R&D grants stop companies gaming system to get tax credits, Joyce says

New Zealand's research and development grant system administered through Callaghan Innovation stops companies gaming the system by reclassifying spending to qualify for tax credits, Science and Innovation Minister Steven Joyce says.

International experience shows R&D tax credits have a bigger cost to the government as firms reclassify their spending to meet qualifying criteria, something the grant system avoids, Joyce told Parliament's education and science select committee. Callaghan's systems had enough flexibility to reject applications if the agency didn't think a firm would use the grant on R&D, while avoiding passing judgement on the effectiveness of the research or development, which Joyce said would be a case of "picking winners".

"What the R&D grant doesn't allow is the reclassification of existing expenditure to obtain it, that was our criticism always of the tax credit," Joyce said. "The world over, the use of R&D tax credits has resulted in a far greater impact fiscally because people have reclassified expenditure."

Budget estimates show the government expects to spend $141.2 million on Callaghan's growth grants in the year ending June 30 and has appropriations of about $145 million a year through to 2019/20. That makes it the third-biggest allocation in science and innovation funding behind the annual $250 million for the Strategic Investment Fund, which provides a mechanism to start, monitor and contrast different initiatives, and an annual $190 million for the Endeavour Fund, which replaced the Ministry of Business, Innovation and Employment's contestable fund and has been tilted to long-term, high impact, mission-led programmes.

Last month Joyce announced an extra $410.5 million to fund science projects over the next four years in the budget, which is expected to lift cross-government spending on science and innovation to $1.6 billion a year by 2019/20, and is part of his drive to grow business investment in research and development to more than 1 percent of the economy.

Today, Joyce told politicians that increase was tilted towards mission-led and investigator-led programmes which typically have a longer horizon than commercially-focused projects "because we've done quite a lot previously at the close-to-market end".

Joyce rejected assertions by Labour Party MP David Cunliffe that funding for Callaghan Innovation and the Crown Research Institutes was down in real terms.

"That's only if you apply your deflator and say everybody should have everything inflation adjusted - the numbers don't change and haven't changed since 2010 and I don't accept your view," he said. "In nominal terms, there has been no cut."

(BusinessDesk)

BusinessDesk receives funding to help cover the commercialisation of innovation from Callaghan Innovation.