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

Minister Megan Woods says the government is committed to lifting business spending on R&D.

Research, Science & Development minister Megan Woods says she's committed to lifting R&D investment.

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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.

RELATED VIDEO: Australian biotech expert Dr Anna Lavelle on R&D tax credits (Mar 29)

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This appears to incentivise companies currently receiving grants to shift R&D activities to Australia.

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My reading is the 20% Growth Grant becomes 12.5% tax credit. Net cost 7.5% but probably a lot less administration as you don't need to deal with Callaghan.

Is the lose of 7.5% enough to shift R&D to Aussie given higher absolute costs.....my guess would be salaries are 10%+ higher etc.

Doubt the change will be enough for people to move......although might make people at least do the exercise.

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20% cash back becomes 12.5% tax offset. That’s a massive difference. Especially if high growth and making a loss.
An investor can choose between leveraging their investment in an Australian firm with a 48% refundable credit or an NZ firm with a 12.5% tax offset.
Xero can do R&D in Wellington or Melbourne.
Even ignoring competition between different countries’ R&D schemes, I just don’t see how 12.5% makes a difference.
If you are considering an investment in R&D, then all other things equal I don’t see how 12.5% changes that decision.
It will absolutely achieve the goal of jumping a few places in an OECD report. The only real incentive here is to report current R&D spend.

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So if in Aussie Xero get 48% rebate verses a 20% rebate now in NZ - why is not ALL of their R&D being done in Aussie now? It is not just about the %. That is my point. The issue for Xero is they go from 20% rebate to 12.5% it is the marginal change that will determine if they change their activities.

Of course for a lot of companies not blessed by Callaghan they go from a 0% rebate to 12.5% - they will be happy.

Accept that they do need to deal with companies that are not paying tax - will read the document and see what is proposed. I am pretty sure there is an existing rebate facility in the NZ tax code for this.

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I trust you will make a submission suggested only NZ based R&D will be eligible for tax rebates.

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That is the proposal - scope for some overseas R&D where local expertise not avaliable.

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I wouldn’t be trying to claim Australian based R&D In NZ either way. Australia allows NZ companies to claim R&D with the ATO if they have a taxable PE.

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Just drop the company tax rate to 25 or 26% . That is so much easier, so simple to administer. Okay Ms Woods? Done deal? Excellent.

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Do something sensible. Are you mad? This is NZ, we don't do sensible. We only do costly and stupid.

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Scrap the Callaghan grants forget R&D credits it will be rorted big time and very expensive to administer these are just feel good schemes simply cut the Company tax rate

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This looks very much like a distraction issue from the really big problems Labour-Greens-Winston have just dumped on businesses.

- Big fuel tax increases to pay for uneconomic 'green' transport projects that do nothing for business while scrapping much needed roading projects that would actually help businesses.

- Employment law re-writes that are very business unfriendly.

- Terrible, radical oil exploration ban that signals to global business community that NZ is now radical, regressive and negative towards future business opportunities, this is the most damaging and hard to measure as it is mostly felt in lost opportunity. Entrepreneurs and investors will now overlook NZ because political risk to doing business is clearly heightened.

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Exactly. This Government's message for business is:-

New Zealand is open for business - probably. Well, maybe, sort of, sometimes, but probably not because we don't really like you business people. In fact, we think you stink.

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Does anyone know why NZ has such a low proportion of business R&D? I think the Productivity Commission noted we’re below 40% for the private sector Vs c70% average for most countries.
Is it partially due to under-reporting as J R suggests?
And who benefits from all the public sector R&D?

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Chasing R&D as a %GDP is one of the bluntest tools and measures you can use. Germany has high R&D as it is weighted by the auto industry, German SME R&D is, if anything, declining. NZ is a country of very small companies so R&D probably looks a lot more like "D", a few guys in the back building a new product, real time. France, Germany have high productivity, NZ and the UK have low productivity. Focusing on productivity is where the Government should put its focus. Productivity is about innovation and new systems. It makes NZ competitive internationally and better able to compete also against imports. This is where investments can be encouraged. Finally don't drip feed in tax breaks. An alternative could also be tax incentives for investors as the UK Government does with EIS and VCTs.

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Just scrap Callaghan completely and be done with it. If there is a surplus, give it to the homeless. They will utilise it better

Don’t bother with complicated R and D rebates. Just drop the overall tax rate to 25%. The only reason people do R and D is to make more money in the future.

There is no point only stopping half the rort. Just put an ace through it all now. Incubators and all

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Just like the good old days when you reclassified expenditure to claim the incentive. And no chance of being caught as Tax Inspectors werent experts in your industry so didnt know the difference.

So many gaming opportunities. This kids just dont know the history of the good old days.

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Back in 2008 as a recently minted grad I spent a few weeks reclassifying opex as R&D and writing intra company contracts as capital investment... This was for a listed company. Total rort. Cut company tax rate remove all the corporate welfare and free up land for housing... Capital intensive economy will follow

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Same rort played with grants... .but under IRD potentially large penalties if caught verse wet bus ticket from Callaghan.

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Are you serious Andy?
How do you turn a capital investment into R&D?
You must know a lot more about these things than I do.
But I will say if my employer wanted me to help construct a rort I’d walk rather than get involved.
To those contrasting the new proposal with Callaghan, can I point out that the 20% grant becomes taxable income, so it’s not a simple matter of comparing %ages

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So after tax about the same value... so to earlier point no real incentive to change behaviour.

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Less R and D in reality because this is too little. Much more rorting as mowing the lawn becomes Rand D. Another bit of amateurism Yes Callaghan paper writng is
complex but you at getting public money.

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Callaghan system is rorted also. As per above after tax not much different to 20% grant.

Many companies doing R&D don't qualify so they are subsidizing larger companies or the ones that have "mates" at Callaghan. Trust me my experience of Callaghan is they don't have a clue about real innovation but really quick to jump on any success and claim credit.

Where as the IRD will just get on and do their job.

Level of paper work is OTT probably costs 10x the amount to administer than is rorted.

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