Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill

The question now is that Part 3 stand part. Just for clarification, this is debate on clauses 66 to 220 and on schedules 1 to 3.

I was just pausing briefly there to see whether any member of the Government would like to stand up and talk about substantive changes to the Income Tax Act that are all about, according to the commentary around this bill, improving research and development, making the taxation system more efficient, dealing with GST and bodies corporate, changing Working for Families tax credits—anything? Nothing at all from the Government. It is absolutely remarkable, Mr Chair, that, as you yourself have just alluded to, there are 150-odd clauses—or something more than that—in this particular part of the bill. The Finance and Expenditure Committee spent significant time going through a number of issues within this bill, checking and then rechecking as to how it would be implemented, and not one member of the Government wants to get up on their hind legs and tell us why they are doing it.

What does that tell us about what those members are doing here? What does that tell us about their commitment, in particular, to research and development, which is one of the major issues dealt with in Part 3?

💬 Dr David Clark: All for show.

All for show—that is what it is, because if they actually wanted to do something substantive about research and development, we would actually be hearing from them about research and development tax credits, because that is actually something that the sector wants. It would give some certainty for investment in research and development, but there is nothing about that here.

One of the main features of Part 3, and the one that I want to talk about in this first of my calls, is around the cashing-out of losses for research and development expenditure. There is no doubt that there was a considerable level of sympathy inside the committee for this particular clause. Everybody knows, particularly when you are starting a business, that being able to invest the money into research and development that you need to create the value in your business, to build it, and to bring on new products is difficult at the start when cash flow is tight, when you have got other things on your mind, and when you have probably financed the business out of an extra mortgage or something like that. That ability to be able to deal with research and development or actually get into research and development is limited.

So we all know that in the first years of life of companies in New Zealand most of them make losses. It is one of the things that, when you do not follow closely the fortunes of particularly small businesses, a lot of New Zealanders would not understand. Actually, the hard graft of the early years of a business includes, almost inevitably, making losses year on year at the beginning. It is very difficult at that point to be able to put that money into research and development that is required. So the idea of cashing out losses for research and development expenditure is something that we would certainly support.

What this bill does and what this part does is allow certain loss-making companies—and we will come back to that in a minute—to cash out tax losses for research and development expenditure to a limit of $500,000 in the first year and $300,000 in subsequent years. The important point here is that although those losses can be cashed out and repaid, once the company makes a return on its research and development investment it does have to repay it. So that is the point. Companies can cash it out at the point at which it is a cost to them—it is part, in effect, of the fact that they have made a loss—but then they have got to return it, and this to me is the weakness in the National Government’s regime that is being put in place here. By all means have that as part of the process by which companies can make investment in research and development, but where is the other end of the equation? Where is the ability of all companies to have some certainty that they can invest in research and development? Because it is not here.

It is, in fact, a deficit model in all respects. It is a deficit model in the sense that it deals with losses, but it is also a deficit model in terms of the value of research and development. It is just the smallest of possible gestures that could be made to support research and development. Yes, it is welcomed by those companies and those firms that will inevitably take it up and cash out the losses, but where is the imagination? Where is the vision for really kick-starting research and development? One of the lowest levels of private sector research and development expenditure in the world is in New Zealand, and this legislation says: “Well, we’ll do this small piece of tinkering that will help a few companies deal with their inability to really invest in research and development in the early stages of their business.” So I would welcome a member of the Government getting up and telling us—is this it? Is this it in terms of research and development? Is this as good as it gets in terms of how the Government thinks we should be encouraging and facilitating one of the things that will truly drive economic growth in New Zealand, and that is investment in research and development? So that would be one particular area that I think we do need a little bit more work on.

We certainly got submissions at the select committee that were concerned about issues like the thresholds, how the thresholds could be increased over the years, and how we were making assessments about whether this really was research and development. One of the things that the committee dwelt on was who would be brought in to make the decisions about this. It will be—I can say that the Inland Revenue Department told us at the select committee—Callaghan Innovation that will play that role. The committee members were relatively assured of that. Callaghan Innovation has a broad range of experience when it comes to research and development.

There were some concerns raised at the committee as to whether or not Callaghan Innovation has the capacity for this in terms of its own work. We were assured that, effectively, the Inland Revenue Department would be paying for the services. There would be a retainer, in effect. The other concern that was raised by committee members was the timeliness of Callaghan Innovation’s ability to actually be there, make the decisions, and enable a business not to have to sit around and wait to see whether or not the work it was doing or the expenditure it was undertaking really was research and development. Again, we were assured by Inland Revenue Department officials that that would be dealt with. But I do think there is a real cause here for a Government member to get up and tell us how this in effect does improve research and development in New Zealand and what else the Government may have planned, because, goodness, there had better be something other than this.

