Taxation (Research and Development Tax Credits) Bill

Thank you, Mr Chair. In Part 1, I would like to start from clause 7. Under clause 7, which inserts new section GB 56(2), it reads, “A person’s entitlement to a research and development tax credit is reduced to the amount that the Commissioner thinks appropriate, whether or not the person is a party to the arrangement.” This is after the amendment that happened in the select committee process. I would like to get some clarification around this clause because this clause gives the ability to the commissioner to reduce the claim to whatever the commissioner thinks is appropriate.

Within this part, I jump to another clause, which is clause 37B, which amends Schedule 7, clause 39. It says, “Agencies for research and development”. Under that, it provides the ability to the commissioner to communicate “to an officer, employee, or agent of the Treasury …, of Callaghan Innovation, of the Ministry of Business, Innovation and Employment …”. So, basically, what it says is that the commissioner is able to communicate with these people to evaluate anything that the commissioner needs in regards to this policy.

Now, we see that there is a Supplementary Order Paper from the Government. It’s a very insignificant, I would say, Supplementary Order Paper because it’s, basically, correcting some punctuation marks, but, in that, it’s also providing the ability to the commissioner to allow these people I have listed before to look into information that might be necessary or reasonably necessary for making a decision that is about administering R & D tax credits. So my question here is: what criteria are there for the commissioner to reduce this amount from what has been applied for? Businesses compete with each other. How will we know that the commissioner is applying the same kinds of criteria for each businessman the commissioner comes up with that new figure for?

I understand the reason here is to see that there is no inflated amount put forward in the claim, but still it’s important that we know that the commissioner, when the commissioner is making that decision—because this clause says that whether or not the person is a party to the arrangement. Without having the individual or the organisation that is spending on research and development being part of this arrangement, the commissioner will come up with a reduced amount. So there are questions about this that I think it will be good if the Minister is able to answer, because the tax credit amount is 15 percent, and if the commissioner decides to reduce it, it could be just 2 percent or 5 percent—the effective tax credit that that business will receive.

The other question within this is that, in this part, the policy is mainly about 2019 to 2020, because the second part, which we will talk about later on, is for the policy that is implemented from 2020 onwards. In this one, there is no preapproval requirement. So if there is no preapproval requirement, as this policy has already come into effect from 1 April this year, businesses will be already spending money, thinking that they’re going to get this 15 percent of tax credit. But after they apply, if the commissioner decides that, actually, the commissioner is going to reduce that amount to the amount that the commissioner feels appropriate, that is not going to be fair to businesses. This is not going to provide any kind of certainty to any business.

The third point within this part is that if this is within the guidelines—which I can’t understand, because, for a lot of the questions, the answers we got during the select committee process were “Well, this is going to be covered in the guidelines.”—I think it’s still important that we have transparency around the method that the commissioner will use to come up with the reduced figure, otherwise that 15 percent tax credit means nothing, because it could actually mean just 2 percent or 5 percent for a business. And if it is going to be based on some kind of market value, it’s important that we discuss that too, because here we are talking about research and development, which means we are talking about people doing new things to acquire new knowledge—people wanting to get some new insights into the things that happen around us.

For that, how do we have a list of market value decided for everything that researchers will do in the future? We cannot. We cannot do that, because market value is available only if something is already available in the market, and sometimes the researchers, sometimes the scientists, could be using different approaches to reach the conclusion that they want to or the knowledge that they want to acquire. So what kind of resource is available to the commissioner here to decide what the commissioner should be deciding as the new reduced amount? And if it is just to make sure that nobody is putting forward inflated figures, then also how will the commissioner know that that is an inflated figure if something new is being done? Researchers have to try different kinds of things, and if some researchers are going worldwide maybe, then they are able to do something at a cheaper rate than someone who is just trying to access that resource from within New Zealand. So we have to be fair to these people.

The most important point in this is that, because the policy has already come into effect from 1 April this year, businesses are already incurring expense on research and development, hoping that they will be getting 15 percent of tax credit—because there is no preapproval in the first year. So how do we satisfy those businesses in terms of providing certainty that they will be definitely getting 15 percent of tax credit? This clause here does not give me any confidence that businesses will be able to get 15 percent of tax credit.

