Published on the 21/03/2019 | Written by Heather Wright

Kiwi R&D is up, but will trend continue under new scheme…

With just over a week until a new R&D funding regime comes into play in New Zealand – with tax credits replacing Callaghan Innovation Growth grants – companies are watching closely to see whether they’re really going to be better off under the new scheme.

From April 1, a 15 percent R&D tax credit becomes the new means of boosting R&D locally, with Callaghan Innovation’s Growth Grants programme – which provided $149 million in grants last year – phased out.

The R&D credits will be available to companies spending a minimum of $50,000 (down from the earlier $100,000, and well below the $300,000 required for Callaghan Growth funds) on eligible R&D – which requires ‘scientific or technological advancement of products, processes or knowledge’.

“When we were smaller and trying to grow we probably wouldn’t have been able to get a Callaghan grant, but we could have got the tax credit.”

Megan Woods, Minister for research, science and innovation, says an estimated 2,000 to 3,000 businesses will be able to benefit from the new incentive, which is designed to drive New Zealand’s overall R&D spend to two percent of GDP over the next 10 years. It currently sits at 1.37 percent – significantly below the average OECD spend of 2.34 percent, with countries like Israel at 4.25 percent.

The government has allocated $1 billion in order to drive R&D to two percent, with most of that going to the tax incentives.

“Lifting the amount NZ businesses are spending on R&D will help diversify our economy by encouraging new industries and companies to innovate, move further up the value chain and deliver higher wages for Kiwis,” Woods says.

She says the R&D Tax Incentive will have a broad reach across our economy – from start-ups to established R&D performers – to encourage businesses of all sizes and scales to undertake R&D.

Per Andersen, director of email signature software provider Crossware, agrees that the new tax credit is likely to have a wider reach and impact than Callaghan’s funding, with lower spending criteria and the likelihood of a less stringent definition of R&D.

Crossware was one of the last companies to receive a Callaghan Innovation Growth Grant – their funding was confirmed in January and runs for two years, providing 20 percent cofounding.

“If the criteria for the credit is just research and development then it could turn out to be much better than the Callaghan funding because you could get a credit on all your R&D. But it’s still a little unclear how it will work out and I don’t think we will know about it until next year when the tax return is due, and then it will probably take another year until everyone is clear on what is happening,” Andersen says. Despite the uncertainty, he believes the credit is a great idea and should include many more companies.

“While we’re bigger now, when we were smaller and trying to grow we probably wouldn’t have been able to get a Callaghan grant, but we could have got the tax credit.”

The company made its play for the funding grant after weighing up the respective merits of the grant versus the tax credit, with the grant option winning out.

“Yes, you can get a credit on the tax you’re paying and get 15 percent of your R&D cost back, but you only get it when you have the final tax bill,” Andersen says.

He notes, however, that the 15 percent could be used to set provisional taxes lower because companies expect to have the 15 percent tax credit.

“What we don’t know about is what is the compliance criteria, and how do you apply for it, and prove it’s R&D and not just regular development?”

It’s a concern also raised by EY National R&D lead Tim Benbow and EY NZ Tax policy lead David Snell, who said in October that a potential high compliance burden is a significant unresolved concern.

“A burdensome compliance framework will reduce take-up. Conversely, a too relaxed set of rules will lead to low value claims, programme costs blowout and scale-back of the R&D tax incentive in three or four years at most.”

Benbow and Snell noted that the last R&D tax incentive lasted just one year and are expecting a high compliance bar this time around given the ‘generous incentive rate and broad definition of qualifying R&D’. (Callaghan grants required R&D to be new and innovative in order to receive funding. In Crossware’s case the company is integrating new Microsoft technology into their product, which qualifies them for a grant, a new user interface, would not.)

Statistics New Zealand latest biennial figures, released last month, showed business expenditure on R&D increased by $548 million in the past two years to more than $2.1 billion last year.

R&D was up 64 percent across service industries, with the ICT, commercial and tourism service sectors all increasing significantly.

Computer services companies alone invested $586 million in R&D in 2018, up $150 million. Investment across information and communications services was up 40% to $431 million – accounting for 11 percent of all R&D invested in New Zealand.

Graeme Muller, NZTech chief executive, says he hopes the transition from growth grants to the credit system won’t slow that growth in R&D.

“There are still a couple of definitional issues to resolve to ensure software firms can continue to have access to R&D incentives and that high growth pre-profit firms are also given incentive to invest. However, it is expected that overall R&D investment by tech firms will continue to grow.”