There are several other issues in this part that I will come to over the next couple of calls. The next thing I want to do is talk about the question of “black hole” expenditure, which, again, the committee spent a little bit of time dealing with. The bill amends the rules relating to “black hole” expenditure, and for those who want a definition of that, which the committee itself did when we were dealing with it, “black hole” expenditure is business expenditure that is not immediately deductible for income tax purposes and cannot be deducted over time as depreciation. The proposals are, effectively, dealing with a number of anomalies under the current rules that were to be fixed. I guess where the committee got to was around questions like patents, trademarks, and how we deal with those from a tax deduction perspective. What we got in terms of submissions was that there had been a lot of uncertainty in the accounting profession around exactly what was covered and what was not, and the amendment of these rules effectively allows an extension of an asset’s cost to include the underlying item of what is called “depreciable intangible property”. That sounds extremely technical, but it was, from the submitters who came to us, a point that they wanted some clarification on.

I will be frank. I do not think committee members across the parties when this was being raised were able to be completely assured that there would not still be loopholes, because it is such a technical area. The idea that accountants will now scour through this to see whether there are loopholes and whether things can and cannot be taxed within those areas like patents, and particularly when patents are looked at versus knowledge that already exists—how do you construct a taxation regime around that? We have to have some confidence in the officials here that the treatment of “black hole” expenditure is now going to be clearer, but I think it does draw to the attention of the House the importance of definition in making sure that taxation law works. We have been assured that we have got that here, and I hope we do.

The final area I want to talk about in this call—and I definitely want to hear from a member of the Government on this—is the question around GST and bodies corporate. What the amendments here are slated to do is to clarify that services provided by bodies corporate are supplies for consideration for GST purposes and give bodies corporate the option to register for GST. This is, effectively, about rules that protect the tax base from the adverse consequences of allowing this choice.

In rising to speak to Part 3 of the bill, I acknowledge that it is the substantive part where all these changes are made. I join my colleague Grant Robertson in challenging Government members and Ministers to speak on this bill. I too find it odd that there was not great competition for calls to speak about these changes.

The Income Tax Act is a very important Act we are amending. It is the Act that provides us as a country with the resources to afford the assets that we hold in common—the hospitals, the schools, the roads, and the courthouses. Without a robust tax system that promotes enterprise and ensures people pay their fair share of tax from the profits of those enterprises towards the common good, we as a country will not go forward, we will not grow, and we will not maintain the level of services that we have come to expect as a country and the growing level of services we will look forward to in the future.

For example, in the health sector, where the cost of health care goes up and up every year due to new technologies that enable better quality of life in old age—we on this side of the Chamber want a robust tax system that can support those standards of living that we all want. The Government has acknowledged that it has not funded the health system to meet inflationary pressures. The $1.7 billion estimate that Infometrics has put on the underfunding of the health system has a very real consequence for New Zealanders. So I would challenge those members opposite to get up and say why it is that they want to make these changes, why they do not want to make the bill more robust still, why they do not want to promote enterprise more, and why they do not want to have research and development tax credits in here in a way that is readily available to all businesses so that we can actually grow the economy.

The current situation, where we pick winners and have, in this piece of legislation and in this part of the Act, clauses that promote a very narrow type of research and development that may benefit the Minister when he wants photo opportunities but does not actually benefit the country in the way that it should, is something that needs to be debated. The Government members opposite should justify why it is that we have these narrow research and development provisions in the law, and not much broader ones. I expect that the Minister in the chair, Nicky Wagner, will have some thoughts on that. I look forward to the Minister speaking a little bit about the vision for research and development that she has that we all should buy into, because at the moment it is not obvious why it should be so narrow, and this is a very important part of the bill.

In this contribution I want to speak about some very specific points, and the first of those is the exception for overseas accommodation, and the second is the exception around accommodation provided to ministers of religion. I think that both of these things are worthy and should be supported, for very different reasons.

The overseas accommodation exemptions aim to include in calculations, at a reasonable level, the benefit derived from allowances or payments. I refer members to clause 69B of the bill. These changes are an attempt to ensure that overseas accommodation is supported. So when enterprises are moving out overseas and are expanding their businesses, they will have the support necessary to do that, in a manner that ensures that they can go about their business in a reasonable way without a great big payment exemption or luxuries being carved out that would stop us getting our fair share of tax from companies, and that actually promotes enterprise. I think that one of the basic principles of tax policy is to ensure that it is fair, but also to ensure that it promotes economic development in a way that, certainly, I care about and members on this side of the Chamber care about. Of course, we know that Labour Governments historically have had much higher growth rates than National-led Governments. Since World War II, National-led Governments have grown the economy, on average, by 2.9 percent—not bad in itself—but Labour Governments have grown it by 3.7 percent. So we need provisions like this in the law that ensure that enterprise is promoted.

