Taxation (Research and Development Tax Credits) Bill

It’s a pleasure to be talking on the Taxation (Research and Development Tax Credits) Bill, first reading. I want to start out by saying that National is keen to support creative New Zealand businesses, to help them grow and prosper. This includes providing not only the right economic environment for them to flourish but also the ecosystem for younger businesses to flourish. Reducing taxes, ensuring laws are kept to a minimum, and other such measures are all part of creating that environment. But R & D is also an important part, as R & D—research and development—has the potential to drive growth in the New Zealand economy not only by increasing the size of businesses in New Zealand but actually by diversifying the activities that our good companies undertake in New Zealand.

It is exciting, in terms of the new creative industries that are occurring and the tools that will be adopted in the future—when you go and talk to these businesses, the growth in things like robotics, artificial intelligence technologies are always going to be there and are an important facet, in terms of further growth of our businesses. But that is why the New Zealand National Party has always been keen to assist companies with R & D. The Callaghan Innovation Growth Grants scheme was part of that programme that we put in when we were in power. I think it’s slightly perverse that when the Prime Minister was recently at Methven on 3 October, waxing lyrically about high-growth companies and the importance of R & D, David Banfield presented her with the latest technologies in a showerhead developed by Methven, and of course that new technology came out of the direct support from the Callaghan grant scheme, which over the last year gave away approximately $150 million a year.

But the Government has chosen to do away with the Callaghan scheme and revert back to a scheme that previous Labour Governments have put in place. That is one based around a tax credit scheme where companies undertake R & D activities and then they’re entitled to offset 15 percent of the total expenditure they incur, and use that as a deduction against their future profits. This scheme that’s been put forward has big bucks. It’s a billion-dollar programme.

The Minister has claimed that businesses will be better off, as more companies will be covered by this new scheme. Initially, she claimed that 3,000 businesses would benefit, and then that was reduced to 2,000. Now, in the scheme of how many businesses we have in operation in New Zealand—nearly 530,000 businesses—it was interesting that officials providing advice on this new scheme said that 85 percent of the Government’s tax payments would go to approximately about 330 firms. In essence, what that’s saying is there is a very small clutch of businesses that are responsible for most of the research and development in New Zealand, and of course that cuts across the whole concept of trying to provide R & D to a whole raft of companies.

The second issue with this scheme is how the Minister knows that only $1 billion will be spent, and that’s an interesting question. In the Australian R & D tax incentive scheme, which is very similar to what’s being proposed by the Minister in this bill, they originally budgeted for a $1.8 billion research and development scheme. That was put in place in 2011. That subsequently blew out by roughly half, to $3 billion. That’s the nature of the scheme that’s been proposed by the Government. The Minister has claimed that, no, that’s not going to happen with this scheme and she’s going to put in mechanisms to make sure that it doesn’t take place—that we do not have a ballooning of the $1 billion to $2 billion or $3 billion. But there have been no further details provided by the Minister as to how she will ensure that there is not such a substantial blowout.

The advantage of the Callaghan scheme—the scheme that’s currently in place—is that it is fixed, and it’s one where the budget is divided and directed at the highest priority research and development companies. This is the one area of particular importance that we will be ensuring is addressed adequately in the select committee stage.

The other issue with this bill is around enforcement. This is a big issue because generally what happens—and this happened when the previous scheme was in place—is that there are rules around which activities will be included and can’t be included. In the schedules there are 24 activities that are excluded and 11 other areas that are excluded from supporting R & D. It’s interesting: things like the cost of incurring and obtaining patents is actually one of those that are excluded in this R & D expenditure. However, rules create the opportunity for interpretation, and this is the issue. Commonly referred to as rorting, these schemes are open to widespread claims by people to say that what would otherwise be normal business expenditure they incur are subsequently reclassified as research and development. This is a real possibility. Again, we will be highly vigilant during the select committee stage as to whether and what measures the Minister will be putting into place to make sure that that does not take place.

The other thing, and this is one of the biggest concerns for us, is that this bill is totally silent on the issue of supporting those young, innovative, creative businesses, made up of wonderful New Zealand men and women, who every day are seeking to fulfil their dreams by creating new products and services. That is incredibly hard work and these people often put themselves in a financial disadvantage to be able to go and do it. But these are the success stories of the future, and we want to see more of them succeeding. I think one of the things that we can do is we need to see how we can support them. National was very conscious of it, and when we were in power we put into place two provisions, both in regard to start-up businesses or pre-profit businesses. One was to provide a real tangible benefit, which was to the extent that they could take in the form of cash any tax credit equivalent amount of 15 percent of the expenditure, which is the most precious element apart from their time in terms of helping them to continue their research and development. That cash-out clause was an important and tangible measure that we put in place.

The other thing we put in place was the ability to deduct what’s otherwise termed black hole investment, which is expenditure that’s incurred in doing R & D that sometimes cannot be deducted against future profits. Again, we came up with practical measures to make sure that black hole investment expenditure could be depreciated and actually taken into account.

But, again, this bill is absolutely silent on the issue of start-up companies, and I think that’s a great travesty. This Government should particularly be concerned about the representation from NZTech, representing over 800 start-up technology businesses—and by the way, New Zealand technology businesses are huge and a large part of our GDP. That organisation made it clear that these proposals do nothing for their members, and that is a travesty.