Another very important component in this part is the refundability provision, which is under clause 9. In clause 9, we talk about the refundability provision in this legislation. During the select committee process, it was really interesting to see that some members didn’t understand the difference between the R & D tax credit and the refundability provision, because the criteria for the refundability provision are different from the criteria for the R & D tax credit. It is not the same. The question, in this clause, that I have for the Minister is that the maximum cap of the refundability provision is $255,000, but if we look at the amount that people could access through the last R & D tax credit policy which was put in place by us, the previous National Government, when we were in Government, that amount was more than $255,000, which is the cap through the refundability provision in this legislation.

So why would a business access this provision and not access the R & D loss tax credit through that policy that was put in place by the previous National Government? Also, why put something that is different for a business that does not have enough tax liable income? If the real purpose is to improve business spending on research and development, then it should be for all kinds of businesses.

Moreover, this provision here in this bill is a temporary provision, because the Government has indicated—and during the select committee process officials also indicated—that the Government’s intention is to develop a policy that will be implemented from April 2020 that will look into providing support or incentive to businesses that do not have enough tax liable income. So why put something so temporary—because this is creating a lot of uncertainty amongst investors and small businesses?

I was talking to an investor. That investor is originally from here but is based in the US. He’s invested in two scientific companies here in New Zealand. He said, because of this—because they don’t know what is going to come from April 2020—why would he be continuing to invest here in New Zealand companies. These investors are going to go around and look for other options.

During the select committee process also we received some submissions on this clause, and submissions came from different entities. So, in summary, what they said was that “Refundability is important to provide support to early stage businesses and needs to be progressed as a priority. Lift the refundability cap that applies in year 1”. So that is definitely something that is of concern to businesses, because a $255,000 cap is not enough given there is a higher amount—a significantly higher amount—that businesses can access through the R & D loss tax credit policy. But the response that we received during the select committee process from officials was—this is not word to word, but overall—that the Government is developing a policy from April 2020, and so at that time, this will be taken into consideration and consideration will be given to allowing R & D tax credits that were carried forward from the 2019-2020 year to be refundable.

Another answer that we got during the select committee process was that a tighter regime in the first year of the regime is a useful precaution because in-year approval of the R & D activity will—[Time expired]

Thank you, Madam Chair. I shall take a brief call on the Taxation (Research and Development Tax Credits) Bill at the committee of the whole House stage to express a few concerns I have about the bill. I guess the major concern I’ve got with it is that I think it is going to be extremely expensive and complicated to access the tax credit regime. I think that’s OK for the companies that are equipped to deal with this and that have been in the business for a long time. They’ll manage it very well. And it will work for some of the bigger R & D expenditure companies in New Zealand. I don’t think it’s going to work for the next level, and I think it will be very expensive to get into, and I think it will probably put some of them off accessing this opportunity—which I think is a bit of a shame.

But this is an area in which I think we’ve struggled in New Zealand since the 1980s, frankly, and we’ve yet to find a real solution that works for research and development in New Zealand. We’ve seen a decline as a percentage of our gross spend in New Zealand. We’ve seen it decline over the years, and that happened—or the decline was initiated—with the changes that happened in the 1980s, where Government pulled out of a lot of R & D that it did itself through the universities and through what in those days were things like the Department of Agriculture, which, of course, have changed their name now—but AgResearch and those sort of companies did a lot of this kind of research and development in New Zealand. And it was actually great value to this country. But we changed the way we did things, and we expected the industries to pick those opportunities up. They really haven’t picked them up satisfactorily—with a few exceptions—in New Zealand since that time.

I think that’s the big challenge that I see with the R & D tax credit regime: is how, in fact, we get people introduced into it and how we get them to access it with confidence, particularly the smaller New Zealand - based firms. I was pleased to see one of the changes that was made as a result of the select committee process was the opportunity to use outside contractors. I think that was hugely important, because initially the bill precluded outside contractors. It didn’t preclude them being used, but it precluded them from being claimed at the full rate. And I think it’s essential that we do enable the use of outside contracts in this because many firms in New Zealand that will be accessing this cannot afford to employ that expertise themselves, and, in fact, that expertise isn’t available in abundance in New Zealand. So that’s a real challenge, and I think that was a positive change that the Finance and Expenditure Committee made to the bill.

There’ve been numerous estimates of the amount of money that this will cost annually, and I think it is a bit of a guess myself because, as I’ve said earlier, with the exception of the large R & D expenditure companies, I don’t think we’ve got any idea how many people will be able to access this in the next tier of businesses that are looking for this type of incentive or opportunity.