The second area I want to speak about specifically is the exception for accommodation provided to ministers of religion. This has been a little bit contentious. I think, though, that the contentious aspects of this seem to have gone away, in the way that it has been resolved in clause 70 as we have here in the bill. We eventually amended the laws around this, if memory serves me correctly, in the last annual rates and remedial matters legislation that went through for the 2014-15 year, in order to ensure that remuneration for accommodation was not calculated in the tax—and the Minister will correct me if I am wrong, I hope, or the members opposite may rise to their feet and take a call. The attempt was being made to ensure that the remuneration given to ministers for their accommodation—recognising that they are sent places, that it is a calling, and that it is not necessarily a benefit of a luxury nature—not be counted in their salary. Effectively, at one level you could say it is a kind of perk and at another level it is an attempt by the State to support the work that traditional ministers of religions do in small communities around the country.

In many small communities, particularly those struggling to get new enterprises off the ground—those that were once thriving communities and industries that have struggled in recent years, for which we could lay some blame at the foot of the Government for its lack of regional development policies, but let us talk about the principle here—those communities often have, as the last remaining professional member in them, a minister of religion. This is somebody who has a level of education and has been trained in critical thinking in a way that enables them to act in those communities as counsellors or as peacemakers. Often they are the people who will sign official documentation, because there is no other professional person in town to witness documents. These are simple, everyday matters. They, of course, bury people, and they marry people, and so on. The “hatch, match, and dispatch”—I have people heard people talk of that in those regional communities. That is part of the role of those ministers of religion.

But recognising that they are those people who do those duties in those towns, and that they actually provide a valuable service, and that the State wants in some way to recognise that through trying to ensure that the tax system does not overly penalise them for that accommodation that they have, was the intention of the changes last year. The amendments here—I assume, having not been a part of that particular debate on the Finance and Expenditure Committee—are aimed at ensuring that the principle that sat behind the amendments we made last year are effective in this law. I refer members to clause 70(3B) , where it says: “For the purposes of subsection (3)(a), the calculation of the amount of the item remuneration excludes the value of accommodation described in subsection (1) that is provided to the person.” That to me, as I read it, is a clarifying statement to make that absolutely clear. We can only assume that there had been some disputes as a result of the annual rates and remedial matters legislation last year, and that therefore the officials have come back in order to make that abundantly clear. I hope my memory of that is correct.

I see many officials here who will be available to brief Government members, should they have questions, or the Minister in the chair, if she is not clear on the issue. I think it would be good to clarify for the Committee whether this clause is designed as a clarifying aspect or if indeed it does in some way alter the purpose, which I have not captured. I am interested to hear that. I think it is a principle that this Committee should understand, so I expect the Minister in the chair may wish to address that—certainly if I have misunderstood it.

The other matter I wish to address in this contribution—sorry, I am just finding my page. It was around the research and development tax credits—there is a specific paragraph. I have taken my finger off the page. I got so wound up in my exposition around overseas accommodation and the exemption of property provided to ministers of religion that I have lost my place. I might wait for that contribution to be made in another section of the bill, because I have lost the page and I do not wish to delay the matters progressing in the Committee.

I just want to continue down the line of tax incentives for business. Originally, the legislation spoke about incentivising research through tax write-offs. It is a tax remedial bill. New Zealand First looked at that in some detail. In our contributions we noted that the issue with that was it was not actually supporting 98 percent of New Zealand businesses. It seemed to disincentivise or, even more than that, prevent small to medium sized enterprises from using the tax claim procedures so that they themselves could use the tax write-offs as an incentive to encourage research. It is a small part of it, and I acknowledge that the officials have done some work and we are moving in the right direction.

But I just wanted to put some context in and around the bigger picture of research in New Zealand. The slump in dairy prices of over 10 percent today just highlights New Zealand’s hang-up with commodities. What we see is a kind of cycle, not just in New Zealand but around the world, where we invest, and then we do not, because the prices drop, and then there are fewer players in the market, so the prices go up, so we invest—and so the vicious circle goes on. I know a lot of farmers in New Zealand are quite anxious about the intellectual property that has been sold to overseas dairy interests, and so we are kind of competing to provide the lowest price to the world market. That model just cannot carry on for an extended period of time. What I am saying to the Committee today is that you have some very small, micro opportunities here in terms of incentivising research. The Government needs to acknowledge this and move our economy out of that commodity conundrum.

