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NZ's R&D tax incentive plan viewed as positive by business

Friday 20th April 2018

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The government's proposal to end Callaghan Innovation's growth grants and introduce a 12.5 percent research and development tax incentive has been widely viewed as positive by businesses but the opposition party claims it amounts to a cut in support.


Research, Science and Innovation Minister Megan Woods yesterday released a discussion document with the proposal and said over the next six weeks, the Ministry of Business, Innovation and Employment, Inland Revenue and Callaghan Innovation will be seeking feedback through a variety of channels.  The government's aim, said Woods, is to lift spending on R&D to 2.0 percent of gross domestic product by 2027. 


According to Woods, the rate is similar to the median tax credit available across OECD nations.


If the proposal is implemented, the tax credit on eligible expenditure will be available to businesses doing R&D in New Zealand from April 1, 2019, and a business would need to spend a minimum of $100,000 on eligible expenditure, within one year, to qualify.


Businesses can also claim a tax credit for up to $120 million of R&D expenditure per year. This equates to a tax credit of $15 million each year, based on the proposed 12.5 percent rate.


Currently, businesses carrying out R&D are funded by Callaghan Innovation three-year growth grants.  In order to qualify, firms need to have spent at least $300,000 per year and 1.5 percent of revenue on eligible R&D in each of the last two years or plan to exceed these levels over the next year, according to its website. Callaghan then pays 20 percent of the eligible R&D spend up to $25 million over five years or $5 million a year.


National Party Research, Science and Innovation Spokesperson Parmjeet Parmar said eliminating the growth grants will "negatively affect" hundreds of New Zealand's most innovative technology focused companies. Parmer said the companies will drop down from getting 20 percent of their R&D funded to 12.5 percent.


Business NZ manufacturing executive director Catherine Beard said, however, the move is positive and the new system will, in fact, provide more funding.


While companies that are recipients of growth grants benefit from the support "the threshold for getting into that group is quite high, so there are only a limited amount of firms in that category," she said.


Under the new proposal "significantly more firms would be eligible as the amount you need to spend on R&D is $100,000," said Beard. She also noted that businesses will be able to claim a tax credit of up to $120 million of R&D expenditure a year, which equates to a tax credit of $15 million a year based on the proposed rate, above the current $5 million. 


ASX-listed Volpara Health Technologies chief financial officer Craig Hadfield said the company is "excited to see the developments with regards to an R&D tax credit to really help drive innovation in New Zealand," however, given the details are quite "light" at this stage,  he is not sure what the full impact on Volpara will be.


Volpara has received funding from Callaghan's growth grant to develop its software products designed to improve clinical decision making and aid in the early detection of breast cancer. Last year Volpara chief executive Ralph Highnam said Callaghan is a key reason why the company opted to set up shop in Wellington. Highnam said Callaghan was instrumental in moving the company from onsite software onto cloud-based software, which is now reaping a commercial benefit.


"We understand that the Callaghan grants will still be available until March 2020, and we continue to receive great support from Callaghan. We will continue to track the developments closely," said Hadfield.


According to the government's proposal, businesses with an active growth grant as at March 31, 2019, will continue receiving their grant until March 2020. A temporary grant scheme mirroring the R&D tax incentive will be implemented to provide support for growth grant recipients with insufficient tax liability to use the R&D credit immediately. However, the growth grant scheme will be closed to new applicants on March 31, 2019.


 ASX-listed Xero, which has received $14 million of funding from Callaghan Innovation, or around 3.4 percent of its R&D spend as of Sept 30, 2017 said “'investment Investment in research and development is vital for New Zealand businesses to grow and export around the world, and we welcome any discussion on the best ways to achieve this.” 



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