The other area that I think is going to create some challenges will be around those start-up companies who can claim, effectively, a tax credit in advance. And that’s a pretty risky business when you think about it, because you’re going out there spending money, you don’t know whether you’re ever going to get it back, and you’re getting a grant back from the revenue, I suppose, in a form, but, actually, you don’t know what’s going to happen with the other 70 percent of the dollar you’ve spent. So it’s quite risky, and it’s taken the place of what, effectively, were expenditure grants—or, in some cases, dollar for dollar matches.

I’m not so sure that’s going to work either, because I think that is a risky area for companies to get into, particularly companies that have got—well, I guess all start-ups to some extent are in a very unknown space and dealing in uncertainty to a large extent. And I wonder how confident we can be that they will actually access this or want to access this and then be able to, in fact, keep themselves going once they’ve done that. So I think there’s some risks in this policy, certainly below those large companies that understand the system and will be able to access and do well with it.

So for that reason—well, for that and a number of other reasons—we oppose this bill. I think it is high time in New Zealand we got to a point where we had a comprehensive R & D policy in place that covered business in general in New Zealand, and I’m sure we would find the expenditure in those areas greatly increase as a result of that.

So that’s the reasons that we’re opposed to it. I do think there’s some questions that we could well have answered in the course of the few minutes I’ve spent talking about it. So thank you.

Thank you, Madam Chair. I just want to respond to a couple of the questions that have been put to me here by speakers so far. First of all, one of the contributors raised the issue of clause 7 and wanted to know about how this would operate. What I’d like to give that member a reassurance around is that this is one of the integrity measures that I think makes this a very strong piece of legislation and that what officials have done, when they have been designing this process, is they have spoken to a number of officials in jurisdictions that already have R & D tax incentives in place and looked at what is required to ensure the integrity of the scheme.

This is a rules-based system, and we have to ensure that within this bill we have a suite of integrity measures, and clauses 7 and 10 and 27 and 30 and 32 to 37 contain these integrity provisions within the legislation. Specifically, the clause that was raised by an earlier speaker was clause 7, and this is an anti-avoidance rule. The rule will only apply where someone enters into an arrangement to defeat the intent and application of the tax credit rules. This is a very high threshold to be used, and it allows the commissioner to reduce the amount of eligible R & D expenditure involved in a claim in these particular circumstances.

But I think there’s just a little bit of understanding of how clause 7 will operate. What it does not do is allow the commissioner to change the R & D tax credit rate. It will allow the amount that is available to be claimed under there. This is an important anti-avoidance rule, and it is very similar to many others that we already have in the Income Tax Act 2007, and it is necessary from this integrity perspective. It’s only expected to apply in a very small minority of cases, and I hope we don’t have to apply it, but it is important that we are writing robust legislation that does have these integrity measures in place.

A previous speaker also raised the question of why it is that within Part 1 of this bill there are different provisions for non-tax liable businesses. That is very simple. It’s because we firmly believe that, when we’re setting up a tax incentive scheme, we have to ensure that we’re also putting in place incentives for some of the companies that are the most innovative, that do have the most potential to transform our economy, and many of those companies are in the pre-profit stage. As I’m sure every member of this House will understand, a tax rebate isn’t a great deal of use to you if you’re not paying tax and therefore can’t apply the rebate.

What we have said is that we need to get this scheme working, so we’ve simply got to do more as a country, and I agree with the speaker that’s just taken his seat, Mr McKelvie. We have to do more to lift New Zealand’s very low levels of expenditure on R & D. This is a scheme that is aimed at going from 300-odd businesses receiving a growth grant to 2,000 to 3,000 receiving assistance under the R & D tax incentive.

What we have committed to doing is a phased approach. We are working in terms of the provisions that are there for these pre-profit firms in the 2019-20 tax year, and we are doing further work with that industry to see how it is that we can roll out post-2020. So that is why there are different treatments for non-tax liable businesses that are contained within the bill.

I’d like to reassure the member that took his seat, Ian McKelvie, when he said that he was worried that small businesses wouldn’t be able to access this. This is something we’ve spent a lot of time talking to industry and to the business sector about—about how it is that we could set up a regime that actually was fit for purpose for our small businesses, because we know many of our start-ups, many of our small businesses, are where innovation happens. What we heard really clearly was that under the current regime of the growth grant schemes, $300,000 expenditure on R & D was simply too high a threshold for those small businesses to be able to benefit from it. So we listened carefully, and under this tax incentive scheme that threshold is lowered to $50,000. If you’re using an outside provider such as a Crown Research Institute, there is no minimum threshold.

So this is a scheme that is set up very much to benefit some of our most innovative, some of our small businesses that we know have the power to transform our economy. We’ve made sure that we’ve consulted widely, we’ve listened today, and we’ve incorporated that feedback into the provisions. Thank you, Madam Chair.