I was looking at some research, and I would like to bring it to the Committee’s attention. New Zealand exported $50 billion worth of goods in March this year. This was the total annual amount: $50 billion—fantastic. It sounds fantastic. We are a population of 4.6 million people. If you contrast that with Singapore, that country exported $410 billion worth of goods or commodities. That is about $10,500 a person for us, and for Singapore it is $113,000 per person. I want to highlight the fact that Singapore is an economy that incentivises research. Singapore is meaningful about it and it takes it beyond the tax breaks. Only one of its top 10 exports is actually a commodity, and that just happens to be oil. The rest are goods that have intellectual property in them; they have value added. That is a conversation that has been had in New Zealand for decades, on so many of the products that we sell abroad—that value-added conundrum. I suggest, and I assert, actually, that this legislation is just a tiny step in the right direction. Research and development expenditure in New Zealand, for example, is 1.6 percent of GDP. That is tiny, and compared with the OECD average it is about half of that. So we have real issues that need to be addressed.

This is a start, as I have said a couple of times, and I will make reference to some of the clauses that I am referencing. So I will speak specifically to clause 192, new Subpart MX in the Income Tax Act 2007. As I said, we spoke insistently and strongly about the tax incentives needed for small to medium sized businesses. We noted that the original drafting of the bill did not even acknowledge small to medium sized businesses—well, it did, but it did not really give them the opportunity to write off those costs because it was kind of post or after the fact. A lot of them were running losses. They were not making the profits that would enable them to compensate, as it were, for those losses in terms of research.

The section I am speaking about is MX6(4): … “the company is liable for an amount of R&D repayment tax equal to the total of the company’s R&D loss tax credits for the tax year corresponding to the reinstatement year and earlier tax years minus the total amount of—”. It explains it in detail. It is hard to summarise it because it is so complicated, so with your forbearance I will just read out the paragraph that I think is particularly pertinent: “(a) the company’s terminal tax, plus tax credits giving rise to imputation credits, minus refundable tax credits giving rise to imputation debits, for tax years in the period beginning with the earliest credit year and ending with the tax year corresponding to the reinstatement year:”. It is incredibly complicated language, but what I wanted to acknowledge is that that part does mitigate somewhat New Zealand First’s concerns around small to medium sized enterprises being left out.

But I ask the Minister—and I ask this earnestly—if this is what was actually wanted, what was the subsequent consultation to reaffirm that that was the outcome from this altered clause? Are you getting what you intended from it, and are our small businesses able to benefit from it?

Just to finish off, I keep raising the point—I have in the past—about unintended consequences. Some analysis on this would be hugely helpful. It will be important to understand just how that works in practice. Perhaps if I just leave my contribution there and wait for my next contribution, to be able to take on another part separately. Thank you.

Research and development tax credits and black-hole expenditure were a big part of this bill, and I will talk about those in a second, but there is one clause that I would like to talk about, which has sort of flown under the radar but I think deserves a bit of attention, and that is clause 69. What this clause does is it amends the available capital distribution amount, and it is actually to do with the buying and selling of livestock—around the capital gains and capital losses associated with the buying and selling of livestock. The interesting thing about this clause is that it actually comes into force on 28 March 2012.

Now, as we know, there are a number of pieces of tax legislation that are retrospective, for a number of very good reasons, and we accept that, even though one of the underlying principles of tax legislation is that it is not ideal to have retrospective legislation because people have tended to make decisions based on the current law—as they should.

This has eluded my attention, I must admit. Maybe I was a bit remiss at the select committee when I looked at this. I am not too sure why we have got a piece of legislation that is actually retrospective for what will end up being about 3½ to 4 years. That is a long time. I am assuming that there is a reason behind this—whether that is case law, and I suspect it must be. I am assuming what happened is that a farmer went to court because he or she was very dissatisfied with the outcome of a decision that the tax department had given, was taken to court, and the court made a decision. That decision has to be ratified through legislation, and that is why it has gone back to 2012. But it is rather unusual.

I must admit that in my short time in this House, including my time as Labour’s revenue spokesperson, I have not come across a piece of legislation that is so retrospective. I wonder whether it has any implications for farmers or Queen Street farmers and the dealings they have had over those last 4 years, or whether there are going to be any unintended consequences. I suspect there are not, but it is just worth noting that it is reasonably retrospective. I wonder whether the chair of the Finance and Expenditure Committee, David Bennett, has anything to say on that, considering he must have bought and sold quite a lot of stock over the last 4 years.

