Government taskforce promotes politically incorrect tax incentives

By KEVIN TAYLOR

A Government taskforce has called for changes to the tax system to encourage investment, research and talent-retention in the information and communication technology sector.

The ICT taskforce yesterday issued its draft report called Breaking Through the Barriers. Its proposals could be embarrassing to a Government which has set its face against tax incentives.

Taskforce chairman Murray McNae said New Zealand's tax system meant we were at a disadvantage compared with other countries, which did not help attract capital and skilled people.

The draft report is the first of three from different taskforces set up under the auspices of the Government's much-hyped growth and innovation framework released in February.

The ICT taskforce report sets an ambitious goal of adding 100 new companies, each earning more than $100 million in annual sales, by 2012.

But the report said the main barriers to growth were access to capital and retention of key people, and it made several tax recommendations.

Associate Revenue and Communications and IT Minister Paul Swain tried to steer the media away from the tax issue at a press conference to release the report yesterday, saying there were bigger issues to be tackled.

He was expecting a report soon on the issues the taskforce raised for the Government.

"I don't want to make any further comment except to say that discussion between officials and the taskforce has opened up a whole lot of interesting debates about how expansion occurs in New Zealand relative to other countries," he said.

McNae said the taskforce met Treasury and IRD officials to describe the policy and regulatory framework required for companies to succeed.

"We made some references to overseas experiences. Make it attractive for a company to attract and retain employees. Make it attractive for investors to invest in New Zealand ICT companies."

The report said the taskforce wanted changes to R&D tax rules to allow deductibility of ICT product development costs.

Despite law changes there were still concerns about the deductibility of certain development costs because most ICT product development, by its nature, was capitalised.

Although some countries had a more favourable tax treatment of R&D than New Zealand, few allowed all product development costs to be fully deducted in the year of expenditure.

"Even so, New Zealand's competitive position would be enhanced by making further changes to the deductibility of development costs because this is an area whereby it could differentiate itself," the report said.

The taskforce also wants tax-neutral investment vehicles.

At present if an individual invests in a company long term, any gain when the shares are sold is treated as a capital gain and is therefore tax-free in New Zealand.

If the same investment was undertaken by a company established to make such investments, or a unit trust, it was taxed at the corporate rate of 33c.

Other recommendations included:

* Changes to the treatment of employee share options as the present system was poor.

* An increased ability for companies to carry forward tax losses, in a manner similar to Australia, which could make direct equity investment more attractive.

The taskforce also noted a lack of long-term savings in New Zealand, which constrained the availability of investment capital.