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Striking gushers and duds: drilling down into the budget's plans for technology

While all budgets have their winners and losers, the election-year budget is the one time in the cycle when everything is looked at again and the priorities for the next government (of either flavour) is signaled.

Great news for tech startups
One of the headline items in this year's budget was the changes for tax and R&D, especially for start-ups. However when this proposal was circulated for comment back in July 2013, there was a large gaping hole where software was meant to be.

For those who haven't caught up with the detail, this policy is a rather neat way of helping support the cashflow of startup companies with a strong R&D flavour.

While more or less cost and revenue neutral over time for start-ups (other than interest savings), it basically means that losses incurred during foundation years can now be "cashed out." Yes, real cash.

For example, if a company makes a loss of $150,000 in its first year, it can opt to claim back $42,000 in actual cash (the tax on $150k of profit). Previously that loss would have to be carried forward on paper, where the $42,000 would then be essentially applied against tax on profit in future years.

The great news is in the detail of the policy. When consulted on, the proposal was to exclude "the late stages of software development (for example coding)." This caused a collective face-palm among those familiar with how software development actually works in a startup environment and IITP raised concerns with the exclusion – and the fact that it would essentially exclude many in the tech space at a time the government was talking up supporting our sector  – with various ministers, officials and anyone else who would listen.

While the details is not out yet, the Revenue Minister has confirmed to IITP that this exclusion has been removed – software R&D is to be included. Hooray!

There are still a few (quite reasonable)  fishhooks. The tax loss is capped at $500,000 in the first year, rising to a total cap of $2 million in Year 6. Also, 20% of wage and salary expenditure must be R&D, which ensures that the R&D is actually happening in NZ, the company can't be publicly listed and crucially, IRD can recover the payment if the company is mostly sold, sells their IP, heads off-shore or is wound up (which may cause issues down the line).

All in all, a great policy. Well done.

Elsewhere in the tax detail, the government is clarifying the tax legislation for software developed in-house for company internal use, which will be capitalised and depreciated (and is current practice in some companies but not others).

School e-learning support
There has been very little in the budget about the teaching of ICT in schools, which is significantly disappointing given the need to address this area to deliver downstream on the skills pipeline.

However, it's good to see that teaching with ICT (ie e-learning, not the teaching of ICT) is continuing to be supported in a bid to ensure schools and teachers have the tools they need to take our classrooms into the future.

Although there was no announcement around supporting student devices, the budget did include:

  • professional learning to support the effective use of digital technology in schools (over $8.5 million in 2014-2015)
  • the upgrade of school ICT networks (over $58 million in 2014-2015)
  • the introduction of the N4L managed network for schools to provide fast, high quality internet with uncapped monthly data (around $211 million from 2014-2021) and
  • the provision of around 45,000 laptops for teachers and principals through the TELA scheme (over $18 million every year).

Good stuff. Now we just need the same for the teaching of digital technology.

$28.6M for tertiary ICT training initiatives, but government staying mum on detail
Staying in Vote Education but at tertiary level there is a provision for $28.6 million of extra funding for "ICT Training Initiatives," including $11.8 million of contingencies (and no, we don't know what that means either…)

We've sought more information about what this is. However, Tertiary Minister Steve Joyce's office is staying unusually tight-lipped on it – refusing to provide any detail and instead repeating "an announcement will be made in coming weeks."

There are several proposals that have been floating around in recent months that this might relate to, almost all outside traditional tertiary provision, and it will be interesting to see which has got the nod. We support almost any initiative that focuses on training in ICT, provided it's not lightweight (that is, it needs to be sufficiently broad and properly cater for more than just technical skills. "Lightweight" education, which doesn't equip students with the non-technical skills and knowledge our sector needs, has a tendency to come at great cost to both employers and students down the line).

Computers in homes gets a welcome boost  but for how long?
Also in Vote Education, it's great to see the government's support of the 2020 Communication Trust's Computers in Homes programme continuing with another $3 million investment in 2014/2015.

Computers in Homes helps get Kiwis in the greatest need online, with a comprehensive training programme and provision of a computer and free (for a limited time) Internet connection. This is a great example of a programme making a real difference tackling the digital divide in lower socio-economic communities.

