Government reviews $500m research tax credit, which Act wants scrapped

Revenue Minister Simon Watts is looking at the scheme. Photo / RNZ

The Government is reviewing the performance of a $500m research and development tax credit introduced by the last Labour Government, and is not committed to keeping it after the next Budget.

The review is a statutory review, meaning it was not initiated by the current Government, but by the legislation that created the tax credit back in 2019, which stipulated the scheme be reviewed every five years to ensure it was working effectively. The future of the scheme may now hang on what the review concludes.

Both National and Act opposed the tax credit when it was introduced and Act leader David Seymour confirmed that as far as the Act party was concerned, that opposition still stands.

The portfolios that administer the scheme are both held by National MPs: Science, Innovation and Technology Minister Judith Collins and Revenue Minister Simon Watts. Binning the scheme was not included as a saving in National’s pre-election fiscal plan, however it was included in Act’s.

Watts, answering questions on behalf of the Government would not say whether the credit would continue, but said the Government would be guided by the review.

Watts told the Herald, “MBIE’s science team is currently undertaking a statutory review of the RDTI [Research and Development Tax Incentive] regime, which is expected to be completed in early 2025.

“Both the Minister of Science, Innovation and Technology and I will be interested in considering the effectiveness of the regime, both in terms of how well it supports research and innovation, and its revenue impact.”

NZ First was part of the Labour-led Government that introduced the scheme.

The scheme was introduced by Research, Science and Innovation Minister Megan Woods to lift firms’ sluggish Research and Development (R&D) expenditure.

The credit works by offering a 15% tax credit on qualifying R&D expenditure of more than $50,000 a year, with a cap of $120m in eligible expenditure.

The most recent Budget set aside $556 million for spending on the credit, up from $461m last year. Spending has grown over time. Budget 2018 funded the scheme at $1b over four years, averaging $250m a year.

New Zealand is famously stingy when it comes to firms’ spending on R&D. According to Stats NZ, private sector R&D spending as a proportion of GDP rose from 0.87% in 2022 to 0.95% in 2023. Businesses spent a total of $3.7b on R&D, an increase of 17% from 2022, the highest annual percentage increase since 2018.

The number of fulltime equivalent (FTE) staff working on R&D rose by 3.9% to reach 21,000 in 2023.

Internationally comparable statistics are only available for 2021, when New Zealand spent 1.45% of GDP on R&D, about half the OECD average of 2.7%.

The science and research sector is keen on certainty following a raft of changes ushered in by the Government. This year, the National Science Challenges, a Key Government initiative for funding science, expired. A $400m plan to turn Wellington into a science city, which was meant to partly fill the gap left by the challenges, was axed.

The science sector is currently under review by former chief science adviser to the Prime Minister Peter Gluckman. The first stage of that review is complete and will shortly be released.

BusinessDesk reported the Government is considering merging seven Crown Research Institutes (CRIs), removing Innovation from the Ministry for Business, Innovation and Employment (MBIE), and creating a ministry focused on science, innovation, and technology.

The CRIs, under that plan, would form part of a national research council, divided into an innovation wing that would focus on attracting foreign direct investment and multinationals and an enterprise-focused wing targeted at startups and growing local firms.

Finance Minister Nicola Willis has revealed that most departments will be getting approximately no new funding at the next Budget, meaning that any new initiatives ministers want must be funded by freeing up spending elsewhere.

It is possible Collins and Watts are eyeing the $500m currently heading to firms under the tax credit scheme for use elsewhere.

Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the Press Gallery since 2018.