Budget 2018: Tax
Reconfiguring the incentives for R&D
By Aaron Thorne
In the lead up to Budget 2018, the Government released its proposals to lift research and development (R&D) spending from the current 1.3 percent of gross domestic product (GDP) to a target of 2 percent of GDP. The solution put forward is to reintroduce an R&D tax credit regime with effect from 1 April 2019.
The bones of the proposed regime are similar to what we had under the previous Labour government, prior to the regime being repealed and replaced with the Growth Grant scheme administered by Callaghan Innovation. It comes at an estimated cost of $1.0 billion of operating expenditure over four years.
Whether the proposed regime will be viewed positively depends on who you are. The Callaghan Growth Grants have been very well received and have been highly valued by those who have received them. The benefit of the grants is that they are known upfront and can be counted on as a regular cash injection to help incentivise R&D and reduce the financial risk of innovation. The grants are internationally competitive and they recognise the spill-over benefits to New Zealand of having smart people doing smart stuff in New Zealand.
In comparison, R&D tax credits will be available to any business undertaking the requisite type of activity, without needing to jump through all the hoops to get a grant. The average business will appreciate getting a tax “reward” for good behaviour.
That said, the R&D tax credit regime proposed is restricted in what can qualify and it is highly likely that many of the current grant recipients will be ineligible to receive anywhere near the level of benefits they currently receive. The problem with the proposed regime is an inherent disconnect between the objective of increasing R&D and attracting large R&D firms to New Zealand and the requirement that the firm claiming the credit must effectively own the results of the R&D. It is this requirement that will not incentivise global businesses to use New Zealand as an R&D base; while a global business might be happy to base R&D here, it will want the ownership of the intellectual property (IP) closer to the markets where the IP will be exploited / the sales of the resulting product will be made.
The proposals are also unclear as to how the rules will apply to software. Under the previous regime there was a cap on the level of tax credit available for expenditure on software. Officials have kicked this for touch and are still working on these proposals. In this day and age, much R&D will have some type of software component and therefore the rules need to embrace and encourage software R&D.
FACTS IN A BOX:
The R&D tax incentive is a 12.5% non-refundable tax credit. It applies to businesses with eligible R&D spend of over $100,000 per annum (up to a maximum of $120 million). The rule will apply to expenditure incurred from 1 April 2019.
More work is being done how the rules will apply to software and what benefits can be obtained by businesses in a tax loss position.