On behalf of the National Party, I want to say that we support plans to help New Zealand businesses to grow and prosper. That’s an absolute given. We understand the value that R & D plays in terms of helping our economy to diversify and to create high-value jobs. In many cases, they are very high-value jobs. And, unfortunately, we’ve just had the debate around the oil industry. We’re not persuaded that this package will work, and I’ve noted some of the specific elements before, but we will be supporting this bill through to the select committee because we want to hear from businesses about the specific elements of this package. But I do say that we give no guarantee of our support beyond that because of the significant concerns I’ve already raised.

Tēnā koe e Te Māngai. I actually must say, I always enjoy the contributions of the honourable member Andrew Bayly. We sit on a number of select committees, and I do value his intellectual input. I think that there are a number of issues that the member raised that I think are also of equal consideration for this side of the House when it comes to striking the right balance, in getting a scheme that incentivises innovation by industry, by our companies. This scheme here is one of, I guess, probably the most—it’s something that private industry all throughout the country has been calling for. Here they were, shackled by a red-tape Government organisation—that was well supported by the Opposition, oddly—that really constricted the way that R & D tax credits have been able to work.

So I want to commend New Zealand First for bringing the R & D tax credit scheme into our coalition agreements and negotiations. I want to absolutely applaud the efforts of the Hon Megan Woods, alongside the Hon Stuart Nash, because what we’ve done here—and, look, you’ll know from when the R & D scheme was first introduced that there was a whole range of measures. One was that the threshold was going to be quite high—$100,000 that every private enterprise had to spend in order to qualify for the scheme. The other was that it was going to be a 12.5 percent rebate. Well, what private industry said, and particularly small and medium sized businesses, was that that is going to make this scheme too hard to access.

Now, what we were trying to do is unlock the potential—look, New Zealand is and always has been a country that has always been able to get out that number eight wire. We rely on our innovation. We rely on small enterprise to create massive momentum. So what this did, in consultation with a whole range of small to medium sized business, plus, of course, our larger industries, is worked—and I commend the officials for the work that has gone into getting this scheme. It’s a technical scheme but it is a positive one that re-enables our businesses to create our own solutions for some very challenging tasks that we as a nation have ahead of us.

I want to draw on the words of the chief executive of Business New Zealand, Kirk Hope. He said, “The Government has listened to small business. They’ve halved the incentivisation scheme to get in, from a $100,000 to a $50,000 spend, and lifted the incentives for smaller companies to access.” And, for us, that’s a real achievement.

I listened to the honourable Andrew Bayly’s consideration, and I think one of the things that this Government has been very cautious to do—we are mindful for the need of fiscal pressure and maintaining the integrity of the tax system. We heard from the Opposition that they’ll be eagerly looking and focusing on the way in which any abuses of such a scheme can exist and occur—as will we, because we’ve been working alongside our officials and alongside the stakeholders because what we do believe is that taxpayers’ dollars must be carefully targeted at the people who are conducting true research and development. So we put a lot of effort into the eligibility scheme, and this is something that I am very proud of our side of the House—that we are going to strike the right balance.

For instance, the bill proposes that claimants must satisfy certain general criteria to be eligible for the R & D credits. The bill contains criteria which will ensure that we’re supporting support for R & D that happens in New Zealand rather than offshore, although some offshore companies that have a stake in New Zealand will be able to apply for those tax credits. To be eligible for the tax credits, claimants have to perform at least one core activity for New Zealand.

Like I said, this is a long and complicated bill. The Hon Megan Woods, when she introduced this bill, spoke to the merits, and she gave a thorough, comprehensive overview of what this bill contains. As it progresses through this House—and I’m glad that the Opposition have decided to support this bill through to the select committee stage. What they will hear is from private industry that have been calling for the R & D tax credits to be made back available.

I implore the Opposition to eagerly listen and follow what private business is saying. They’ve been calling on the previous Government to re-establish the R & D scheme, but, this Government, we’re just getting on and doing it. So, that said, I commend this bill to the House.

Thank you, Mr Assistant Speaker. The National Party support the R & D tax credit bill to select committee because, while we support the principles behind the bill, we have some serious questions to ask of the Government and we will be doing that through the select committee process and in the House here. My colleague who spoke on this side of the House, Andrew Bayly, has given a very good summary of our concerns around this R & D tax credit bill and what is just in and what is just out, so I’ll just start there with my brief contribution.

The first thing to do is go to the schedules in the bill and see what is excluded and what is not. I don’t have time—and probably it’s not a good way to spend my time—to go through each and every one of those things, but there are a number of matters which are excluded from the definition of core research. So there’s things like routine software and computer maintenance—well, of course, that should be excluded from claim as an R & D tax credit line item; management studies—yep, that’s fine; activities relating to organisational design—and on it goes. There are 24 of those exclusions, and then in Part B there are 11 activities that are excluded from the definition of supporting research and development activity, and on it goes.

Through the schedules, there are a lot of inclusions and exclusions, and I would expect that a number of the submissions on this bill will relate to these inclusions and exclusions. That always is the weakness and the pressure point and the soft point, if you like, in drafting legislation which has to be so prescriptive, because it won’t just be parliamentarians and the submitters who are scrutinising these inclusions and exclusions; it will be accountants who—as they did back in 2006, 2007, I believe, when Labour, when it was previously in Government, did introduce an R & D tax credit scheme. Accountants were gearing their clients up so that they understood fully those items that they could claim. There is a concern, and I think it is valid, that rorting could be—I mean, this kind of expenditure is prone to rorting. So it’s good to see that this bill is prescriptive, but there are weaknesses within the regime.