What I would like to talk about—and this came up a lot in discussion, including in submissions—is the eligibility of the research and development credit. As mentioned, we talked long and hard about this. We believe, on this side of the House, that we need a regime for rewarding research and development. The last speaker from New Zealand First talked about New Zealand’s research and development spend at 1.5 percent of GDP. I suspect that it is actually a lot higher than that. The reason I say that is that in this country you have to capitalise research and development. I believe that if we change the law—and this bill does not do that—to allow people to expense research and development, then I think you would find it went through the roof. I suspect that at the moment there is a lot of research and development undertaken that is not counted as research and development but is expensed in some way, shape, or form. But that is a point for another day.

I want to talk about Subpart MX2, the corporate eligibility criteria. In the select committee what we were really keen to ensure was that only New Zealand companies took advantage of this, because the purpose of this is to grow New Zealand companies to the point where they can take on the world. Certainly there is a recognition that early-stage companies are often the ones that are the shortest of cash or suffer cash-flow crises, but that they are also the ones that are spending a lot of money on research and development. So what we wanted to ensure was that a big corporate did not set up in New Zealand simply for the purpose of leveraging off this research and development tax credit. This is Subpart MX2.

We had a definition of corporate eligibility criteria, and, excuse me, but I am just going to read this out because I do think it is quite important just to clarify what we are talking about with eligibility. The first point is that the person is a company that is resident in New Zealand and that there is no double tax agreement under which, for the purposes of this, a person is treated as a resident of a foreign country or territory. This comes back to the point I was making: we did not want a large corporate to set up a subsidiary here, with a view to claiming this research and development tax credit.

The third point—this is an “and”, not an “or”—is that the person is a member of a group of companies, and the group does not include a company that is not resident in New Zealand. We talked quite a lot about this and determined at what level we should take this. There was an agreement that, in fact, what happens with a lot of these early-stage companies is that they set up offshore marketing or sales forces or incorporate small companies to actually commercialise or sell the research and development in another country. We needed to make sure that we allowed that but, however, avoided the circumstance I was talking about before. We said also that the company cannot be a company that is treated, for the purposes of a tax double agreement, as a resident of a foreign territory. And, of course, that the person is not a special corporate entity, that the person is not a qualifying company, and there are a number of other provisions.

I suppose what the select committee wanted to do was to make sure that we set up a regime that was easy to implement. We talked about the cost of setting this up, and we did not want a regime where the cost of setting it up was actually greater than the benefit received, which would have defeated the whole purpose, obviously. But it needed to be easy to access, it needed enough money so that it was worthwhile, but the costs and compliance needed to be such that the benefit created was way above that.

There were thresholds on this. For example, if I am right in saying this—Mr Bennett might be able to correct me on this—and if my memory serves me, you can collect only $500,000 per year, up to a total of $2 million. So again we are talking about really the small and medium enterprise sector. If we say the small and medium sector is defined by having 19 employees or fewer—there may be some companies that go above that, but by and large we are talking about small growth companies—it is up to a maximum of $2 million.

What the commissioner can do is stated in Subpart MX 5: “The Commissioner must extinguish the person’s tax loss for a tax year to the extent of the amount given by dividing the amount of the tax credit for R&D tax losses for the tax year by 0.28.” So we are using the corporate tax rate on that. There are a lot of clauses that talk about how this is going to be administered, and how much is available, but I think I will let my other colleagues talk about this. I just want to say that we do believe there does need to be a research and development regime in place, implemented by the Inland Revenue Department, but we think it could have gone a whole lot further. Thank you very much.

I want to carry on while we are debating this part with the discussion that we have just commenced through Stuart Nash on tax credits for research and development tax losses. The history of research and development tax losses in our tax legislation needs to be referred to. For many, many years New Zealand has had a low level of expenditure on research and development in the private sector relative to other OECD countries. Stuart Nash is quite right when he points out that the incentive to under-report research and development expenditure is higher in New Zealand than it is in other countries because you cannot claim a tax deduction for a lot of that expenditure and you are meant to capitalise it and then amortise it. If as a taxpayer you can categorise that as another category of expense and therefore get a tax deduction in the year it is spent, you are better off to do that and, as a consequence, there will be some areas of research and development expenditure that are reported as research and development expenditure in other countries that actually are appearing as other categories of expenditure in New Zealand in order to get that tax deduction.

