KEY POINTS:
The government's commitment of $700 million for investment in innovation in the pastoral and food industries over the next 10-15 years has been subject to much comment and attention since its announcement.
The NZ Fast Forward Fund (FFF) will be a collaborative government/industry partnership, with the private sector set to match the state's contribution, meaning there will be a targeted total spend of an eye-watering $2 billion (after investment interest is included).
Although the FFF has been welcomed and strongly supported by many in the targeted sectors, National's John Key has been vocal in his opposition to the scheme, even going so far as vowing to scrap the fund if his party wins the election. Whatever the outcome, the critical question to be answered is: what is the benefit offered by the FFF for New Zealand businesses?
The investment strategy for the FFF has yet to be articulated but we know it will target transformational changes rather than run-of-the-mill "business as usual" activities. The aim is to invest in initiatives that will significantly lift the capability, performance, sustainability and global competitiveness of the pastoral and food sectors. This ambitious goal will inevitably require high levels of targeted funding. This raises the question of how seamlessly this programme will dovetail into the R&D tax credit incentive introduced in last year's business tax package.
TAX CREDIT vs FFF
The R&D tax credit incentive offers a 15 per cent credit which can be treated as income tax paid or received as a cash refund by the claimant. It represents not only a significant cash benefit for claimants, but is also anticipated to deliver benefits to the wider economy.
The broader impact of R&D incentives has been demonstrated in other countries such as Australia, Britain, Canada and the United States, where targeted tax incentives have supported significant additional investment in R&D and related skills and infrastructure.
In order to prevent businesses "double-dipping" for government support on their R&D spend, projects that have already received government grant assistance will generally be excluded from the R&D tax credit.
This tainting extends not only to the grant monies received but also to any promised co-funding by the recipient (the business' commitment of its own funds to the project) and also where this co-funding has been committed by a third party.
A business receiving funding via the FFF could potentially see its other incentives and entitlements around R&D projects tainted as a result.
This may also occur where an industry body receives the FFF grant on the promise of securing industry funding, despite the contributing businesses never receiving any grant monies directly.
It will be crucial that these kind of interactions are thought through to ensure legitimate, individual R&D is properly supported while allowing for the industry-wide projects targeted by the FFF to run in parallel. Businesses need to have certainty around the support they will receive.
The R&D tax credit arises on a broad range of activities that relate to a claimant's business in New Zealand. Comparatively, the FFF appears to focus on key outcomes for the food and pastoral sector based on a pan-industry approach.
Although the knowledge gained from the latter must have the potential to be transferred and commercialised, the direct benefit for the investor's business is likely to be less obvious and may take longer to manifest as financial returns.
This contrast in focus may also minimise the impacts of tainting, given that the projects supported under the regimes may not actually overlap. We understand the Government's desire not to provide doubling-up in funding, but considerable effort must be made to ensure the regimes work in tandem to ensure all genuinely innovative activity is rewarded appropriately.
How the new fund will be managed is still to be released, so the opportunity remains to weave a co-ordinated approach to R&D tax incentives into the fabric of the initiative, ensuring eligible tax credit expenditure is unaffected by any FFF agreements. This will be an important factor if the Government wants to get the full economic benefits of these programmes and get private sector buy-in.
IRD FOCUS
Recognising that the pastoral and food industries are unique in their importance to the economy, Inland Revenue is also giving considerable thought to ways in which these sectors can be targeted to ensure their continued growth and prosperity.
As other countries where R&D tax credits have been introduced are not so heavily reliant on agriculture, we can expect specific guidance to be published by the IRD, potentially followed by tweaks to the R&D legislation. This will ensure it is more accessible to those operating in the pastoral and food sectors. However, we know from our discussions with the IRD that any changes should not be expected in the short term.
THE FUTURE
Substantial benefits from both regimes loom for those in the pastoral and food industries, although a raft of unanswered questions remain as to how they will work together in practice.
The impact of the FFF will be largely dependent on the investment strategy and operational policies which are yet to be formulated. Policy-makers must take into account the impact on the R&D tax credit with a view to ensuring we get the best possible outcome for investors and the economy as a whole.
At the heart of the tax credit incentive and the FFF is the aim to encourage businesses to invest more in R&D, leading to improved productivity, international competitiveness and providing wider benefits to the economy.
This objective should be backed up by the IRD and other government agencies working together to apply the policy intent behind the legislation so Kiwi innovation is rewarded and New Zealand businesses come out on top.
* Aaron Thorn is national R&D incentives leader and Catriona Ewen is a senior consultant in the tax team at Deloitte. They specialise in assisting businesses to leverage their expenditure on research anddevelopment.
