R&D funding, 2018: Goodbye Callaghan, hello tax credits

Published on the 15/06/2018 | Written by Jonathan Cotton

Callaghan Innovation phased out

Will the government’s decision to abandon R&D grants kill NZ’s startup tech sector?…

With $1 billion over four years designated for R&D ($71.2 million invested this year, rising to $350 million by 2022) and the announcement that Callaghan Innovation’s Growth Grants will be phased out as of April next year, opinion is split about just what the Labour-led government 2018 means for R&D – and innovation – in New Zealand.

“This system will help us transition away from the current growth grants model, which is available to a narrower range of firms,” says Innovation Minister Megan Woods. “This represents a significant increase in the amount available to help smart Kiwi businesses to innovate.”

That new money, however, will take the form of a 12.5 percent research and development tax credit, allowing businesses to claim 12.5 cents on every dollar spent on R&D (provided that bill is more than $100,000 a year) and whether that’s a good or bad thing depends on who you ask.

“The removal of Callaghan Innovation Growth Grants mean many research intensive businesses will actually get less support for Research and Development.”

“Research and Development are crucial to the growth of the New Zealand economy,” says Mike Rudd, Staples Rodway Tax Director. “While this was well signalled in the election campaign, it’s great to see a billion dollars being spent, which is more than we expected”.

“The Labour Government is so far living up to its promises of no new taxes and balancing the books. This should help with business confidence.”

That tax credit will also come at the cost of the scope of Callaghan Innovation, with the grant programme planned to be phased out from the beginning of next April.

Still, Callaghan Innovation CEO Vic Crone is welcoming the plan: “The $1 billion over four years will help accelerate uplift of business investment in R&D which is a key lever in diversifying and future-proofing our economy,” she says.

“Currently, we’re not increasing our investment fast enough,” she says.

Politics being what it is, the National Party is taking its swings, saying the tax credit policy will benefit a small group of large companies and do nothing to help smaller businesses looking to grow.

“The removal of Callaghan Innovation Growth Grants mean many research-intensive businesses will actually get less support for Research and Development,” says National’s Science and Innovation spokesperson Parmjeet Parmar.

“Most of our highly research active companies are currently getting 20 percent of their R&D funding back through the Callaghan growth grants – which Megan Woods is axing. This will drop back to 12.5 percent and only if you’re making a profit to set the credit against.”

“Sadly most of the extra money will only go to companies that spend their time researching how to reclassify existing expenditure as R&D and give themselves a tax break.”

Parmar says that the new systems carry the risk of exploitation from companies savvy enough to reclassify existing expenditure as R&D – something Australia is currently grappling with.

“The removal of Callaghan Innovation Growth Grants mean many research intensive businesses will actually get less support for Research and Development,” she says.

NZTech chief executive Graeme Muller says that while the budget, in general, represents an encouraging boost for New Zealand tech and will likely lead to more digital and hi-tech jobs, he fears fledgling companies will feel the pinch if R&D grants are replaced with tax credits.

“The current consultation process presents an opportunity to have a real good review of the structural set up and equity for all high tech companies,” he says. “We also need to make sure the R&D incentives help both research and development – they currently focus on research and ignore development.”

“We need to make sure that research and development software activities are adequately addressed and recognized in the further work currently being undertaken by officials and changes to growth grants are delayed until this process is complete.”

Muller says that NZTech has “critical concerns” that companies currently receiving the growth grant will most likely receive less support, reducing overall investment in R&D.

“As it is a tax-based scheme it will also automatically exclude most high growth software firms that run at high levels of losses as they aggressively invest in product development and market expansion.”

“Further work needs to be undertaken to better understand the implications on high growth hi-tech firms, in particular, software firms.”

He says that New Zealand boasts a number of successful software firms like Xero, Pushpay, Soul Machines and Vend who spend significant amounts on R&D as their products need constant development.

“These firms run at a loss as they invest in global market growth and product development and yet will have no access to tax incentives as they are loss making.”

Muller says Australia is offering 38.5 percent R&D tax incentives with beneficial cashback schemes while Canada has an incentive climbing to 60 percent.

Traditionally, New Zealand has lagged well behind the OECD in terms of both public and private R&D investment. Currently, New Zealand invests just 1.28 percent of gross domestic product, compared to the OECD average of 2.38 percent; Business invests just 0.6 percent of the GDP.

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