Notwithstanding that there is almost universal agreement in New Zealand that levels of research and development expenditure in New Zealand are lower—that is, private sector research and development—than in other countries even when you adjust for that anomaly and that that is one of the reasons why New Zealand’s export performance is worse than it would otherwise be. Because of that historic under-investment in research and development the last Government in the last term of that Government introduced a research and development tax credit of 15 percent qualifying expenditure. The current Government came to power and axed it, and it axed it in order to fund amongst other things a decrease in the corporate tax rate, I think, to 28 cents in the dollar—was it 30 to 28 or did it go down in two stages; I forget the history but it went from 30 down to 28 percent—and it also funded income tax cuts, which were, as other people have said in other parts of this debate, weighted to those who were at the higher end of the income spectrum, with 40 percent of the income tax cuts going to the top 10 percent of income earners.

The Labour Party at the time was critical of that because we thought that although it was true that some of the money that was received by companies for research and development tax credits would, effectively, be a tax credit for what they already spent, albeit characterised as other sorts of expenditure, overall it would have lifted the increase of research and development tax expenditure, and that was modelled by Treasury. Treasury opposed the abolition of the research and development tax credit and said that New Zealand’s economy would be weaker as a consequence. The Inland Revenue Department at the time opposed a research and development tax credit and I think it is a matter of public record of a lot of those people who went through the initial stages that they actually found the Inland Revenue Department at that stage quite unreasonable in the way in which it implemented the controls around the research and development tax credit and made it difficult to access.

In any event, what happened subsequently to that was that the Government found that its export target of increasing exports from 30 to 40 percent of the economy went wrong. Indeed, exports as a percentage of the economy, instead of increasing from 30 towards that 40 percent target, have gone backwards, and have dropped to under 30 percent of the economy—to around 28 or 29 percent of GDP, and still dropping.

As a consequence of that the Government says “Well, we’ve got to do more than we’re currently doing in respect of research and development incentivisation.”, and it has, in new Subpart MX inserted by this bill, introduced these new rules in respect of smaller entities that are intensively investing in research and development that do not have other areas of income that they can take advantage of and that they can offset their qualifying research and development expenditure against, and therefore ought to be able to get it paid out to them as a credit, particularly when they are small companies and they are cash-flow negative.

The Labour Party supports that, and that is why we are supporting this part of the bill, but I do want to highlight what I think are the inconsistent arguments that are being run against research and development tax credits generally by what is happening here. The Government said that research and development tax credits were too complex to operate, and yet it has actually got a system here that is more complex than you would have if you had universal rules. Stuart Nash has gone through some of the definitions of the eligibility criteria to determine whether you come within these rules.

Look, I want to incentivise research and development tax expenditure in New Zealand, and I do not object to it being done for these companies, but it is somewhat ironic that the Government said that it opposed these sorts of initiatives because of complexity, and yet the rules surrounding this bill include rules relating to the research and development intensity of a firm in order for it to qualify. New section MX 1 says that Subpart MX applies to a person—which includes a company; it is a corporate person, as well—only if “the wage intensity criteria in section MX 3 are met;” and there are intellectual property outcomes that are intended for the benefit of the company.

To get to what that means, you then have to look at new section MX 3, which sets out the wage intensity criteria, and it is complex. It sets out a formula that has a different rate, for example, that you can claim in respect of contracted-out research and development expenditure compared with that which is done internally. That is in subsection (3) of the formula in section MX 3. Then it sets out proportions that you can claim for each of them. It then, in the next section, new section MX 4, sets out that there has to be a tax credit equal to at least the amounts that are set out for various years—very, very complex.

Then there is section MX 5B, which I do not quite understand, and I would be interested to hear the Minister explain it. Section MX 5 says that you have got to extinguish your tax loss to the extent that you have had a research and development tax loss credit. That is fair, because you do not want the Government paying out a tax loss credit and then people carrying forward a research and development tax loss that could then in a future year be used to reduce your income tax when you were in profit. That would not be fair, so they are stopping double-dipping there, but then section MX 5B is titled “Deduction if increase in basic tax rate for company”. When this section applies, it says that if the person “has an R&D loss tax credit for a tax year”, which they call the “credit year”, before the current year “for which the basic tax rate for a company is increased (the rate increase) if the rate increase results in a basic tax rate for a company that is greater than the basic tax rate” for the latest year, or the credit year, then various formulae apply.

Again, the complexity of this is extraordinary. For the Government to persist in pretending that its mistake in abolishing the research and development tax credit was not a mistake, and to come back with this narrower version of a credit for a research and development tax credit—in terms of the ambit of the economy to which it applies, which is narrower than the former research and development tax credit—and pretend that, 7 years into its Government, with exports going down as a percentage of the economy instead of up, as it promised, is galling. I would like the Minister to take a call and say how the Government can support this provision in respect of a narrow set of research and development and logically oppose broader research and development tax credits. If this sort of tax credit is accepted as stimulating research and development effort in a way that benefits our economy, grows the breadth of our exports, and grows the sophistication and value of our exports, why does that same argument not hold true in respect of other areas—

I move, That the question be now put.

