Andrew Dickeson: Proposed R&D plan needs to go further

It's also often said that the reason our R&D spend is comparatively low is that the Government doesn't offer a strong enough incentive to make these investments viable. Photo / Getty Images

Opinion

The most recent figures from Statistics NZ show that our total R&D spend across the business, government and higher education sectors in 2012 was more than $2.6 billion, an increase of 10 per cent on 2010 figures.

According to Statistics NZ the main reason Kiwi organisations invest in R&D is to gain access to new markets, and the biggest spenders are the manufacturing, primary industries and health sectors. However, as others have pointed out, our R&D spend as a proportion of GDP remains lower than many other OECD countries, and has been static since 2010.

It's also often said that the reason our R&D spend is comparatively low is that the Government doesn't offer a strong enough incentive to make these investments viable.

This particularly impacts on start-up businesses - they often endure long periods of tax loss which means they can't benefit from R&D tax loss deductions.

The Government is now seeking to remedy this with the release in July of an Inland Revenue Department tax policy paper. Making the assumption that the changes will eventually become law, and with our closest overseas peer having just held an election, it's timely to compare which side of the Tasman provides the more favourable R&D regime.

The main benefit under both regimes is the provision of a cash refund to companies engaging in R&D, with particular emphasis on start-ups and smaller-sized companies.

In Australia, if a company has a turnover of less than A$20 million ($22.7 million), a refundable tax credit of 45 per cent of eligible R&D spending (that is a 150 per cent deduction) is available. Larger companies get a non-refundable tax credit of 40 per cent of eligible R&D spending (that is a 133 per cent deduction). This non-refundable tax credit can be carried forward to future years, and there must be at least A$20,000 of notional R&D deductions in the year for which the claim is made.

On this side of the ditch, under the IRD's current proposal, a tax refund would arise where there were eligible losses from R&D spending of up to $500,000, with the aim being to eventually increase the cap to $2 million.

Further, there would be a limitation on the amount of loss that could be claimed, being the lesser of 1.5 times R&D wages or actual spending on R&D. Any losses over and above the limit would be treated under the usual rules. So looking solely at the respective refund rules, it is clear that Australia has the more generous regime, even if the refundable tax offset were to be reduced to 42.75 per cent (to match the Coalition's election promise of a lower corporate tax rate of 28.5 per cent).

The proposed New Zealand regime would give the same definition to R&D as per current accounting standards, albeit with a lengthy list of exclusions, such as spending on social science research, clinical trials and software coding.

The Australian regime defines R&D activities as either core or supporting R&D activities. Very broadly, core R&D activities are scientific activities carried out for the purpose of generating new knowledge, and are subject to a prescribed list of excluded activities. Supporting R&D activities are undertaken for the main purpose of supporting the core R&D activities. The Australian regime also requires R&D activities to be registered with AusIndustry (Australia's economic development agency for businesses) prior to the annual R&D tax credit claim being made.

The proposed New Zealand regime would have no such requirement. With minimum additional paperwork required under the new rules, New Zealand would have the simpler R&D regime. However, the proposed NZ regime would also impose loss recovery rules. Where intellectual property is sold - and which was created as a result of R&D spend - loss recovery income would arise to the extent of any remaining cashed out loss in the company. Where more than 5 per cent of shares are sold in a company that has obtained cash payouts of R&D losses, then loss recovery income would arise to the shareholder.

While the Australian regime does not impose equivalent claw backs, claw backs can apply in some cases. Overall, Australia's R&D regime offers more financial benefits to business, even though the proposed New Zealand regime would have less paperwork. Although it would be welcomed, in my view it needs to go much further.

• Andrew Dickeson is director of taxation services at Staples Rodway and chairs the New Zealand Tax Committee for global accounting body CPA Australia.