Government introduces a tax incentive scheme for small business to encourage investment

Finance Minister Grant Robertson this morning unveiled the Government's economic plan, including changes to small business tax incentives. Photo / Mark Mitchell

The Government will make sweeping changes to New Zealand business tax rules by creating new tax incentives scheme for small businesses and startups.

This comes as part of the Government's economic plan, unveiled by Finance Minister Grant Robertson this morning.

At the moment, the costs of looking into a potential business investment – such as buying a new asset or changing the way a company does business – is not tax deductible.

This stops many entrepreneurs from spending money on improving the way they do business, Robertson said.

"We're changing this so businesses can deduct 'feasibility expenditure' from their tax bills, including for projects that don't end up going ahead."

In other words, if a business invests in new product-enhancing technology but that investment does not work out, that business owner will now be able to claim a tax deduction on that cost.

Under the current rules, there is no allowance for such a deduction which, says Robertson, has meant less innovation in the market.

Robertson told Newstalk ZB the tax plan would cost the Government $80 million to implement.

"But we think the pay-off from this is actually the innovations we're going to get from businesses."

Revenue Minister Stuart Nash said the rules in place at the moment were particularly problematic for infrastructure companies.

"To keep it simple and reduce compliance costs, particularly for small and medium businesses, we're proposing that qualifying expenditure totalling less than $10,000 be deductible immediately. Deductions will be able to be spread over five years."

Robertson said these rules were about creating an environment where businesses are encouraged to innovate and become more productive – "even if some of these ideas don't work out".

The new tax plan will be introduced into Parliament early next year, meaning the change can kick in from the start of the next tax year.

The Government will also make changes around the so-called "loss continuity rules" – whether or not businesses' losses from a previous year are able to be applied to the current year.

At the moment, a business owner can't claim back losses if they sell more than 51 per cent of the business at start-up.

Robertson told Newstalk that was a big issue, as a lot of capital changes hands in a startup.

"You start off with you and your mates and then you bring in two or three other investors and suddenly you lose the ability to be able to offset your losses."

Robertson said the new rules change that – "it's really significant and mostly for those start-ups".

He added that the Government's planned changes would make it easier for start-ups to attract investment and get off the ground.

How might the new tax incentive changes affect you?
John owns a company that uses 3D printing to create products that he exports as components to a large Australian manufacturing company.

He sees two opportunities to innovate and expand his business, and wants to test whether they will work. However, he is worried that one might not work, and so he's hesitant about investing time and money trying it out.

This is because if the project is not successful John may not be able to claim a tax deduction for the costs incurred in attempting to develop that project.

This would mean he faces a much higher tax bill on his profitable business than if he just plays it safe and doesn't test out his new idea.

The reform to the deductibility of feasibility expenditure will ensure that John will be able to claim a tax deduction for the costs involved in the project and therefore the cost of the investment is less, which makes the project more viable.

Above all, the new tax setting will have encouraged John to test ways to innovate and become more productive and profitable.

Example provided by the Office of the Minister Revenue