I just wanted to carry on from one of the contributions earlier around the ”black hole” expenditure issue. It is a question of appropriateness and fairness, and so the question needs to be put to the Committee: what is this black hole expenditure? It is defined as expenditure that is currently neither deductible nor depreciable over a financial year, or, in fact, at all.

And, speaking specifically to new section CG 7C of the Income Tax Act, inserted by clause 73, and section DB 34(3)(a) of the Income Tax Act, in clause 85, what they are trying to do there with this tidy-up of the legislation is to remove—or it is probably best to describe it as reduce—distortions that discourage investments in research and development. So New Zealand First wholeheartedly supports the intent there. There has been a lot of ambiguity, and a lot of accountants going back and forth—in fact, I think one of the earlier contributions mentioned court cases around what is involved, and how we resolve these issues and come back with clear and meaningful definitions.

The black hole exemptions have been issues going forward. But what I want to say—and the example I want to use—relates to expenditure on derecognised non-depreciable assets, so it is a person incurring expenditure specifically on the development of an intangible asset. I just put it to the Minister—and it is a short call, Mr Chair. But when you look at that language—and I will just say again that it is specifically on the development of an intangible asset in terms of a person incurring an expenditure—I put the question to the Minister: will the issue be resolved?

New Zealand First acknowledges that the black hole exemptions from items that are neither deductible nor non-depreciable have created an issue in the past. We do want to incentivise small to medium sized businesses, particularly, in terms of giving them a chance to claim those tax credits, but the problem is, does this now not create just a different issue of ambiguity around the black hole exemptions? So some clarification is what New Zealand First is seeking there, because when you read the legislation the ambiguity is still there, to be fair, and it is simply a matter of the need for clarification. Thank you.

I would like to pick up some of the themes that have been echoed by my colleagues Mr Parker, Dr Clark, and Mr Nash, because we are at the heart of the bill, and, Mr Chairman, I know that you know that the previous Chairman guided the Committee to this part of the bill for the substantive part of the debate. This is where the meat of the legislation is, and it is very, very important that we deal with it substantively.

I want to turn in this particular call to the cash-out provisions, which are contained in clauses 192, 213, and 217, in particular. Let us give context to the public as follows. There was a heated economic and political debate about how we tilt our economy towards more value-added—how we get away from being just a commodity exporter of fairly unprocessed red meat or unprocessed logs or pretty unprocessed milk powders— and how we allow our economy to earn more value so we can pay higher incomes to New Zealanders.

Inherent in that strategic transition is the need for doubling if not tripling the level of research and development investment in this country—probably doubling the Crown’s investment but at least tripling the private sector contribution, which is derisory. It is in the bottom quarter of the OECD and it is not improving, and a key reason for that is the structure of the tax system, which gives a real estate speculator a tax break and an innovator in a start-up a tax penalty. That is nonsense. It is so bad for our economy. Is it any wonder that today unemployment has reached 6 percent again and growth is no better than 2 percent?

We are in trouble. We are not moving from the pathway to mediocrity, at best, that has characterised this economy, and, actually, it is in technical stuff like this bill, in these clauses, that we see the problem. The Government has been too scared to take on the real estate speculators. Money talks and National walks.

The CHAIRPERSON (Lindsay Tisch): Order!

In this bill what National is trying to do is get the tax credit, which Labour proposed and National cancelled, by another means, but it has gone in such a roundabout route that it is so cumbersome, so detailed, and so complex that start-up businesses probably will not be able to access it reliably. We are supporting the bill only because it is better than nothing, and only because it is a timid step towards what Labour proposed, but it is not good enough.

Here is the problem. For example, the cash-out provision for research and development expenditure contained in clauses 192, 213, and 217, and schedule 1 is designed to provide a temporary tax-flow relief to companies that are high in specific kinds of research and development, and then once they are over the cash flow crunch, they have to pay it back again. So the first point is that under these clauses it is very different from a proper tax credit—say 12.5 percent, as we proposed—where the company gets to keep the tax remission and put it on its balance sheet because it is a legitimate recognition that there is a public interest as well as a private interest in that research and development. Yes, it helps the company, but it also helps the economy and the whole country, and it never works, anywhere in the world, for the innovator to take all the risk if they cannot keep all the reward. That is why tax credit systems give a permanent remission, but this does not. This is only a cash loan. It is a timing change, and the company has to pay it back. That is the first problem.

