The Government's proposals to reshape the business research and development tax incentive remain of serious concern to industry and need further consideration before being passed by the Senate, according to the Australian Industry Group.

Chief Executive Heather Ridout said today, "If Australia wants to be a country that makes things we need to have an R&D regime which is effective in supporting manufacturing.

"Moreover, the overwhelming feedback from our members across a range of industries is that the Government's proposals, which are currently before the Senate, will impose undue restrictions on eligibility for the tax incentive. This will occur through the operation of the definition of core research and development, the dominant purpose proposed for supporting expenditure, the complex feedstock rules and the unfair treatment of research and development undertaken by the construction industry.

According to Mrs Ridout, business expenditure on R&D is fundamental to national efforts to raise productivity and international competiveness.

"On any measure the tax incentive supporting business R&D is high quality public investment. The Bill should not be passed in its current form."

"To allay business concerns and address the substantial uncertainties surrounding the proposals, Ai Group calls on the Government to ask the Board of Taxation to assess the very strong claims from businesses that undertake R&D that the Government's proposals will severely restrict eligibility for the tax incentive through what is a poorly targeted attempt to address claims that the tax arrangements have been misused by a handful of claimants.

"The Board of Taxation should examine the clear risk that the new proposals will unduly constrain legitimate business expenditure on R&D and consider alternative ways to address any misuse of the current tax arrangements. Any changes that are warranted could be legislated in time for operation from 1 July 2011," Mrs Ridout said.