Thank you, Madam Chair. I think, fundamentally, there is maybe a difference in opinion about what constitutes a small business. The Minister of Research, Science and Innovation has given a good exposition of her point of view that lowering the threshold to $50,000 expenditure on R & D is in fact making R & D investment easier for small business. I couldn’t disagree more. I couldn’t disagree more about that. There are a number of small businesses, which are small—small start-up businesses—that are the very ones who have the innovative thinking, innovative policies, and innovative plans and where some form of Government assistance, which of course they had available to them under the previous Government, would indeed be most useful. So I would urge the Minister, and I would urge the Minister for Small Business also, in conjunction with his colleague, when talking about our R & D investment, to really have a good look at what is a small business and what is going to be most useful for them, because I can think of a number of the many small businesses and start-ups that I have engaged with who couldn’t dream of investing a minimum of $50,000 in research and development, and yet that is just what they need to do to take the next step as a business.

I also would note on that point—and I just want to stick to that point—that, fundamentally, the primary reason that New Zealand does have relatively low levels of investment in research and development is the sheer size of our companies in New Zealand. It is the nature of the New Zealand business economy that most of our business is small. There are a number who grow and there are a number who will benefit from R & D grants, but that number is not predominant in the New Zealand economy.

So maybe I will finish on this point, because we did see back in 2007, under the previous Labour Government, when there was an R & D tax credit scheme, a lot of attention was given to companies by accountants and advisers about how they would get the best out of that R & D tax credit regime at the time. And I can’t see that this time it will be any different for accountancy firms, who I know are already beginning to put out newsletters alerting their clients to the work that their business and financial advisers are doing around how to best leverage and how to best use this R & D incentive. So it would seem a shame that there were some adverse impacts coming out of this legislation, where it is more about how we classify and code expenditure, rather than purely using the opportunity to invest. Thank you.

Thank you, Madam Chair, for this opportunity. I would like to start where I left off when I was speaking before. I was talking about the refundability provision in this legislation, in clause 9, but I would also like to talk about some of the points that the Minister of Research, Science and Innovation has answered.

One thing the Minister said about clause 7 was that it will be to make sure that people don’t have the intention to rort the system. How would the commissioner know that there is an intention? How do you measure intention? You cannot measure intention without providing proper criteria, and I haven’t heard anything here about the kind of criteria that would be used to measure that intention. Also the rate, 15 percent—I totally agree that the bill is to implement 15 percent of tax credit, but if somebody has spent $100,000 on their research and development and they’re expecting 15 percent, $15,000 in R & D tax credit, but the commissioner decides to reduce that total amount, then it would be just $5,000. That means the effective rate, or the amount that the person will get, will be equal to only 5 percent. So that’s the point. Saying that this will be applied to hopefully only a minority doesn’t give a proper justification to have this kind of provision in this bill. So we need more than that. Just because it is going to be applied to a minority, or may not be applied at all, doesn’t mean that we should tolerate something like this, which hasn’t been based on a proper criteria.

Now, for the refundability provision, the maximum amount is lower than what people could access through the last R & D credit policy. When I was speaking before, I was saying that the answer that we got during the select committee process was that because there is no year approval, the pre-approval process kicks in from next year, 2020, and in this part, which is 2019-20, there is no pre-approval process. So the goal is to keep the whole scheme really tight. This actually conflicts with the whole idea. On one side, we want to see that businesses are able to access this incentive so that they can spend more on research and development, but on the other hand, this is aiming to make it difficult for businesses. So I don’t see a proper balance here, because there is focus on making it tighter but then the focus on business is smaller.

We also heard from the Minister when she talked about the integrity of this policy. The uncertainty that it creates for businesses wasn’t addressed in the Minister’s answer. So I think what we want to see through this legislation is that, yes, the Government should be able to control its policy, control the spending, and it shouldn’t be a fiscal risk—which we believe it is going to be a fiscal risk as we have seen what has happened in other countries—but on the other hand, providing that certainty to businesses so that they can go ahead and spend money on their R & D, knowing that they are going to get 15 percent after incurring that expense.

So here, they do not get that certainty. In clause 10, looking at the activities which are called research and development activities, they, again, are not consistent with other policies. Stats NZ use a different definition for research and development than this legislation—again, another point that creates uncertainty. So how do we measure business spending on research and development when the definition in different policies is going to be different? Here it’s different from what Stats NZ uses to measure business spending on research and development.

