Details of R&D incentives crucial; doubt on ring-fencing rentals

The Coalition government's budget provides for research and development (R&D) incentives of $1 billion over four years.

Finance Minister Grant Robertson says New Zealand spends just 1.3% of GDP on R&D, below the OECD average of 2.4%.

The new incentive will give eligible businesses 12.5c in the dollar back and this will be available for all businesses spending more than $100,000 a year on R&D.

The government is also expecting to recoup an extra $726.3 million in revenue over the next four years through cracking down on tax dodgers, ring-fencing rental losses and collecting GST from offshore suppliers.

NBR understands the R&D incentives is new spending and not a substitute for Callaghan Innovation. No decision has been made yet on what's happening to Callaghan.

EY's head of tax policy David Snell says it's interesting New Zealand is increasing R&D incentives at the same time that Australia is reducing its and that should make investing in New Zealand more attractive.

“I'm broadly supportive of an R&D tax credit. Innovation is important and there's a case for business expenditure to increase,” Mr Snell says.

The $1 billion over four years sounds about the right amount to allocate, based on past and overseas experience, he says.

“This credit needs to be sustainable. Ten years ago we had a one-year wonder that wasted everybody's time including EY's and is definitely the businesses' concern, so design is vital.”

The incentive plan is out for consultation and Revenue Minister Stuart Nash says the government is "having very productive conversations with businesses around the country."

But one thing missing is a provision for “refundability," Mr Snell says.

That is, that businesses making losses need to be able to claim 12.5c in the dollar, not just have it added to accumulated losses, so that the cashflow of such businesses is enhanced, Mr Snell says.

“Also, there needs to be a strong audit component because this is the kind of area that could blow out if not tightly managed and well designed.”

IRD enforcement
Mr Snell says he thinks the government could have allocated more money to Inland Revenue to ensure outstanding company tax returns are filed.

The government has allocated $31.3m over the next four years to the IRD and expects it to recover about $183.3m.

Mr Snell says it is only assuming a return of $6 for every dollar spent on enforcement when the IRD's track record shows it collects about $8 for every dollar spent.

And a recent study showed small businesses are underestimating tax by about 20%.

“There has to be scope for Inland Revenue to use a stick and carrot, education and more audit funds to close that gap,” Mr Snell says.

He is sceptical about the estimate that ring-fencing landlords' rental losses will bring in at least $325m over four years.

“I'm not convinced it's good policy. I don't see anything that's so special that will have a significant impact on the property market,” he says.

“My initial reaction is that I'm surprised that's going to bring in $300m – I'll be investigating that further.”