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R&D Tax Credit Scrapped - Why?

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  • R&D Tax Credit Scrapped - Why?

    Restore the R&D Tax Credit
    Wednesday, 24 February 2010, 5:09 pm
    Press Release: NZMEA
    Restore the R&D Tax Credit

    The New Zealand Manufacturers and Exporters Association (NZMEA) is calling for the Government to front up and restore the Research and Development (R&D) Tax Credit. The Innovation Index of New Zealand launched yesterday showed that R&D investment had been flat between 2000 and 2007, and dropped in 2008. John Key’s science advisor Sir Peter Gluckman also described our R&D investment performance as “dismally low.”

    NZMEA Chief Executive John Walley says, “With most other countries offering significant tax benefits for R&D activity, is it any surprise that more activity is occurring overseas rather than in New Zealand? Australia has recently introduced a 45 percent tax credit.”

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    Gluckman noted that New Zealand had “paid the price” for failing to invest in knowledge-based sectors and went on to ask, “why is that the case?”

    “The absence of specifically targeted support for R&D and generally better balance in fiscal and monetary policy spells out why pretty clearly; who would invest in new products or processes when returns are so uncertain?” says Mr. Walley.

    “The policy framework has ignored the tradeable sector for years – in the 1990s added value exports grew by 50 percent; for the most of this decade that growth has stalled.”

    “We cannot expect better performance from the tradeable sector without investment, and that investment is unlikely until our policies at least match those of our competitors.”
    Novel Ways have applied for, and been granted, a small tax concession for R&D work carried out in the financial year 2008-2009. The Labour policy of a small 15% rebate on top of standard expenses tax claims, was revoked for following years, as one of the first policies of the incoming National Government.

    When I was talking to the specialist staff at IRD over my claim, I was told that not as many businesses applied for the rebate as they expected. Staff were, however, pleasantly surprised by the calibre and range of research work that the private sector were performing outside their normal business activities. If I had involved a consultant or accountant to file my claim instead of doing this myself after hours, there would have been nothing left over for the business.

    However, while filling out the paperwork, I realised that my business had a lot of IP that could be worked on for long-term profit. When talking to an examiner at IPONZ (The Patent Office), he mused that an unusually high number of patents were being worked on at the moment. Not surprising - this was the hoped-for result of the R&D tax credit.

    National's policy on the R&D Tax credit removal appears to be driven by their advisors, who assured them that there would be 'marginal expenses' applied by businesses to the credit system, i.e. it would be rorted. Had any of those advisors read the 1 inch thick paperwork for the credit application? One business I know of applied for the R&D credit at some expense, and was audited very carefully by two IRD staff who were flown in. Their application passed, and since then the business has achieved some major foreign exchange earnings with a hi-tech product range. I'd like to see a similar speedy marketing result from any of the CRIs.

    We are still working on our R&D projects, a little slower, and finding it harder to get undergraduate students on the TIF scheme, because the number has been pulled right back to just 195 for the whole country. When you consider that many thousands of students are looking for suitable holiday work that complements their degrees, this is unfortunate to say the least.
    Graham Lynch

  • #2
    Now Labour is fronting up with a solid policy to reinstate the R&D tax credits, this time with a 12.5% credit. This is welcome news, even if it also means that major R&D funding that went only to large private sector businesses would be pulled back. I think businesses know how to look after themselves, and the bigger they are, usually the more effective the policy. Large businesses with international sales like Rakon will always spend a good portion of income on R&D, as that is their edge, and a way of keeping out competition. It is the smaller businesses that have yet to realise this, that should be supported also.
    Graham Lynch


    • #3
      Australia has just voted in a very similar R&D tax credit over there, to keep their businesses working in the right direction.

      The current major funding for R&D to the private sector in NZ is reserved by the National Party government for businesses with a turnover of more than $3mill per year for the last three years, and with ongoing high percentage of R&D spend. Fast-growing small businesses need not apply.
      Graham Lynch


      • #4
        Tha National Party has been voted back in, with an improved percentage of the vote, over the weekend. As far as Labour's R&D tax credit proposal for 12.5%, it will remain a hope for another 3 years. I wonder how many export-earning projects would have been helped past the development stage, if National had left the original scheme in place in 2008. As it stands, the overall message to smaller businesses (of which there are 450,000 employing less than 5 people in NZ) is to batten down the hatches and leave R&D developments to bigger businesses and the CRIs.

        It's a bit unfortunate that the track record for useful innovation from the CRIs is not great, and that bigger businesses tend to use R&D effort to reduce their workforce through automation of processes. National's policy will only make the job queue longer, and that will reduce our export earnings, not increase them.
        Graham Lynch


        • #5
          It would appear that John Key had a strong opinion that the R&D Tax credits were simply a boon for accountants, and that opinion may have scuttled a good policy started by Labour. National were also scrabbling for any cost reductions to allow for top-end tax cuts.

          Here's a post by Shaun Hendy.

          It would appear that increased R&D spend by both the public and the private sector would be a good idea. The public sector is a good training ground for engineers (might be a bit expensive though).

          In the short term, there would be nothing that would beat the speed and economy of the private sector for R&D, but of necessity the options for blue-sky research there, will be limited.
          Graham Lynch


          • #6
            Here's an in-depth article on NZ R&D from earlier in the year.


            While it might be a pleasant interlude to build yet another business incubation area to see if it works, there are a lot of SMEs that have great ideas, great experience of being in business for a few years, but just lacking the final resolve to take a punt on new products. Their reserve is founded on profitability mostly. They know that without extra cashflow and profits, they cannot attack many new areas at once.

            However, many would have no doubt that the thousands of SMEs in this position, are a valuable supply of future export goods and services from NZ. They already have their own buildings and support structures, already have contacts and customers, and a track record. This makes no difference to MP Steven Joyce's opinion of them.

            Despite the fact that he made a lot of profits from the sale of a radio advertising business a few years back, presumably a business selling radio time to SMEs, he doesn't trust them to properly handle a small audited 15% break on R&D in their businesses.
            Graham Lynch