to actually take some risks, try out some things, come forth with ideas and solutions and suggestions because they’ll feel safe to do so. So you’ll get more of that. And then when it comes to accountability. Some of the same things because people will feel safe to own their mistakes, so they’ll be okay to put up their hand and say, hey, I messed that up. Wasn’t quite right. But you know, I own it and here’s what I’m going to do to fix it or I’ll do something a little bit differently.
[00:15:28] Nicole Goodman: Lastly, Kylie, what’s one thing that a leader could start doing differently tomorrow to build a stronger connection with their team?
[00:15:36] Kylie Paatsch: Yeah, I think the one thing that I always say to leaders is get to know your people beyond their role. Get to know I call it know their why. So know why they do what they do, like what really motivates them and drives them. Know their wants. Know their goals. Know what they aspire to do, what they want to actually get out of the role and the job that they’re in. There’s a couple of things that happen with that. Not only will your people feel like they’re heard and understood and that you care for them when you actually find out what they want to do and you actually work with that, you’ll get greater loyalty, you’ll get greater engagement, you’ll get greater buy in to things. And the other thing that I always say is know their white, know their wants and know their way. So know how they prefer to communicate. Find out how they like to receive information. Just find out which way works for them. And I think now we live in a society where different generations expect us to find these things out. So know your people beyond the surface level is the first step. And then I think the second step is to show them that, you know, so if you find out what their motivations are or what their strengths are, or the things that they want to do, turn that into something tangible. So if someone says, oh, look, I’m really creative and I like to problem solve, next time you’ve got a problem, come to them and say, hey, I know that you love problem solving and I can see it’s a strength of yours. Could I get some help from you on this challenge that I’ve got right now? So know them and show them would be a good start.
[00:17:24] Host – Grace Jennings-Edquist: That was Kylie Paatsch, leadership expert, founder of Kylie Patch Leadership and author of The Connect Effect. Thanks for joining us for this week’s episode. Follow Business Essentials Podcast across social media and head to www.BusinessEssentialsPodcast.au for more. Business Essentials is a SoundCartel podcast. Producers are Nick Schildberger, Nicole Goodman and myself. Technical production is by Pete Letts. I’m Grace Jennings-Edquist thanks for listening. We’ll bring you more business essentials next week.
