R&D Tax Credits: Reflections from New Zealand and Australia
Tax Alert - December 2017
By Aaron Thorn (Deloitte New Zealand Partner) and Greg Pratt (Deloitte Australia Partner)
New Zealand has historically underperformed its OECD counterparts in the investment of its businesses in Research and Development (R&D). Whilst the broader benefits of R&D in growing an economy are accepted, the debate has continued as to the best way to encourage and incentivise a higher level of business R&D investment.
For the 2008/09 income year, New Zealand arguably had one of the world’s best R&D Tax Credit regimes which gave innovative businesses a potential 15% tax credit for R&D. Alas, for political reasons that regime only lasted one year, but with the formation of the 52nd Government of New Zealand we now have the prospect of a revived R&D Tax Credit Regime back on the table. Not only that, but the Minister of Research, Science and Innovation, Hon Dr Megan Woods, has set an ambitious timetable of having a 12.5% R&D tax credit regime in place for the 2018/19 income year (this timeline is subject to receiving and considering official advice, which we would expect to recommend a later application date). With such an ambitious timeline, the most efficient approach for everyone would be to re-enact the rules which applied in 2008/09.
Given this initiative is being driven by the Minister of Research, Science and Innovation rather than the Minister of Revenue, it has so far avoided being included in the range of tax topics to be analysed by the Tax Working Group.
So what does an R&D tax credit regime mean for taxpayers? Well it is one more avenue for taxpayers being encouraged and supported to invest in innovation, delivered in a way which doesn’t require applying for grant funding. Our expectation is the new R&D tax credit regime will sit alongside grant based funding, and the existing R&D tax loss cash back regime (refer to our December 2016 Tax Alert for more information about this regime).
As we wait for more details on how the new regime will work, we thought it was worth reflecting on how the R&D tax credit regime operated in 2008/09 and what Australia has done in this area in recent years.
The New Zealand Experience
In the 2008/09 income year claims were made for R&D Tax Credits which totalled $154 million (source: IRD Annual Report 2010), this was roughly in line with the forecast cost of the regime of $630 million over four years when the regime was first introduced.
The purpose of the R&D tax credit regime was to encourage greater innovation and dynamism in New Zealand businesses and to make New Zealand a more attractive location for innovative businesses. Because of the political issues surrounding the R&D Tax Credit regime, with taxpayers knowing that the regime only had a single year of life, in our experience fewer taxpayers made the effort to understand the regime and make claims that might have otherwise been the case. It was too soon to be able to comment on whether the previous regime was successful in encouraging innovation.
The Inland Revenue invested heavily in preparing guidance on the operation of the regime. In our experience Inland Revenue robustly tested a number of claims made by taxpayers, but on the whole was accepting of credits that taxpayers thought they were eligible for.
The Australian Experience
The Australian R&D Tax Incentive regime operates in a slightly different fashion to the old New Zealand R&D Tax Credit regime, whereby rather than receiving a tax credit, tax offsets are available. There are two rates:
- a 43.5% refundable tax offset which is available to companies with a turnover under $20m. If companies have sufficient tax losses, this entire amount can be refunded; if the company is tax paying, the benefit equates to a 16% tax credit (given the small business tax rate of 27.5%).
- a 38.5% non-refundable tax offset which is available to companies with a turnover of $20m or greater. If a company is in tax losses, this benefit is carried forward (similar to tax losses); if the company is tax paying, the benefit generally equates to a 8.5% tax credit (given the standard corporate tax rate of 30%).
In recent years we have seen a continual tightening of the R&D rules in order to restrict the ability of businesses to claim the tax offsets and to place limits on the level of R&D tax incentives available. The objective of these recent changes is to constrain fiscal costs.
In addition, a review of the R&D Tax Incentive was requested by the Australian Government as part of the National Innovation and Science Agenda announcements back in 2015. The aim of this review was to identify opportunities to improve the effectiveness and integrity of the program. Six recommendations to improve the program were made in the review. Key recommendations included retaining the current definitions of R&D activities, the introduction of a collaboration premium for certain R&D expenditure incurred with publicly funded research organisations and the capping of cash refunds available to companies. There have been significant delays in the Australian Government announcing which, if any, of the review recommendations will be adopted, with latest thinking suggesting there will be announcements made before the end of 2017.
Despite the continual tightening of the rules, the Australian Government has continued to invest significantly in the R&D Tax Incentive regime, which continues to be the Federal Government’s primary mechanism to support innovation in Australia.
The commitment of the Government to do something to encourage R&D is pleasing. While we are still to find out the finer details of what the tax rules will be and when they will apply, businesses may now wish to consider whether the future existence of an R&D tax credit may improve the viability of innovative projects which may otherwise be high risk marginal investments.
December 2017 Tax Alert contents
- Tax Alert - December 2017
- BEPS proposals now before New Zealand Parliament
- Terms of reference announced for Tax Working Group
- R&D Tax Credits: Reflections from New Zealand and Australia
- Is AIM the right provisional tax method for you?
- GST on online shopping – the holiday is coming to an end
- Proving arm’s length pricing is set to become a taxpayer’s burden
- Impact of changes to the look-through company rules
- Are your GST processes and controls up to scratch?
- Recent tax developments