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BusinessMay 30, 2018

‘If you do R&D, we plan to support it’: Megan Woods defends the new tax incentive

(Image: Getty Images)
(Image: Getty Images)

Innovation Minister Megan Woods says the Government’s new R&D tax incentive is far from a startup killer. In fact, she says, it will open up R&D funding to more businesses than ever before.

We want New Zealand to have a vibrant, innovation-led economy that will give us new solutions to old problems. Developing our innovation sector will help New Zealand to build a diverse, sustainable, and productive economy that delivers for our people.

Through Budget 2018 we set aside the largest ever appropriation – over $1 billion – for research, science and innovation. This new money will help a wide range of businesses to grow their R&D activity through the tax incentive.

Having the right support for hi-tech startups is crucial for us in achieving our goal of increasing R&D expenditure to 2% of GDP. The 2018 Startup Genome report recently identified New Zealand as an up and coming home for hi-tech startup businesses. We want to build on and supercharge this part of our economy and MBIE is kicking off with this work.

During consultation on the R&D tax incentive I have heard many of the concerns raised by Parkable co-founder Toby Littin in his Save our startups: an R&D SOS opinion piece.

One of the reasons we are introducing the tax incentive is that it will be much more accessible to businesses – including startups – than the current Growth Grant system. The proposed threshold is that a business will need to spend a minimum of $100,000 to qualify for the tax credit – compare this with the $300,000 minimum spend required for Growth Grants.

A tax incentive means businesses will be able apply for the tax credit as part of their tax return, making it a straightforward, accessible process. And we have not suggested a time limit to support, or a requirement that businesses spend a certain proportion of their revenue on R&D.

If you do R&D, we plan to support it, which means many more businesses will qualify for support than do at the moment.

The proposed 12.5% tax credit rate also stacks up internationally, placing us about mid-pack in OECD countries. But simple comparisons with other jurisdictions can be misleading; the Australian scheme for instance is much more complex than the scheme we are proposing here, and the rate of 43.5% is the rate before corporate taxes are taken into account. It is split into two streams for small and large businesses, so has a slightly larger effective rate of 13.5% for small business, and a smaller non-refundable 8.5% rate for larger firms.

One of the questions we have asked for feedback on in the discussion document is whether the proposed New Zealand rate is set at the right level. We want to compete on an equal footing with other countries, but don’t want a race to outspend them to be our only way of being attractive to hi-tech businesses. We believe New Zealand has more to offer.

We know that pre-profit and loss-making businesses cannot benefit fully from the incentive in the short term. We also know startups often run at a loss while performing a disproportionate amount of R&D for their size, but we are utterly committed to a system of R&D supports that will accelerate and grow this critical part of our collective future as a country.

The policy issues involved in supporting these types of businesses are complex. That’s why we’ve given ourselves an extra year to make sure we get this right. So while they will not be resolved in time for the introduction of the tax incentive in April 2019, we will continue to work on this issue and expect a solution to be introduced by April 2020.

We have also said that we will continue paying growth grants, and will work on an interim solution for firms that might fall into the gap, until we are able to introduce our full policy in 2020.

In the meantime there is a range of supports for startups this Government will continue to back, including Callaghan Innovation’s incubator and accelerator programmes, the R&D Project Grants, and the R&D tax loss cash-out. Callaghan Innovation will continue to provide R&D and innovation-related advice, services and grants to businesses to complement the support provided by the R&D tax incentive.

But most of all, this is the chance for some kiwi innovation from our startups. This is the time for some creative thinking from smaller businesses, to help us to design a system that works for them and their industries. This is an opportunity like never before.

I encourage you to make an official submission on the Ministry of Business, Innovation and Employment’s website by Friday 1 June 2018. We are ambitious for New Zealand’s innovators, and it is vital we hear from you so that we are able to introduce the best possible support for the future of our country.

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