My concern and qualified support for this bill centres around the fact that small business—which comprises 97 percent of business activity in New Zealand and ranges from anything from a tech start-up in Wellington where the directors and managers of that start-up are so enthusiastically falling over themselves with enthusiasm and great ideas—and that’s fantastic. Will they be eligible for R & D grants? Start-ups go from that to rural New Zealand, where a farmer is using the woolshed to develop a new product to diversify their agricultural offering, as happens all around rural New Zealand. As a threshold for R & D investment, $50,000 is high for someone who is literally developing a new idea, developing a new technology, or developing a new product out of their back bedroom or their shed or their woolshed. Those of us who talk to small business—and constituency MPs talk to people like that every day, who are just as excited about the opportunities presented with their new product or idea as anyone else. But will they be entitled to claim the R & D tax credit, because of the $50,000 threshold of investment?

I would really like and appreciate—particularly in the committee stage, when this bill is returned in due course—the select committee to examine that, because if this is an R & D tax credit system which will benefit some business in New Zealand, why then is such a large sector potentially excluded, particularly when there is no certainty around other measures that National brought in when we were in Government around providing tax relief and stimulation for small business.

My final point is that the one thing that small business and business in New Zealand needs is stability of Government policy. That is one of the factors why the National Party is supporting this R & D tax credit bill through to select committee. But, having said that, certainty is what they haven’t got, because the contents of this bill are not sufficiently clear. Having said that, there are a number of very prescriptive schedules in the back of the bill, but that actually doesn’t advance their certainty any further, and that is yet another matter I would like to see addressed in select committee. Thank you, Madam Assistant Speaker.

Thank you, Madam Assistant Speaker, for this opportunity to speak to such a fantastic piece of legislation. You wouldn’t realise it by listening to those on the other side of the House, would you, but this is exciting. This is amazing, and we’re doing it at a time when the economy is doing really well—really well.

💬 Hon Member: Ha, ha!

The member laughs because he believes his own internal spin machine. But right now we have, for example, the tech industry—they just saw, I think it was, an increase into their R & D of $1 billion themselves just in the last year. Why are they doing that? It’s because they see the positivity of this Government that’s willing to participate and encourage and make sure that this country takes advantage, and that our businesses are able to take advantage of real opportunities that are out there in abundance through the Provincial Growth Fund (PGF). And through—I’m proud to say—New Zealand First’s negotiations with our amazing coalition partner, Labour, we’ve got Minister Woods and Minister Nash doing fantastic work to bring this vision to fruition. They see and understand, and saw it themselves, the logic of what we’re trying to do here.

I’m getting lambasted from the other side of the House, not very well, but what I would say to that is for—I think, forgive me, I forget the year that it was trialled. It was kind of started and then it wasn’t implemented particularly well.

💬 Hon Andrew Little: 2008.

2008?

💬 Hon Andrew Little: Never had a chance to get off the ground.

No, it was pretty much stopped as soon as National came in. That’s right—2008. That’s right. Thank you. That’s exactly right. And they spoke about the abuses of it, the stories that Mr Bayly was regurgitating earlier in his contribution. So what he doesn’t acknowledge in his contribution is that we learnt from that lesson. We saw the abuses that businesses were trying and successfully getting away with. So we saw it; we’ve identified it. Good minds, good people with tax expertise have worked on this so that we’re not enabling another system where businesses can take advantage of a tax system.

What we’re doing, actually, and what we should have done a long time ago—what a Government should have done a long time ago—is actually bring in these R & D tax credits, because what our businesses have been facing is the real issue of competing with their international competitors who have regimes that we’re trying to implement in New Zealand right now. They have been advantaged by this very type of regime, and they are doing incredibly well because of it.

I wanted to note that, for example, our tech industries—and I’ve spoken about the PGF, so I’m pleased to say, I’ve seen first-hand our tech industries in our regions actually setting up shop out in our rural communities, out of the big cities and doing incredibly well, because we’re supporting them to do that. We think it’s a wonderful thing. Their revenues grew by 11 percent in the last financial year.

💬 Alastair Scott: Without tax credits.

I’m getting there, mate. Calm down. And their exports rose by 12 percent and staff numbers in the tech industry have increased to nearly 50,000 people. Now, what we have seen in the conversations that we have had is the engagement with PGF and the opportunities that has created, but they’ve seen that fundamental change in the Government’s approach. They knew this was coming. They knew that they will be able to take advantage of real opportunities for R & D tax credits so that they can compete on a level playing field with their international competitors. We are at 0.86 percent, I think, of GDP in terms of spend on R & D. What we’re trying to do here is take us to a place where we’re at least at 2 percent. My understanding is that actually is simply a good start, because international competitors are at two-point-something percent of GDP in terms of the R & D tax credits.

So this is fundamentally good Government practice. This is something that will encourage the very innovations that we have been celebrating recently and we will see more of. We were having a debate around clean technologies in the House earlier, and this is the very kind of mechanism where we can encourage these renewables, that research, that fundamental core element of good business at that cutting edge so that New Zealand can continue to be good at what we do in terms of niche industries where we’re operating just ahead of the curve in terms of world competition. This helps. This makes a big difference, but you wouldn’t think so from listening to the Opposition.

We envisage 2,000 businesses, including start-ups, benefiting from this package. We are absolutely sure that what we are doing in terms of the Callaghan Innovation Growth Grants—that’s just the growth grants. Callaghan’s still there. We’ve still got New Zealand Trade and Enterprise; we’ve still got Callaghan trying to do good work with businesses directly. But we know that industry said, “Actually, this growth grant is really difficult, and actually it’s putting us into boxes that we don’t necessarily want to be put in. So let us make our decisions for ourselves. Let us take the risks that we want to take, but help us to do that.” And so that’s exactly what this Government intends to do with this piece of legislation.

