Cullen confirms tax breaks

By BRIAN FALLOW Economics editor

The Government is pressing ahead with changes to the tax treatment of research and development spending, which it announced at the business-Government forum in October last year.

The change aligns the tax treatment of R&D, which has been an area of considerable uncertainty, with accounting standards on development spending.

Expenditure that business categorises as R&D and which is immediately written off for accounting purposes will also be immediately tax-deductible, said Finance Minister Michael Cullen.

Yesterday's announcement is the upshot of the public consultation phase of the generic tax policy process.

As foreshadowed when the discussion document was released last November, the new provisions will come into effect on April 1.

The tax director of the Institute of Chartered Accountants, Jeff Owens, said the change would potentially give a significant boost to software developers, as most expenditure would be immediately deductible rather than progressively written off once the first commercial sale was closed.

Mr Owens also welcomed the establishment of a private sector group as a watchdog, which should ensure the policy was applied as intended.

How the new regime works in practice will be monitored by a group of tax practitioners and representatives from the Science and Innovation Advisory Council.

Dr Cullen said bringing the tax and accounting regimes into alignment would reduce compliance costs.

It would also mean greater certainty as the accounting definition [of an asset] was much clearer and tended to cut in further along in the product development process.

"While in most cases R&D is being fully deducted already, the lack of clarity in the deductible/non-deductible boundary creates scope for unnecessary disputes about interpretation between taxpayers and the IRD," Dr Cullen said.

Deloittes tax partner Thomas Pippos said the move was a step in the right direction but did not go far enough, in that some companies still had to capitalise development spending.

The policy is a turnaround from that announced in last year's Budget, which concluded that the cost of introducing full deductibility for R&D spending, which Labour had campaigned on, would be too high.

Prime Minister Helen Clark said then that the Treasury had "scared the pants off" Dr Cullen with an estimate that the likely cost to revenue would be more than $100 million a year.