This is both a bouquet and a brickbat, however, as the funding continues to be year-by-year with nothing committed beyond next year. Come on guys, this is a great programme that has shown outstanding results over a long period of time – it's time to give them some funding certainty over a three to five year period rather than making them waste precious time and resources coming cap-in-hand to government every year. Please.

Some other gems
And a couple of other things of interest to our sector:

  • $56.8 million of additional contestable science funding, which should cover ICT as well.
  • International cable: MBIE is continuing to work to secure a second international cable operator in the NZ market. In the event that the existing $15 million funding is not used by the end of this financial year, a process has been triggered under the Public Finance Act that can transfer the funding to next financial year with the approval of the Minister of Finance.
  • Maori ICT Fund: Contingency funding for Maori ICT has been set aside in the Budget, but policy is yet to be developed about how that money will be used, or allocated.

And the brickbats: what's missing?
We were interested to take a look back at some advice we provided back in 2011, outlining the steps government (and industry) needed to take over the following years to address the skills shortage and other demands from our sector. This was outlined in a five-part series we released at the time - how does the budget stack  up?

R&D funding broad enough?
Interestingly, the first recommendation from that work was a greater focus on R&D funding, which ties into this budget well. The point was made that while the R&D Growth Grants from Callaghan (now) are great, they only generally hit larger companies – there is a whole tier of up-and-coming tech companies that will be our next generation being left in the dark.

It's great that startups will now have access to some support (albeit by removing tax loss deferral rather than grants) but we still think there's a gap. Through the R&D Growth Grants, Callaghan Innovation provides R&D support for large companies spending generally millions on R&D, and through the new policy, startups will get a he and with  huge growth potential?

ICT educational research funding
We also hold some deep concerns around research funding for ICT-related areas, such as computer science, as opposed to areas such as maths. We're actively working with MBIE and others to get to the bottom of this.

While nothing really applies directly to this from the budget, the announcement of increased general science funding is positive, and especially that several new Centres of Research Excellence(CoRE) are being created, which opens up some great opportunities where our research communities have missed out in the past. We'll be supporting our tertiary research community directly in the likely upcoming bid to access this funding.

Undergraduate internships
Undergraduate internships is another area that was identified a while ago, but hasn't had much further progress from the government.

Callaghan Innovation funded 220 spots last year, an increase of 20 from 2011. We would like to see this lifted to 1000 places and the entry requirements opened up a little, to give students of programmes such as the wildly successful Wellington Summer of Tech internship programme more support.

Interestingly, providing these 1000 places would cost around the same as just one of the 20-30 Growth Grants given out each year, and it would be hard to argue that the impact wouldn't be greater.

Resourcing the teaching of ICT in schools
Another recommendation from 2011 was fixing ICT education in schools. We're happy to see some solid progress in this – we have the new achievement standards and there is an indication of some professional development support to teachers to teach it in this year's budget.

However, it's very disappointing to not see any specifically tagged funding to this area, especially given the Ministry of Education effectively introduced an entire subject (through the new achievement standards), then didn't resource teachers to upskill in the area. Having said that, we would expect to see some further announcements around that when Minister Nikki Kaye releases the 21st Century Learning Reference Group's report in a few weeks. We'll be better positioned to award a bouquet or brickbat then.

On balance
All in all, this is a solid budget from a tech perspective. While understandably missing much of the detail, from what we do know, the good certainly outweighs the bad and the removal of the software exclusion to the new R&D policy was a welcome change from the original proposal.

While there is a distinct lack of support for digital technologies in schools, which we were hoping to see, we are expecting some announcements in coming weeks and especially around the release of the report above. We'll cover this in more detail when it happens.

So the budget as a whole? Certainly in the bouquet category in our view.

Paul Matthews is chief executive of the Institute of IT Professionals NZ.

More by Paul Matthews

Comments and questions
1

I love the tech industry. I'm thrilled to see the industry booming, with successes small and large.

But the policies in part directed at this industry are a good example of corporate welfare that is simply not needed. Over time, corporate welfare will slow the performance of the ICT.

Very sad to see an industry become attached, maybe even addicted, to corporate welfare.