Thank you to the Opposition for not politicking for the sake of politicking, I suppose, is one way to put it. We will have a good, robust select committee process, and I look forward to that. And, I suppose, all there is to say now is: I commend this piece of legislation to the House. Thank you.

It’s a pleasure to follow Mr Tabuteau. On a lot of things we agree, but some of the comments he made in his previous contribution I can’t agree with. First of all, this side of the House is very, very supportive of growth in New Zealand. In fact, the current growth is largely the result of the policies of the previous National Government. We want that to continue. We want New Zealand to be prosperous and to succeed, and we support research and development support, and we have done previously.

This has been announced, as my colleague Mr Bayly said, as a billion-dollar programme. That’s ambitious, and anything that supports research and development and the growth of New Zealand businesses we also support. But he also said—and I wish to reiterate—that around 2,000 businesses would probably be eligible for this type of support, out of a business community of around 550,000. So it’s a very small percentage, but it is important.

In my own electorate, I’ve watched innovation, research, and development flow right through the horticultural sector in my own community. At a very time when that is booming and we can’t find enough labour, what we need to do is innovate, and I see lots of businesses that are doing that. So I’m hugely supportive of research and development and how we can do things, and we on this side of the House are happy for this bill to go to the select committee. Then we’ll have a proper analysis of the issues that are involved in this different approach. It’s fair to say that we have some concerns, and some have been raised by previous speakers—my colleagues on this side of the House.

The Australian example would show you that the tax credits tend to blow out over time. They start off as a prescribed amount—and in this case, we’re talking about a billion dollars—but the Australian example, with all the best advice, with all the best rationale and all the best controls, has ended up in a somewhat uncontrolled position, far greater than what was envisaged. That’s because accountants, lawyers, and smart business-restructuring experts find ways around to actually shift normal income that isn’t taxable into a taxable expenditure. We shouldn’t underestimate—and I’ve read the schedule and I’ve seen the exemptions—how accountants will try and reclassify expenditure to get a greater deduction.

I also have a particular concern because I can’t see in the legislation how start-up companies can access this easily. I’ll give you an example: in my own electorate, last week, I met a start-up company that, in my reading of this bill, would qualify for R & D tax credits, but they told me that for the first four years they have been cash-flow negative, so they are not paying tax to get a credit. These are the types of things that we want explored properly in the select committee. This is why we’re happy for it to go to that stage, and at the select committee there will be a robust debate, and this side of the House will form its view as to which side we’re on, whether we’re supporting grants like with the Callaghan Innovation process or we’re supporting R & D tax credits or a combination of both.

But I do not want Mr Tabuteau and others to think that this side of the House is not supportive of R & D support and grants or tax initiatives going to our businesses. We are a completely pro-business party. We strongly support the endeavours of community businesses, large and small, right across New Zealand.

When I draw it back once again, in closing, to my own electorate, I see tremendous opportunity for more R & D and tremendous opportunity for more growth. We just have to make sure, as politicians in this House, that we create a structure in terms of R & D that is fair, enduring, and also uses the best of knowledge we can glean from other countries that have tried this. So I commend this bill at its first reading to select committee, and I’m really interested to see what comes out of that process. Thank you, Madam Assistant Speaker.

E Te Māngai, tēnā koe. Tēnā koutou e Te Whare. It is a pleasure to rise and speak on this, the first reading of the Taxation (Research and Development Tax Credits) Bill. We as the Greens believe that a clean, green economy has to be our future because, indeed, if we don’t have a planet, if we don’t have a sound, safe, secure environment, then we don’t really have an economy.

I also wanted to reach out across the aisle and say thank you very much to the Opposition for throwing their support behind this piece of legislation. I do think that it’s perhaps the first time that I’ve ever heard from the National Party fears or concerns about tax credits or reducing tax, but I absolutely invite their critiques on this piece of legislation, because that robust scrutiny is going to be incredibly important at the select committee process.

This piece of legislation is important because New Zealand is presently behind the rest of the world, but we typically, actually, pride ourselves on being at the cutting-edge. We’re behind the rest of the world when it comes to our investment in research and development—a point which has been noted by speakers prior to myself, but I think it’s important to put it on the Hansard, in detail—and New Zealand’s investment in research and development measures at 1.26 percent of GDP, which is well below the OECD average of 2.35 percent. New Zealand is also behind on the number of patentable ideas produced, with most OECD countries producing nearly four times the amount produced here in Aotearoa New Zealand.

I think that we’re a country and a people and a society that prides ourselves on our innovation and, indeed, on our ideas. The purpose of this legislation is to get behind those ideas and incentivise them, with as little bureaucracy and red tape as possible. Why we are stoked about this methodology as opposed to what other members from the Government benches have criticised, the grants-type approach, is that grants appear to pick winners. There is absolutely a competitive process, but it isn’t as simplified or as streamlined or as available to all companies who are investing in that research and development, and innovating. There therefore are barriers to entry, and it’s not available to all. Tax credits remove that bureaucracy and ensure that all who are investing, obviously, within that threshold are able to get that tax credit.

So too I think it is important to note that this diversification, which is enabled by way of investment in research and development and, indeed, in innovation is incredibly important to build a more robust and sustainable economy—one which adds value. New Zealand has often actually led the world when it comes to our innovation and ideas in services, in software, and in products.

