Businesses asked to comment on 12.5% R&D tax credit

LATEST: Coalition’s R&D tax break ‘unworkable,’ ‘uncompetitive’

The government has started a six-week consultation on its plan to introduce a 12.5% research and development tax credit.

Research, science and technology minister Megan Woods says the coalition government is committed to increasing spending on research and development to 2% of gross domestic product over the next 10 years. Business investment in R&D alone was 0.64 percent of GDP in 2016, and while steadily rising is still low compared to other small advanced economies, well below the OECD average of 1.65%, and also below the previous National government's target of 1%.

“New Zealand’s gross expenditure [including government spending] on R&D is 1.28% of GDP, much lower than the OECD average of 2.38%. We need new ideas, innovations and new ways of looking at the world if we are to build a sustainable and productive economy that delivers to all New Zealanders,” Ms Woods says.

The consultation paper includes canning the existing growth grants administered by Callaghan Innovation in favour of the tax credits although the government still has to decide how that transition will happen, including for those in the process of applying for grants. All of Callaghan Innovation’s other programmes, including R&D project grants and student grants, will not be affected by the introduction of a tax credit. Callaghan Innovation hands out around $155m of direct R&D grants annually.

Revenue Minister Stuart Nash says the tax credit proposed by the government will enable businesses of all sizes to engage in research and development.

“It will be a simpler process and will open access to those that have either struggled to access support or been shut out of the process in the past. The system should stand the test of time and give business the consistency and confidence they need to succeed,” Mr Nash says.

Earlier this week in a report on the New Zealand economy the International Monetary Fund said a well-designed R&D tax credit would be an efficient way of lifting R&D investment by business. It favoured that over suggestions of a progressive tax rate for firms.

“New companies and start-ups can be supported more effectively through other instruments, such as R&D tax credits or grants,” it said.

Under the government’s proposal – as in 2008 – the business imputation credit would be credited by an equal amount so shareholders will receive a benefit from the tax credit when dividends are paid.

Having your say

If it all goes to plan any R&D spending after April next year will be eligible for the tax credit. However the discussion document recognises that some startups are still not making profits where they could utilise a tax credit so work is still underway on how the system could be changed by 2020 to address their situation.

Businesses and others with an interest in tax have until June 1 to have their say on the proposal.

ManufacturingNZ has welcomed the government’s announcement, saying tax credits are a good step towards encouraging more innovation.

Its executive director Catherine Beard says the proposal could go a long way to increasing business investment in R&D.

But she says there are questions about how difficult it might be to navigate, whether more work is needed to ensure small firms can use it, what amount of information should firms have to provide to get the tax credit, and whether there should be more support for New Zealand companies doing R&D overseas.

Australian innovation expert Anna Lavelle, who served on the R&D tax incentive advisory committee for the Australian government, told NBR in Australia the tax arrangement was 45Ac in the dollar rebate – that is a cash rebate for companies with a turnover of less than $A20 million a year.

A strong advocate of tax credits, Dr Lavelle said however the small percentage tax rebate as proposed in New Zealand was not really going to move the dial. It is also important that it is a cash rebate rather than a tax offset because most small innovative companies don’t make a profit so they get no benefit from an offset, she said.

After the consultation ends, the Ministry of Business, Inland Revenue, the Treasury and Callaghan Innovation will provide the government with policy options based on the submissions made.

Mr Nash says the discussion paper sets out the main design and technical features of the R&D tax credit.

Businesses can see the full proposal and comment on it.

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