R&D grants scheme under fire

By DANIEL RIORDAN

Initiatives announced in the Budget mean business will have to live with grants rather than tax breaks to help offset spending on research and development.

The decision has been roundly criticised by many in the business community.

Manufacturers have been outspoken in their opposition, claiming the decision represents a cop-out on a pre-election policy pledge that helped the Labour Party win business votes.

Business has long lobbied for R&D tax breaks similar to those in Australia (where 125 per cent of certain types of R&D spending can be written off) and in Britain (150 per cent).

But the Government decided grants were a better alternative.

How do you classify R&D? If the Government effectively compensates companies for R&D then the incentive to classify everything as R&D is overwhelming.

John Blackham, a board member of the High Tech Council and Software Association (which he co-founded in 1990), worked in Canada, which offers tax breaks.

"My remuneration package had a component related to how much I could extract from the Canadian taxation system," he said.

"I know of companies that classified the costs of the cleaners of offices used by R&D staff as R&D spending."

Not illegal, but an example of the complexities and costs of administering a tax-break regime.

Mr Blackham said a grants scheme was potentially a good idea but the way it was administered was crucial.

The Government-funded agency Technology New Zealand, a key player in the new grants scheme, had done "reasonably well" in the past distributing funds.

However, he was less confident of the Public Good Science Fund, traditionally responsible for administering the bulk of Government science allocations.

The effectiveness of its decisions had never been properly measured.

Dr William Rolleston, chairman of industry group Biotenz and the Life Sciences Network, said any Government boost to R&D had to be welcomed, whatever form it took, but a far more effective response would be through changes to the tax system.

Tax breaks would be fine, but the Government need not go that far.

Dr Rolleston, like Mr Blackham, would prefer to see a simple change to the tax system enabling R&D spending to be treated as tax-neutral.

That would allow it to be treated like any other expense, rather than being capitalised as it is now and immediately generating a tax liability.

The inflexible tax treatment of R&D also had the unfortunate effect of short-changing New Zealand's efforts in the area, he said.

Private sector and Government spending on R&D lags that of most other developed countries, but one of the reasons is that many companies are not reporting R&D expenditure and choosing to classify it as something else.

Many in the high-tech community argue that if Treasurer Michael Cullen is feeling really generous and enlightened, there is an even better option, with a good chance of boosting business and the economy beyond even the Government's wildest dreams.

That option would be to drop the corporate tax rate from 33 per cent to 10 per cent for companies producing products deemed worthy of pushing New Zealand to the forefront of the knowledge economy.

Firms qualifying for the lower tax rate would have to produce exports with a high value-added component - say 70 to 75 per cent.

The big advantage to the local economy would be encouraging overseas firms to set up here.

In turn, they would spin out new companies, create jobs and lift export earnings.

This would ideally more than offset any loss in Government tax revenue.

It is a similar model to that operating in Ireland and its advocacy here is not new.

Mr Blackham said that if the Government was genuine on directing finance into new industry, it might need to take such a big step.

However, it is unlikely to win favour with mainstream "bashed metal" manufacturers. Most of them use too high a component of imported goods in their final export product to meet the value-added criteria suggested by Mr Blackham.

...Choice 'silly' says industry

Budget 2000 feature

Minister's budget statement

Budget speech