I think that it’s also worthwhile noting that throughout the select committee process, it would be incredibly valuable for members of the select committee, as I’m sure will come up throughout the submissions process, to take into account that it’s presently kind of unclear how loss-making companies—which, notably, is the situation for many start-ups and small businesses, which has been cited by many members—will be catered for under this new regime. So that, perhaps, is something worth taking into account throughout the submissions process, and, indeed, I would invite any member of the public who is interested in this riveting piece of legislation—I promise, it is riveting—to engage in that select committee process. It creates, essentially, a more level playing field because it is moving away from this system of grants and picking winners. Instead, it is available to all of those companies who engage in that investment in research and development.

I just, finally—despite the cross-partisan sense of great unity—want to bring to account a few of the tiny things mentioned by the previous speaker Lawrence Yule, when he noted that it was under the National Government that we steamed ahead with our diverse and our highly productive economy. Just on one point in particular, I wanted to state and fact-check the point that labour productivity in the final years of the National Government was at the lowest that had been seen since 1996. So I think that’s just an important fact to put on the Hansard, if we shall entertain such facts.

But, moving back to that unanimity and that great sense of innovation and collaboration, which I’m stoked to see lighting the way across the House this Thursday afternoon, the Green Party is incredibly proud to be supporting this piece of legislation and would like to tautoko the sentiments raised by my colleagues—particularly from New Zealand First—in bringing this idea to the table and making it happen in this Government through the coalition agreement. We’re incredibly proud of this move.

I would also—just finally—like to make the point that this is something which I hope Russel Norman, former Green Party co-leader, will be incredibly happy with, given that it is something that he advocated very loud and strong for, for quite a long while. Kia ora.

Thank you, Madam Assistant Speaker. It’s a pleasure to be taking a call this afternoon and speaking on the Taxation (Research and Development Tax Credits) Bill. I enjoyed—as I often do, actually—the contribution of the Green member Chlöe Swarbrick opposite, and she noted that it’s the first time that she’s heard National MPs speaking with some scepticism about how a tax credit might be applied. Well, I’d just simply counter by saying that it’s the first time I’ve heard the Green Party speak in favour of a reduction in tax.

We do support this bill, though, because primarily we do support a greater uptake of research and development in the New Zealand economy, particularly for small businesses. We also recognise the destabilising effect that can happen when Governments do change, and Governments have a habit sometimes of throwing out everything that the previous Government has done. So we are conscious that we want to preserve some stability and ensure, I guess, a lasting research and development regime that can continue into the future. So we do support it to select committee, and we will be working in a collaborative way and contributing, hopefully, to a lasting policy to support research and development.

But I do wish to just dispel a couple of myths that have been raised this afternoon and in the wider debate. The first one is that we do actually have a very innovative economy, and if you want some evidence of that, you don’t need to look too much further than my electorate of Rangitata. In my electorate of Rangitata, we’ve got a very large Fonterra plant called Clandeboye. The Clandeboye plant now produces more than half of the mozzarella that tops the pizzas in China. Several years ago, Fonterra moved away from the volume products like milk powder and started investing in some of the value-add products, and that’s a really good example, where a huge amount of mozzarella is now being produced in South Canterbury, and it employs a large number of people in the Temuka area.

That sort of innovation was supported by the previous National Government through things like the Primary Growth Partnership, also the Sustainable Farming Fund, and, of course, we also created Callaghan Innovation to work hand in hand with New Zealand Trade and Enterprise to help create and market the new products and ideas. In the past 12 months, Callaghan Innovation has worked with more than 2,700 companies, so their spread is quite broad. They do work with a range of companies.

There has been some criticism, I think, so far in the debate of the growth grant process and how they’re allocated, but I do just want to remind members opposite of why that growth grant scheme was put in place. It’s because when we came into Government in 2008, there was a situation where the previous tax credit regime was being rorted. Unfortunately, a number of companies were reclassifying existing expenditure as research and development, and they weren’t actually undertaking genuine R & D. So we unapologetically axed that scheme and brought in the growth grant scheme because we felt it was important that if you are going to undertake R & D, then you should be up front about the fact that you’re doing that and that you should provide some evidence that you are doing that, because otherwise you do have a system where it is being rorted.

So that will be the focus, I think, of members of the committee. I hope it’s coming to the Economic Development, Science and Innovation Committee to be worked on, because I’m very keen to ensure that we do have a lasting research and development scheme but that it’s one that’s robust and has a number of safeguards to ensure that that rorting doesn’t happen.

I understand this is a split call. Dr Deborah Russell, you have five minutes.

Thank you, Madam Assistant Speaker. It gives me great delight to stand and speak on a tax measure. Actually, I’ve been thinking about a brilliantly innovative company in Avondale, in my electorate of New Lynn—the Smart Hot Water Company. They do some amazing things with hot water cylinders and layers and convection currents to enable people to manage their hot water cylinders very efficiently and effectively. It shows real ingenuity and thoughtfulness. They’re doing some incredible work right at the moment with solar panels and heaters. I don’t think it’s public news yet so I won’t take it all that much further.

What this makes me think is just—you know, they’re doing a great job, but there is real ingenuity and real knowledge amongst New Zealanders about how to do some of this great research and development, and wouldn’t it be great if we could do more? And we know we need to do more, so that’s why I support this particular measure. It’s about upping our R & D and about trying to get some stuff right for our economy. But, as previous speakers have noted, there is a need to get some of the technical details of a tax credit right. There’s the ongoing issue of grants versus R & D—research and development—tax credits, and, as my colleague Ms Swarbrick noted, it’s about giving everyone an opportunity to access Government support for research and development instead of picking winners. But that’s a debate we can have in, I hope, the Finance and Expenditure Committee. I’m certainly looking forward to it.

