Callaghan Growth Grants axed

Woods confirms $657.2m scheme is on the way out, and how it will wind down. Questions remain about its replacement.
Science, Research and Innovation Minister Megan Woods explains why they are out.

On Budget 2018 day, the re-introduction of a 12.5% R&D tax break was confirmed.

But the status of a parallel coalition promise – to axe Callaghan Innovation Growth Grants – was not clear.

Late yesterday, Science, Research and Innovation Minister Megan Woods clarified that the $657.2m Growth Grant programme will indeed be shuttered at the end of the current tax year.

"The Growth Grant scheme will be closed to new applicants on March 31, 2019," the minister says.

"Businesses with an active Growth Grant on March 31, 2019, will have the option to continue receiving their grant until March 31, 2020. A temporary grant scheme mirroring the R&D tax incentive will be implemented to provide support for former Growth Grant recipients with insufficient tax liability to use an R&D tax credit immediately."

But while a core focus for Callaghan's 384 staff is now gone, and a sharp round of redundancies is presumably on the way, Dr Woods emphasises it will have a continuing role in support areas.

"All of Callaghan Innovation’s other services and products, including R&D Project Grants [a smaller scheme that typically tops out at $100,000 per grant compared to Growth Grants' $15-25m] and R&D Student Grants are not affected by the R&D Tax Incentive," the minister says.

"Callaghan Innovation will continue to play an important role in fostering R&D growth and innovation in New Zealand, particularly by providing advice and support for startups, innovation accelerators, and business collaborations. Callaghan will continue to deliver complementary R&D funding, such as Getting Started Grants, Project Grants, and Student Grants."

Controversial history
Callaghan Innovation was created by the Key government by fusing Crown agency Industrial Research Ltd with several R&D funding bodies. 

Now Callaghan is essentially being devolved back to the old IRL.

The Key government scrapped the Clark-Cullen 12.5% tax break for R&D — which had been in place for six months — shortly after taking office.

Callaghan Innovation's centrepiece Growth Grant programme constantly attracted flak as some companies allegedly tried to game the system, and others, like PowerbyProxi and F&P Appliances, used the grants to build intellectual property that then went to new offshore owners.

Critics like Sam Morgan said the government should not try to pick winners, and more so when it was looking at a pool of companies who had been rejected by private enterprise.

Growth Grant boosters said New Zealand's remoteness and low population meant a state leg-up through direct grants was necessary (yes, it was a topsy-turvy debate where National was arguing for more hands-on intervention by the state, and Labour for a tax break).

Questions remain
National tweaked the scheme, including adding clawback restrictions in the event of an offshore sale (although exactly how that works has been fuzzy, with discussions dragging on and on in a couple of cases).

And, after a savage review, Callaghan installed a new chief executive and tightened up its act.

But through it all, National kept pouring more money into the agency. Big top-ups with Budget 2016 and Budget 2017 saw Callaghan's four-year Growth Grant budget swell to $657.2m.

The elimination of Growth Grants will, in rough terms, cover the estimated cost of the 12.5% R&D tax credit.

A number of tough questions remain, however. Businesses around the country will be wondering what they will be able to claim as R&D. And, conversely, IRD will want to know what they can't, and what powers it will have to clamp down on those who try to game the system.

And loss-making startups will wonder if they've been left high-and-dry (see more discussion on the pros and cons of R&D tax breaks here).

Those businesses that do make a profit on which to claim an R&D tax credit will be looking across the Tasman to the much more generous tax-break scheme there.

NBR hopes to have an interview with Dr Woods on Monday to resolve some of those issues.

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