R&D tax scheme well-received, but issues still to be ironed out

Published on the 12/10/2018 | Written by Pat Pilcher


Research_Development tax scheme

Lower base, higher rate, tech inclusions...what’s not to like?

The imminent launch of a research and development tax credit in 2019 has received both brickbats and bouquets from the Kiwi market.

The credit is intended to stimulate innovation by growing business R&D. From the first of April 2019, a 15 percent tax credit on eligible R&D related expenditure will be available to New Zealand businesses. Businesses will be able to claim on up to $120 million of R&D expenditure annually, equating to possible tax credits of up to $18 million.

New Zealand’s current R&D expenditure is estimated to be 1.3 percent of GDP and compares poorly with the OECD average which is an estimated 2.4 percent.

“Woods looks to be seeking to ensure no business is worse off, and that many will be significantly better off.”

The government is hoping the R&D tax incentive proves to be a case of success the second time around. The previous R&D tax credit scheme implemented as part of the Business Tax Reform package in the 2007 Budget only ran for the 2008/09 financial year before being replaced with R&D grants.

David Snell, Tax Policy Lead from EY is upbeat on the upcoming tax changes, saying “A well-designed R&D tax incentive can boost productivity, create high-skilled jobs and attract economic activity to our shores. Many innovative businesses missed out on support under the existing Callaghan Growth Grants.”

Snell sees the R&D tax incentive as a win-win, particularly for small loss-making businesses. “[Innovation Minister Megan] Woods looks to be seeking to ensure no business is worse off, and that many will be significantly better off.”

The government has delivered an industry agnostic definition of R&D. This aligns with the policy intent of making the program broadly accessible, especially for software R&D. Inevitably, those businesses which benefit most will be those which carry out the most R&D, so high-tech manufacturing, for example, will do well.

“Smaller, R&D intensive loss-making businesses qualifying for the existing R&D tax loss cash out rules, do well under the new R&D tax incentive. They can claim under both schemes, potentially receiving 43 cents in the dollar for qualifying R&D spend.”

Snell’s positive sentiments align with those of Business New Zealand’s CEO, Kirk Hope. He says for many smaller businesses, the problem with a tax credit scheme was that without sufficient expenditure on R&D there would be no way to claim back a tax credit.

“The Government listened and halved the amount of R&D investment required from $100,000 to $50,000. This places the incentive within reach of more smaller businesses.”

Hope is also optimistic that the scheme could drive investment in R&D in New Zealand. “Raising the credit itself from 12.5 percent to 15 percent also makes the policy more attractive to more businesses. Along with a broader definition of research and development, these improvements should increase New Zealand’s rate of investment in innovation.”

Snell notes that the business sector had expressed concerns around the proposed tax policies as outlined in the original discussion documents released in April.

“Business expressed four big concerns on Woods’ preliminary paper – a 12.5 percent incentive was too low, refundability was essential for loss-making businesses and existing Callaghan Growth Grant recipients would be worse off, and software was potentially excluded from a too narrow definition of R&D. The Government’s acted on all the major concerns.”

Adding to these concerns is compliance. The announcement is still light on compliance requirements, which begs the question: just how will Inland Revenue police claims?

The clock is ticking as businesses start entering the program, so Government is under pressure to succinctly and quickly explain the compliance process, so companies can correctly comply and understand what type of evidence is needed to claim tax credits.

As with any other taxation issue, this will require a delicate balancing act. If compliance proves too onerous, take-up could be affected. If compliance requirements are lax, the government could find itself flooded with low-value claims which could see R&D rebate costs balloon and the scheme scaled back (remembering that the last R&D tax incentive lasted for a year before being repealed). Achieving the right balance is no easy feat. Many overseas governments have found themselves locked in an endless cycle of continually tweaking R&D tax refund schemes.

Because of this, Snell believes there is room for improvement. “I’d like to see comprehensive guidelines and exclusions to prevent pseudo-science from being claimed, especially covering the IT and manufacturing sectors. These guidelines and exclusions will be key in determining which projects do and don’t qualify and will hopefully prevent protracted disputes as are commonplace in Australia. Let’s hope this time – unlike 2008/09 – we have a sustainable balance.

“Refundability should also have been available across the board. Right now, only a subset of loss-making businesses will benefit. Also, Inland Revenue will administer the R&D tax incentive, supported by Callaghan Innovation. Details regarding how this process will work are limited at this stage.”

Compliance aside, Snell believes that the R&D tax could prove advantageous for New Zealand.

“Multinationals will locate high-value R&D activities where the business case stacks up. Access to markets, the availability of skilled scientists and engineers, intellectual property law and other regulations are all factors they’ll be looking at.”

Snell notes that the timing of the new R&D tax package is good.

“Woods’ globally competitive R&D tax incentive package looks attractive, in particular, compared to Australia. The Australian Government tabled legislation only two weeks ago aiming to reduce R&D tax incentives for the majority of large businesses to just four percent (the benefit is up to 13.5 percent for certain businesses). I’m seeing business already considering whether to relocate certain R&D to New Zealand.”

Business, however, is taking a wait and see approach. iStart reached out to several CFO’s for comment. Most said they had yet to get to grips with the scheme and declined to comment. Others cited political concerns around commenting on the issue.

 

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