The bill as presented does have a definition of what this research and development is going to look like. It’s an interesting one, and I know it’s been developed throughout consultation, but I’m looking forward to debating that particular section: it’s a new section LY2, set out in clause 10, that will go into the Income Tax Act.

But what I especially want to address is the issue of supporting start-ups. Now, the previous National Government introduced a very interesting measure whereby companies which were engaging in research and development could get refundable tax losses. Now, this is interesting because normally when you make a tax loss you don’t get any money back on it. You can carry the tax loss forward and set it off against future profits. But for some types of R & D, instead of having to carry that tax loss forward, you could actually get some cash back straight away, and this was explicitly designed to help start-ups.

Now there is a measure in this bill to assist start-ups. In fact, these tax credits will be refundable tax credits, so that means that for certain small companies, up to a certain value, you will be able to get actual money back on the R & D that you’ve done. Now, that’s a very useful measure, and I hope, Mr Yule, that addresses some of the concerns that have been raised this afternoon. I think Mr Yule and Mr Bayly both raised this concern. There is a measure in this bill that will help with this. I want to know what the relationship between that measure and the refundable tax losses will be, because they both cover a bit of the same ground, so I think that’s one of the issues that we will discuss in depth in the select committee.

I think one of the other issues that has been raised, I think by Mr Bayly and I think by Mr Yule, was around issues to do with rorting and the possibility of people rorting these really quite generous measures—it’s a good concern to raise. It’s interesting, because clearly the people who have designed this particular set of legislation and have drafted it have thought of that issue already, and clause 7 of this bill introduces a new section into the Income Tax Act, section GB 56, and that’s about arrangements to avoid tax liability.

So there is a sort of a catch-all measure in there, but like other members who have spoken this afternoon, I do want to have a look at those schedules and have a little think about what ways that clever accountants—because people have noted that accountants are clever—can get around this particular measure, and, you know, it’s worth having a good think about, a good examine. I’m looking forward to doing it in the select committee, remembering always that the objective here is to promote research and development and to promote more R & D in our economy. And for that reason, Madam Assistant Speaker, I commend this bill to the House.

Thank you, Madam Assistant Speaker, and, as we know, this side of the House will be supporting this bill, but with some strong reservations. I guess the first question is why we need to have research and development tax credits, or even grants, when, as Mr Tabuteau himself said, the IT sector is spending a lot of money and doing very well, all by themselves, without tax credits, in research and development. And so you have to ask the question why—why are we supporting this bill and why are we supporting tax credits? From the Government’s point of view, they say it is to increase productivity—increase productivity—and it might. But there are lots of other things that should be done first and as a higher priority if we want to increase productivity.

We could do all sorts of things around industrial relations. We could talk about immigration, we could talk about cutting the tax on fuel, we could talk about investing more in teachers. There’s a whole lot of stuff that we could talk about if we are to talk about increasing productivity, but we’re here and we’re arguing—and agreeing at this point—that research and development tax credits will increase productivity. But then I’d like to quote Professor Göran Roos, an Australian academic, who says that none of the top-performing countries in the world have R & D tax credits. So in select committee that is the first question we should be asking ourselves: do we really need R & D tax credits to increase productivity? At the end of the day, it’s taxpayers’ money that we’re dealing with. It’s a subsidy from the taxpayer to the business.

But having said that, and we’re going to discuss that and we’re accepting that that is the case for now, I’d like to point out a couple of other issues that I have with the bill, and that is the restrictive nature of the terminology that it uses. It’s only good for scientific or technological research and development, so it excludes market research. It excludes research on social services, for example. So let’s say that one of the main things we want to do is reduce poverty in this country. Wouldn’t it make sense to allow research into the way we deliver social services in this country from the private sector, if you like—or any entity—to allow them to get a deduction for research? I’m thinking of the Salvation Army, and I know it’s a charity in any case, but why is that not allowed as legitimate research and development? Why is research and development into markets not allowed?

We’re an export nation; we need to develop customers and satisfy customer needs. We have no idea of the specific cliques, small groups, target markets in India, China, Mongolia, and Europe for our markets. Why are we not allowing market research, or product research, in those markets? We’re restricting ourselves. We’re missing an opportunity to subsidise, if you want to call it that, really essential channels to market for our primary produce. And we might be able to develop the leanest, meanest sheep carcass with the finest cuts, but if we have no customers and we don’t understand who’s going to buy that product, then we’re wasting our time.

So I submit that research and development should not be restricted to just scientific and technological solutions. We should be discussing the ability to use this research and development pool of funds to do other things that benefit society as a whole, in the social services sector, and in the market place specifically around market research and product development, because those things at the moment are not included in this deductibility regime. So, in the meantime, we will support this bill. We want it to be debated in select committee. We’ll be asking those questions about whether we widen it, whether we narrow it, whether we have nothing to do with it, but in any case I look forward to that process.

Thank you, Madam Assistant Speaker. This Taxation (Research and Development Tax Credits) Bill is a really important piece of legislation. I think, as Mr Alastair Scott asked, the right question is: why should we have these tax credits? I think we need to be very careful when we think about that. It’s not simply because we want to encourage research per se; it’s because research has value which goes well beyond the company or individual who generates that research. And we’re talking about hard research; we’re not talking about market research.

