Taxation (Research and Development Tax Credits) Bill

I move, That the Taxation (Research and Development Tax Credits) Bill be now read a first time. I nominate the Finance and Expenditure Committee to consider the bill. At the appropriate time, I intend to move that the bill be reported to the House by 1 April 2019 and that the committee have authority to meet at any time while the House is sitting except during oral questions, during every evening on a day where there is a sitting of the House, and on a Friday in a week in which there has been a sitting of the House, and outside of the Wellington area.

This bill proposes to introduce a research and development tax credit to incentivise businesses to perform more research and development within New Zealand. This Government has a vision to build a better New Zealand for all our people, and we see an incredible opportunity ahead of us to do this. This means a country with affordable, healthy homes; an environment we can be proud to leave to future generations; and a diverse, sustainable, and productive economy that delivers for all of our people. This vision cannot be delivered with the same old approaches. We need new ideas, new innovations, and new ways of looking at the world, and that is where research, science, and innovation can play an important role. This is where we see innovators, our scientists, our entrepreneurs, and our visionaries building a better New Zealand.

Introducing an R & D tax incentive was always a high priority for this Government, which is why we allocated over $1 billion in Budget 2018 for this initiative. We know that it will help in transforming our economy, bringing us in line with other OECD countries. It is a key lever to deliver on our coalition agreement with New Zealand First to increase R & D expenditure to 2 percent of GDP over 10 years.

In designing the tax incentive, we ran through a consultation process and, as a result, we have made significant changes to the tax incentive originally proposed. We listened to the business community. The rate will be higher, the threshold lower, and the definition more inclusive. The most significant change we’ve made is to increase the rate from the proposed 12.5 percent up to 15 percent. A 15 percent credit rate is likely to introduce a greater amount of additional R & D than the 12.5 percent rate initially considered in preparing the design. The rate is more favourable than the current growth grant: 15 percent compared to the net rate of 14.4 percent for businesses in profit. A 15 percent credit rate is also more internationally competitive, putting us in the top half of the OECD’s B index, a measure that indicates the generosity of tax incentives. A higher credit rate combined with a mechanism to exceed the eligible R & D expenditure cap is likely to attract more international companies to relocate their R & D activity to New Zealand than would have otherwise been the case.

Currently, New Zealand’s gross expenditure on research and development is very low compared to the OECD average of 2.38 percent. Business expenditure on R & D has been steadily rising, but at 0.64 percent of GDP, it is low compared to other small advanced economies, and it is well below the OECD average of 1.65 percent. As I’ve already mentioned, we have committed to increasing R & D expenditure to 2 percent of GDP over the coming decade. Growing R & D expenditure has benefits for all New Zealanders. For businesses, R & D is recognised as a key indicator of innovation, which enhances their ability to succeed in changing markets. More broadly, R & D enables the diversification of the economy by encouraging new industries and companies, new jobs, and new ways of doing business. Some of these industries will build on our traditional strengths; others will develop in new areas. Increasing R & D support is part of how we’ll keep Kiwi firms moving further up the value chain and delivering higher wages.

More R & D will ensure we are living up to New Zealand’s international reputation as a place of daring and innovation. Achieving this ambitious R & D target will require a step change in New Zealand’s approach to innovation. Sustained increases in Government investment are important, and we are committed to playing an active role in investing in research, science, and innovation to ensure we make a real and noticeable difference. But we also need to see an increasing contribution from the private sector if we stand any chance of hitting our 2 percent target. That is why we are introducing this tax incentive as a further addition to the system of Government support for New Zealand’s innovation framework.

Over time we intend to grow this package, including targeted support for R & D performers, start-ups, and innovative firms. The R & D tax incentive will be one lever amongst many. The R & D tax incentive will have a broad reach across our economy. A wider and more diverse range of firms will be able to access the tax incentive, which will assist and encourage businesses of all sizes and scales to undertake R & D. Tax incentives allow firms to decide what R & D they should do and offer a greater element of certainty to all businesses. The process has been designed to cater for all types of businesses, opening access to those who have either struggled to get support or who have been shut out of the process in the past. We want to establish a system of support that will stand the test of time and give businesses the consistency and confidence they need to succeed.

Obviously, there needs to be a very careful approach to distributing tax incentives. We have learned from what happens overseas and from what we’ve experienced in New Zealand to ensure a high level of trust and confidence in New Zealand’s tax system, and the credit is used to support genuine R & D activity. The bill makes amendments to the Income Tax Act 2007 and the Tax Administration Act 1994 to give effect to the policy and for the provisions to apply from a business’ 2019-20 income year. This nests the R & D tax incentive within our current tax system.

The legislation performs two functions: it sets out who is eligible for the R & D tax incentive and how they will claim it, and it also sets out what is eligible and ineligible for the R & D tax incentive. These boundaries are necessary in order to provide as much certainty as possible both for firms undertaking R & D and for the Inland Revenue Department in its administration of the scheme.

The key features of the R & D tax incentive include a credit rate of 15 percent; a $120 million cap on eligible expenditure; a minimum R & D expenditure threshold of just $50,000 per year; the inclusion of State-owned enterprises, industry research cooperatives, levy bodies, and minority-owned more easily across all sectors, including the technology and IT sectors.

Additionally, in the first year, refunds of the tax credit are targeted to research-intensive small and medium enterprises. This will mirror the R & D tax loss cash-out scheme run by Inland Revenue. By the second year of the scheme, we will have a more comprehensive policy in place, but the feedback we have received was that it was important to have some form of refunds in place for year one, particularly for loss-making and pre-profit businesses.

Our modelling shows there is sufficient funding available to meet the forecast cost of the scheme at the 15 percent rate through to the 2021-22 year once growth grants funding is re-prioritised, as grants are phased out by April 2021. This is because a business will not be able to claim for both a growth grant and an R & D tax incentive.

I am pleased that the design that we have proposed in this bill has been well received from stakeholders, following a thorough consultation. We’ve listened to feedback, and we have provided a user-friendly, fit for purpose scheme that will support businesses, from start-ups to established businesses, to undertake more R & D. The R & D tax incentive is a significant addition and I commend this bill to the House.

The question is, That the motion be agreed to. With about 10 seconds remaining, I’m—

💬 Hon Ruth Dyson: Sorry, what was the question, Mr Assistant Speaker?

ASSISTANT SPEAKER (Adrian Rurawhe): The question is, That the motion be agreed to. And—

💬 Hon Member: Those of that opinion?

ASSISTANT SPEAKER (Adrian Rurawhe): Ha, ha! I don’t think we’ll put the next member through about 10 seconds of a speech. It is now 10 p.m., so this debate is interrupted and set down for resumption next sitting day. The House stands adjourned until 2 p.m. tomorrow. Pō mārie.

The House adjourned at 10 p.m.