Research tax refund cap could halt WA's Lithium Valley in its tracks

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Research tax refund cap could halt WA's Lithium Valley in its tracks

By Hamish Hastie

Lithium Valley could be over before it starts if a federal government cap on the research and development tax incentive isn’t reversed, the head of a Perth-based aspiring battery materials supplier warns.

The cash refunds have allowed smaller businesses and startups across a variety of industries to invest in infrastructure and grow their operations.

Lithium Australia's managing director Adrian Griffin said the $4 million cap on R&D tax refunds for smaller businesses threatened to "destroy" Australia’s crack at the lucrative and growing global battery supply chain.

A Lithium Australia testing lab.

A Lithium Australia testing lab.Credit: Lithium Australia

At risk was a potential 93,000 Australian jobs and $56 billion economic injection by 2025 that would come from a WA-based "Lithium Valley" supplying a world hungry for batteries to put in electric vehicles and commercial energy storage.

The federal government announced the cap in this year’s budget, following the 2016 review of the $3 billion R&D tax incentive program, which found it was not meeting its policy objectives and was being gamed by some companies.

Prior to the changes, which came into effect on July 1 but still need to pass parliament, businesses with an annual turnover of less than $20 million could apply for an unrestricted cash refund of 43.5 cents for every dollar spent on R&D activities.

ASX-listed Lithium Australia invests heavily in research and development with the aim of becoming a global producer of battery materials like cathode powder.

Mr Griffin said the refunds enabled the company to fund infrastructure needed to begin processing battery materials. As a founding director of Northern Minerals he cited its recently commissioned Browns Range heavy rare earths pilot plant as a success story.

He said the plant, south-east of Halls Creek in WA, would not have got off the ground had it not been for the federal government’s generous subsidies.

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It is the first non-Chinese producer of rare earth dysprosium in the world, another component crucial to modern electronics.

“A large proportion of the funding package revolved around the R&D rebate,” Mr Griffin said.

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“You can’t spend the rebate before you’ve got it of course but if you know its coming and know what the rules are you can get someone to finance the rebate because they know you’ve got a government receivable.

“It’s testament to the benefits of positive government policy.”

If the federal government didn’t get R&D incentives right Mr Griffin said companies could go overseas where grants were more generous.

He said Lithium Australia’s German operations could receive four times the help from the German government than in Australia if the cap stayed and countries like South Korea where battery industries were already well advanced were pulling out all the stops to attract businesses.

Germany doesn’t offer tax incentives for R&D but the 2017 Deloitte global survey of R&D tax incentives details other support on offer like grants up to 50 per cent of eligible project costs. Higher rates were available for small to medium enterprises.

“(The federal government is) taking the R&D rebate scheme and they’re shrinking it to something that’s microscopic to make sure that you can’t create the clusters that are required for Lithium Valley,” Mr Griffin said.

“What the government needs to do is look at what’s on offer in other countries that will compete against establishing that industry here.

“If you go out ten years it’s quite possible the (battery) supply chain is going to be worth three times the GDP of Australia.

“This is a really big prize and the way to do it is having the right structure to get as much of that industry established as you possibly can before the opportunity disappears.”

Clinical trials are excluded from the $4 million cap and Mr Griffin called for the battery sector to receive similar treatment.

Concerns over rorting of the system could be addressed by requiring expenditure pre-approvals, business plans and cash flow model pre-approvals as well as auditing the outcomes of the research.

Electric car companies like Tesla will fuel the battery and lithium boom

Electric car companies like Tesla will fuel the battery and lithium boomCredit: Tesla

“It’s a cumbersome means of doing it and I would not like to see an extra layer of accounting and auditing put in place but the fact of the matter is you can do it,” Mr Griffin said.

The cap won’t impact the big players in WA’s emerging lithium processing sector but they see its potentially detrimental impact.

Tianqi Lithium is currently building the world’s biggest lithium hydroxide processing plant in Kwinana at a cost of $700 million.

While the company won’t be significantly affected by the incentive changes Australian general manager Phil Thick said it would put the sector at a competitive disadvantage if companies were researching further down the supply chain.

“As an industry that’s obviously going to create some more difficulty if we genuinely are looking at pushing further down the supply chain in battery minerals in WA,” he said.

WA-based Neometals is looking at building a lithium hydroxide refinery in Kalgoorlie, 40 kilometres north of its Mt Marion lithium mine.

Managing director Chris Reed said their R&D expenditure had not come anywhere near the $4 million cap but he could see the position of Mr Griffin’s R&D-heavy companies.

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Mr Reed said the best way for the federal government to support the industry would be to keep a level playing field.

“Certainty about your operating environment is probably the biggest advantage. Setting the bounds and sticking to them,” he said.

Resources and Northern Australia Minister Matt Canavan dismissed Mr Griffin’s concerns over the $4 million cap and said the vast majority of businesses would not be affected by it.

“The vast majority of companies (over 10,000) are not impacted by the $4 million refund cap,” he said.

“The few companies (approximately 20) that are impacted will still receive large cash benefits, and keep any additional amounts to reduce their tax in later years.

“In order to exceed the cap, a company needs to be spending close to $10 million on eligible R&D in a single year — these are sophisticated businesses who are likely to have access to other sources of finance in addition to the R&D Tax Incentive to support their R&D activities.”

Mr Canavan said in exempting clinical trials from the $4 million cap, the government had recognised the critical role of clinical trials in developing life changing drugs and devices.

“Clinical trial activities are highly mobile in nature and the government wants Australia to remain an attractive destination for companies undertaking this important research,” he said.

Mr Canavan said the federal government supported a strong and sustainable lithium and battery metals industry but ultimately the decision to establish downstream processing of any mineral was a commercial matter.

WA Liberal Senator Linda Reynolds has led a delegation in Canberra spruiking WA's lithium industry over the past two days.

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