Hard research—research which creates technological advances—adds to the net sum of human knowledge and human wealth. In terms of wellness, it gives us greater choices and it gives us greater prosperity, and that’s what we need to do. But the difficulty for a researcher, for someone who’s at the cutting edge of some technological improvement, is that once they make that improvement, it’s very hard to hold on to it all for themselves. Notwithstanding the law of patents and copyrights and what have you, the fact of the matter is that once we get an advance of one kind or another, others jump on the coat-tails. That’s no bad thing, because what it means is that New Zealand as a whole, the industry as a whole, and, in fact, quite probably, the world as a whole benefits in some way. In economic terms, that’s one of those rare things: a positive externality—a side benefit, if you like, conferred as an effect of the main thing.

So by providing this tax credit, what we are doing is recognising the fact that the benefits of this go beyond the researcher themselves, and we are, in a sense, giving back a little bit of that capture. So research isn’t just good for some vague reason; it’s good because it enhances productivity, it enhances prosperity, it enhances knowledge, and, also, it has that filtering effect where it spreads beyond the person who may have generated it in the first instance. This, in a sense, offsets those losses, because the worker who developed it might have gone to another competitor or something along those lines.

It is important to recognise here what “research” is under this legislation. It isn’t some loose market research, some non-systematic furthering of knowledge in a loose way; it is scientific research. It has to be systematic, and, importantly, it must create new knowledge. We discussed, not long ago, a patents bill, and talked about the need for genuine innovation. That’s what we want to fund here: genuine innovation which makes an actual step forward. It’s interesting to see what it’s not. It’s not some advance that is deductible from publicly available information. So in that sense, we need to make sure that it is a genuine scientific improvement.

Now, it’s also worth noting that the rate here is generous—15 percent is a generous tax deduction—and, also, there’s a low threshold. The $50,000 threshold which is proposed, I absolutely endorse, because there are many small companies, whether they be IT companies or medical companies, who may actually be one guy or one woman working away, and they may only spend $50,000 or $100,000 in a year, but that also is deductible, so that’s a great idea. It also captures—we mentioned Fonterra before—large companies with up to $120 million of expenditure.

So what this is doing is really encouraging something which has wider benefits. It’s a great innovation. I sit on the Finance and Expenditure Committee with Dr Russell and many others, and I look forward to engaging in a robust discussion—

💬 Kiritapu Allan: And Fletch.

—on how to make—oh, and Mr Tabuteau—

💬 Kiritapu Allan: And me.

—when he’s not overseas. Oh, and Ms Allan, when she’s not far too busy doing something else. For that reason, I absolutely commend this bill to the House.

Thank you, Madam Assistant Speaker. We rise in support—at least at the first reading—of the Taxation (Research and Development Tax Credits) Bill, with some reservations. The reservations are actually historical fact. Historical fact should always trump optimism. So the research tax credit has been tried before in New Zealand—tried and proven to be rorted. Now, I know this for a couple of reasons. One is I trust official advice—and I’ll come to that in a minute—but I also know it because I had customers telling me not only that they were rorting it when it was last in this country but how they were able to rort it. So particularly in the area of information technology, businesses were able to reclassify simple maintenance activities, upgrade activities, as research and development, and claim the tax credit. An absolute rort—running all the way to the bank, which is possibly also somewhat symptomatic of the customer in question. So it is a rortable event.

The official information of the time actually put that to the Governments of the day, both Labour and then National. The point they made was that a tax credit was far less certain and less likely to provide an incentive for genuinely new research and development. The information they had and the projections they made were that it would be more likely to foster, if anything, perhaps some acceleration, but simply the undertaking of R & D that was going to happen anyway. Their advice of the day was that a grant-based system would be far more likely to create a genuine incentive for new research and development—that which wouldn’t have otherwise happened. That might go some way to explaining why it was, for instance, that the National-led Government in 2008 and beyond chose to get rid of the tax credits and instead use a system of grants-based assistance to businesses in research and development. So the rorting of it is a serious, serious issue.

But the better question—Dr Webb said it’s a question of whether we want research and development tax credits. Really, the question is: are tax credits a better method than other options available? The advice of some years ago suggests very strongly that that’s not the case. There are other elements of a tax credit, and particularly the implementation proposed, that suggest that it is a suboptimal approach to, particularly, the grant structure that was used under the previous National Government.

Dr Webb has said it’s a simple threshold to meet and the relief is quite generous—well, that’s debatable, but that was his position. That being the case, there was therefore an incentive for as many businesses as possible to recode their activities to take advantage of it and to meet those so-called simple and worthwhile thresholds. But it also creates a system which simply means that if you meet the threshold, you get the cash back, in effect—you get the credit. So there’s no cap on the actual expenditure for Government, and this is what happened under the previous Labour Government—the actual cost of the tax relief was much higher than had been budgeted for.

But, secondly, it risks creating the ongoing expectation within business that they will always get that level of Government assistance to help part-fund, in effect, their research and development. It creates an expectation that that will perpetuate. So instead of, perhaps, the approach that the previous National Government had, which is “prime the pump”—get businesses investing, because they get the returns from it, they get the benefit from it, and they get the realisation that it is worth their while making continued private personal investments in R & D. Well, the tax credit isn’t going to do that. It’s simply going to perpetuate the same level of assistance, no matter how much you do over how many years.

You might take, for instance, our growth grants. Over the term of the Government, we started off by having something of a 50/50 split, so the business had to show that their ideas were good enough to get half of the funding from private risk and private investment. Then over time we shifted that up, so they had to provide even greater than 50 percent of that investment from private funding sources before the Government would contribute the remainder. That actually helps to wean—if I can use that word—businesses off an over-reliance on money from the State to undertake research activities that, principally, they are going to be the beneficiaries of. This tax credit system actually undermines that approach.

