R&D tax-break rate, other details, up in the air

The government’s R&D strategy is operating on two different tracks.

The strategy for Crown agency Callaghan Innovation’s Growth Grants is already cemented in. The $657.2 million scheme will be closed to new applicants from March 31 next year.

But details of the coalition’s replacement mechanism for boosting R&D: a 12.5% tax break is up in the air as is the future shape and role of Callaghan.

Science, Research and Innovation Minister Megan Woods was asked about a host of issues related to the tax-break, and Callaghan, including: profitless companies; the 12.5% rate being uncompetitive with Australia; startups that fall under the $100,000 R&D threshold for the tax break; and the potential for gaming the system.

The minister’s headline response to each: Good question but it’s under consultation until June 1. Anyone with an opinion should contact MBIE (she's also been reading NBR and can quote from articles, so do keep leaving those comments about cash-backs and other ideas).

Even the 12.5% is up in the air, and could potentially be changed by the consultation process, Dr Woods says (already, Grant Robertson has floated 15%).

But the minister’s extended comments and well-marshalled arguments on several of the points indicate her thinking.

Innovation expert Anna Lavelle recently told NBR that an R&D tax incentive has to be sizable to spur companies into action. In Australia, companies with less than $A20 million can offset 43.5% of eligible spending.

Dr Woods says the proposed 12.5% compares favourably internationally, and that each country’s R&D regime has to be seen in the context of its whole tax system.

“[New Zealand’s proposed 12.5%] certainly compares favourably with the Australians, which for large profit-making businesses is actually at 7%, if you put it in the context of other taxes that are being paid,” she says.

“Any large company that’s thinking about moving its R&D to take advantage of tax incentives is going to be sophisticated enough to be able to think about taxation in all its forms and what the whole package looks like.”

The minister says at the moment, some 300 companies have Callaghan Growth grants but 25% of R&D takes place at just six companies [MBIE later clarified the figure to 26%. It would not name the six companies].

She says, by contrast, MBIE estimates an R&D tax incentive could help 2000-3000 companies as New Zealand tries to boost its R&D spending as a percentage of GDP from 1.28% to 2% (the OECD average is 2.4%).

For profit-less companies, she's leaning on the consultation process for bright ideas. She does say that the end-date for Growth Grants was pushed out a year as a nod to the fact it will take some time to come up with a solution.

Will offshore companies be eligible?
One of the few areas where Dr Woods is willing to give a black-and-white answer is the question of whether offshore companies will be eligible for the tax break (due to kick in on April 1 next year).

And it’s a “yes.”

“We want to attract international companies to set up and do R&D here,” she says.

“We’ve seen Larry Page and Zypher and the flying cars investment [in Canterbury], which is pretty exciting, but of course it’s not only those businesses themselves that benefit. You get whole eco-systems growing up around a particular business. We’ve seen that with Rocket Lab and we want to have some big players.”

Officially, it’s another element that’s still under consultation. But the direction of the minister’s thinking is pretty clear.

Rules will be set up to make sure an offshore R&D investment benefits the economy, she says.

Hodgson: new role for Callaghan, no deep cuts
Pete Hodgson, who replaced Sue Suckling in the Callaghan chair in January, says he can understand why the status of Growth Grants has been settled while other elements of R&D strategy are still being consulted on.

“It’s a large chunk of work, so I can understand why MBIE would want to break it into two chunks,” he says.

It’s not surprising Mr Hodgson would be diplomatic. The ex-Labour cabinet minister could be seen as the most political of appointments; he served as in the same portfolio that Dr Woods holds now in the Clark-Cullen government that first introduced a 12.5% tax break (that was eliminated within months as the Key government came to power in 2008).

The last National government formed Callaghan Innovation by merging the old Industrial Research Ltd with several grants funding bodies.

Mr Hodgson resists the notion that Callaghan is being devolved back to the old IRL.

He says that would imply a rump of scientists, when many Callaghan staff now advise on R&D issues such as protecting intellectual property or play a facilitation role in research and development as they hookup companies with researchers in various agencies.

And although the four-yeur budget of Callaghan Growth Grants is (or was) set at a substantial $657.2 million in National’s final budget, Mr Hodgson says administering it only accounts for roughly 20 of the Crown agency’s 385 staff. Any staff cuts relating to the elimination of the grants will be modest, he says.

He adds that project and student grants will remain, though acknowledges they are “small potatoes” next to the Growth Grants.

About two-thirds of Callaghan staff are ex-IRL and working at IRL’s Gracefield site at Lower Hutt he says.

No more cupboard love
Although he sees limited staff cuts, Mr Hodgson says a culture and strategic change is on the way for Callaghan.

“We’ll have to improve and extend and use different ways of making contact with people,” he says.

“Some came to us because we’ve got grants. But we’ll find new ways. New Zealand is a small country.”

For her part, Dr Woods says “What Callaghan can do really well is be a bit of a dating agency for innovation, as it were, that can link up companies that want to invest with providers that are doing the research. So I think there’s a really exciting future for Callaghan.”

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