The second issue is that when you take this alongside the structure of the Callaghan Innovation growth grants, which are not available to companies that spend less than $300,000 a year, or 1.5 percent of their revenue, on research and development, and thus are not available to start-ups, and have mandatory non-discretionary disbursement criteria so that they are funding—

I would like to take just a short call to answer one of the queries that David Clark put up to the House. He was concerned about the accommodation for ministers of religion, and this is clause 70 of the bill. Yes, I can confirm that this is a clarifying amendment, and it is to ensure that the original policy intent is met. The change ensures that the value of the accommodation is not double-counted when accommodation is part of the minister’s remuneration. So it is not double-dipping; it is a clarification.

Thank you very much, Mr Chairman—I appreciate it, because we are getting near the heart of the matter here. As I said, the Callaghan Innovation grants are not available to start-ups, because they have not got $300,000 to invest in research and development; they are absolutely scraping by, and they do not have a 1.5 percent of revenue - track record that would allow them to get these non-discretionary grants. In the Callaghan system, they are giving grants to foreign multinationals like, for example, Bayer and the Oracle America’s Cup syndicate—can you believe that? But in the detail of this bill, in clauses 213 and 217, the excluded activities from this complex halfway house take an opposite approach and—quite rightly, I think—exclude activities performed outside New Zealand.

If you go down the list of exclusions in this bill, there are some that we would agree with, such as why would we give a tax credit to research and development done outside New Zealand? Fair enough—good move. Why would we give a tax credit to the acquiring or disposition of land unless it is directly related to the research and development? Good move; I agree with that one. However, here are some that we certainly do not agree with: acquiring, disposing of, or transferring intangible property, core technology, intellectual property, know-how, or related activities. So when you are transferring—for example, if you are in a high-tech cluster—intangibles or intellectual property from one part of the innovation chain across a company boundary to another, you cannot claim the tax credit.

💬 Dr David Clark: Which clause is this?

This is in clauses 213 and 217. This is a very unusual move, because, frankly, it shows a misunderstanding of the nature of high-tech clusters, where, typically, you have multiple firms working together to solve complex problems, often taking specific parts not only of a business value chain but also of a software process, even. So this makes no sense. What is really ironic, of course, is that at the same time, the same Government, in the Trans-Pacific Partnership negotiations, is making it—

The CHAIRPERSON (Lindsay Tisch): Order! That is not part of this bill.

Mr Chairperson—

The CHAIRPERSON (Lindsay Tisch): No.

It is directly relevant.

The CHAIRPERSON (Lindsay Tisch): We are not talking about the Trans-Pacific Partnership.

I am not challenging your ruling. OK—I will come at that issue in a different way. Were it the case that while excluding a tax qualification for intangible property and intellectual property here, somewhere else the Government was extending the life of the same forms of intellectual property protection and was making it harder for small businesses to get one and defend one, then there would be a double jeopardy. It is excluded here, and it is more difficult there. So, again, the gestation—the history—of this bill shows the Government tripping all over itself. It would have been so much simpler, so much better, and so much cleaner to have an across-the-board research and development tax credit properly defined, with appropriate exclusions, and to have it across the board and bankable rather than this cash-out loan, which is so complex that most small businesses will not ever access it. One wonders: is it bad policy design or a deliberate public relations spin so that it looks like a proper tax credit but is in fact not one, because it is not fit for purpose and is too complex for start-ups to use?

Once again, it is a bit like Child Support - lite or Working for Families - lite—or this lite or that lite. The Government has signed up to a concept that the Opposition has been evoking—finally. It brought something in that looks like half a loaf, but it just will not work. It is just not good enough. What about the idea of having an accelerated depreciation rate for short-life high-technology plant and equipment? It sounds sensible—there is a body of international literature around that—but it is not in this bill in the same way. In fact, the exclusions here include things like the acquisition or disposal of the intellectual property, the commercial legal aspects of the patenting and licensing, the excluded use of the services of developing through an external contractee the acquisition of intellectual property, and excluding the cost of acquisition or transfer—again, making it very difficult for small companies working in a cluster to access these benefits.

The reinstatement of losses is contained in clauses 99, 117, 119, 192, 194, 195, and 213—

The CHAIRPERSON (Lindsay Tisch): I am sorry to interrupt the honourable member. The time has come for me to report progress.

Progress to be reported presently.

House resumed.

The Chairperson reported progress on the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill, no progress on the Weathertight Homes Resolution Services Amendment Bill, no progress on the Radio New Zealand Amendment Bill, and no progress on the Health (Protection) Amendment Bill.

Report adopted.

The House adjourned at 12.56 p.m. (Wednesday)