But we do believe in listening to business. We believe in listening to New Zealanders. We think it’s worthwhile that this goes to select committee so we can tease those and other matters out—matters like will software development and labour-based activities be included; if so, will there be any caveats, any thresholds, any protection measures? These are all things worthwhile canvassing in select committee. It’s for that reason that we will vote in support to go to select committee.

Thank you very much, Madam Assistant Speaker. It’s a pleasure to speak on this bill, for a number of reasons. First and foremost though, I’d just like to address a couple of the points that Brett Hudson made. I hope that the honourable member does get to sit on the Finance and Expenditure Committee. I’m not too sure if he’s on the committee or not, but I hope he is, because what he will see when he is on the committee is that in fact a lot of what he has said is actually incorrect—this will come out in the select committee—first and foremost, about rorting the system.

We are not the first country in the world to do this; in fact, we’re one of the outliers. The countries with economies of a similar size to ours, the vast majority of them actually have a much higher R & D spend than we do. As a consequence of that, what we have done is we have actually gone out and talked to these countries. Officials have gone out and they’ve had a talk to them and said “Hey, what works? What doesn’t work? How can we end up with a system which isn’t easily rorted but is going to drive innovation in the way that we know it needs to happen in our economy?”

A classic case is one of the first discussions I had with senior officials from the Australian Taxation Office. They said, “An R & D tax system is really good at driving innovation, but don’t do what we’ve done.” I thought, OK, well that’s a salutary lesson. So we’ve spoken to the Brits, we’ve spoken to the Norwegians, and we’ve said “How have you”—not you, Madam Assistant Speaker—“How have the officials made this work in a way that creates integrity but also drives innovation?” The last thing we want to do with taxpayers’ money is end up with a system which is easily rorted. No one benefits from that, and that is why we are very careful and have been very prudent in the way we have done this.

One thing I will say is when there is a grant-based system, what ends up happening is that inevitably you end up picking winners, because those that can fill in the forms or have the relationships or have the technology that ticks a whole lot of “gee whiz” boxes end up with a lot of the money. What we’re doing with R & D tax credits is actually giving companies the ability to drive their own future. So what we’re saying to them is “Hey, you think you’ve got some great R & D? You think you want to drive innovation and growth? Well, go hard. We’ve set up the infrastructure.”

To give surety, we’re actually introducing a pre-approval process. So that means that a small to medium business—and as the Minister for Small Business, not just the Minister of Revenue, this will give a level of certainty. And it’s not some massive bureaucratic behemoth we’re creating here. We believe that we can provide a yes or no—yes, this is R & D and fits within the tax credit structure; or no, it doesn’t—within about six weeks. So it will give small to medium businesses the certainty they need to move forward in the knowledge that they will be able to acknowledge the R & D tax credit.

What we did is we went out—this is Minister Woods and I—and we consulted. We said, “We’re starting with a threshold here of $100,000.” What we actually heard was “$100,000 is too high. You’re not going to get a whole lot of small to medium businesses spending $100,000 on R & D.” So we said, “OK, we’ve heard what you’ve said; we’ve come back, and we’re going to make the limit $50,000.” They went “Oh, well, shivers. That’s a Government that’s listening.”

Mr Hudson suggested that in fact there’s a lot of companies that won’t take this up. Well, our market research shows that in fact there’s going to be about between 2,000 and 3,000 more businesses that will engage in R & D as a result of this tax credit. So where we think we’ve landed is a place where we can actually allow businesses to take control of their own future whilst driving research and development in a way that allows us to be productive, that allows our small businesses and medium and large businesses to grow. We do not think—we do not believe in any way, shape, or form—that this is just a system that will be rorted by the big guys who have the really smart accountants, because we have learnt about how we can do this better.

We understand the need for fiscal prudence. We are not being blasé about this. We are not being casual about this. We know that in order to earn the trust and the confidence of the business sector, we need to ensure the integrity of the system. There is absolutely no doubt about that whatsoever. So we have set up a system that we think will provide a level of fiscal prudence. To be eligible for the tax credit, claimants have to perform at least one of the core activities in New Zealand. We acknowledge that sometimes it’s necessary to go offshore. We know it’s necessary to go offshore, but what we’ve said is that no more than 10 percent of a claim can be for R & D credits.

In fact, what I will do is I’ll just sum up in a way, because we do want to get this first reading through and the bill to the select committee, and I don’t want have to come back next week to do this. But one thing I will say is I recently attended the chartered accountants’ annual tax conference, and I was delighted to hear someone—a chap by the name of Dr Tim Benbow, a partner at Ernst & Young—speaking in very positive terms about the approach that the Government is taking, and saying that the open discussions that occur between officials and the private sector have made a huge difference.

I am interested to hear what submitters have to say on the bill when it does go to select committee, but one thing that I absolutely believe this will do is drive research and development in a way that will be positive for our country. I think it’s a fantastic bill. Thank you very much.

Is there some Minister to move the report-back date?

I move the report-back date.

ASSISTANT SPEAKER (Poto Williams): Can someone help the Minister with the wording please? [Interruption] Does the Minister need some assistance?

That would be very kind, Madam Assistant Speaker.

ASSISTANT SPEAKER (Poto Williams): Just a moment.

I move, That the Taxation (Research and Development Tax Credits) 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 any evening on a day on which there has been a sitting of the House, and on a Friday in a week in which there has been a sitting of the House and outside the Wellington area, despite Standing Orders 191, 193 and 194(1)(b) and (c).

Motion agreed to.