Cullen set for Budget u-turn on forum eve

By VERNON SMALL deputy political editor

Finance Minister Michael Cullen plans to unveil new rules on the tax deductibility of research and development spending at a forum with business in Auckland next week.

The change would not go as far as Labour's election promise to give tax breaks on all R&D. But it would change Budget provisions, which ruled them out.

It is understood the change will allow taxpayers to claim for R&D on the same basis that it is expensed in their accounts.

That would mean if existing accounting standards allowed a deduction, then it could be claimed.

The Budget u-turn drew strong criticism and the Government clearly hopes the changes will set a positive mood at the invitation-only forum and help rebuild business confidence in the Government.

KPMG tax specialist Craig Elliffe said such a change would confirm and clarify the way the courts were interpreting the law but would otherwise make little difference.

"You could say it's actually a statement of the status quo."

The Coalition may also announce its long-awaited export credit guarantee scheme at the forum, although sources said it was unclear how far that work had advanced.

At the time of the June 15 Budget the Government said it had opted for grants instead of tax breaks for R&D because they would help businesses not yet making profits, which could therefore not claim a tax deduction. Tax breaks would hit the revenue base without necessarily aiding the economy.

Both Helen Clark and Michael Cullen pledged a rethink shortly after the Budget, with the Prime Minister suggesting it could be looked at as part of the Government's broad review of the tax system.

National's revenue spokeswoman Annabel Young said Associate Finance Minister Trevor Mallard appeared to have gazumped Dr Cullen's news by announcing the change at an education forum last week. Tax practitioners were already examining the impact of the change, she said.

There were already complaints because standard accounting practice was to capitalise some R&D expenditure, so the new policy would not allow 100 per cent deductions.

Accounting standards were open to a variety of interpretations, she said, so the move might not clarify the situation for business.

Some companies were already deducting 100 per cent of their expenses, and that was not what the accounting standard allowed, so they could lose money from the change.

Mr Mallard denied he had made any announcement on R&D.

"The confusion has obviously arisen because I have been involved in a number of in-house briefings over the last four months with a wide range of businesses including a special focus on IT businesses."

He said he normally raised a number of possibilities, including the one outlined by Ms Young.