The answer we had was that the Ministry of Business, Innovation and Employment is going to look into it, but that doesn’t give us any assurance that it is going to be fixed. So we have this growth grant scheme, which is continuing for another couple of years, and then the growth grant scheme is going to be phased out. It is going to be only just one incentive, and that is this R & D tax credit. The other policy is going to be developed. So having a temporary measure in here, through clause 9, is creating uncertainty, and, again, the definition of R & D, which is different from other areas, is creating more uncertainty.

These things are really important for businesses. These things are really important for us to measure what kind of outcome we have from implementing a policy like this. We know that there is evaluation in new section LY 10. There is this evaluation provision that is after every five years, the Minister will be required to provide a report on evaluation of the policy. In that one, if we look through all the points which are listed, from paragraph (a) to paragraph (f) under LY 10—that is, “Evaluation”—the first one is “the delivery of the policy intent of the regime”. So how will it be measured? Again, it goes back to the point that I raised previously. This is so preliminary that we cannot see how this policy will actually help us increase or understand that it has actually increased business spending on R & D. First, the definition is different, so it will be difficult to measure what kind of business spending is going on on R & D, and then these points which are listed are quite vague. The second one is “the stimulation of spending on research and development activities”. What does this mean? Does this mean that there will be more jobs created? Does this mean this is just about expenditure, just about what dollar value will be spent by Government or spent by the private sector? What is the outcome here? There is a big focus on what is going to be spent rather than what is going to be achieved through this policy.

Also, how do we know that—because this is not fully developed; it is going to be developed close to the time. How do we know what is going to be the criteria that the Government will use to evaluate? It could be that just something that is looking good can be picked as a criteria, because then the Government can easily stand up and say that, yep, the policies are working well. So there are a lot of questions. These kinds of things are very important for us to see in the start, which are not available at the moment.

Under new section LY 2, talking about consistency of this legislation and talking about consistency of research and development, under “Core research and development activity”, under LY 2—this is subsection (1)(b)—it says “does not include an activity, if knowledge required to resolve the uncertainty, described in paragraph (a)(iii), is—(i) publicly available”. There is a lot of R & D work that goes around where only validated or publicly available methods are used, because if validated methods are not used, then they will have to first prove that the method was validated, and only after it is validated can they progress their work. Someone somewhere else in this big world should be able to replicate that work once it’s published. If they cannot replicate, then there are questions that need to be answered. So here I would like the Minister in the chair, Megan Woods, to take a call and tell us exactly what this means.

As a former scientist, I know in biological sciences research there are a lot of validated methods that are used on a routine basis. That doesn’t mean that they are not trying to acquire new knowledge. Of course they are trying to acquire new knowledge, and the guidelines that are developed so far are not looking satisfactory at all. Saying that businesses will have to rely on the pre-approval process is actually creating a lot of compliance cost for businesses, because businesses will have to list everything they think could possibly go through for their R & D tax credit, and then they will have to wait for that pre-approval process to see what actually has gone through and not gone through. So that is not good enough.

So this legislation—already, we can see it’s quite complicated legislation, because part of the policy is different. So the policy that has already come into effect from 1 April this year—today’s 30 April and we are debating this bill in the committee of the whole House. We can see how unorganised this Government has been in regards to this policy, which they think is one of their biggest policies. So here I think that it will be really good if the Minister is able to give us an example of some biological science research or maybe in terms of oil and gas exploration. You know, there are a lot of things which are publicly known and publicly available in terms of techniques which are used, because it’s important that validated methods and techniques are used to acquire that new knowledge. It’s important that we have confidence that this policy is going to cover all areas of research, not exclude some areas of research where they have to rely on getting pre-approval, because that is going to be very hectic for businesses, as I said. They will have to simply employ another person just to put that process together and then wait for pre-approval, which we will talk about later on, where I have some questions as well.

So it will be really good to see what the Minister has to say about this LY 2, “Key terms”, under “Core research and development activity”, paragraph (b). What does it mean by publicly available? It’s important for everybody to understand, and also those who are doing R & D—for them, it’s important to understand this legislation so that they can go ahead confidently, spend on R & D knowing that, yep, their R & D is going to qualify while they are waiting for pre-approval. They shouldn’t be just holding their work until they get the pre-approval.

Thank you very much. I’m trying to get to my feet with things in my way. This bill is an attempt to try and drive innovation in New Zealand. Obviously, if you go back through history, there have been many different arrangements. In fact, we’ve been here before. We moved to a new system with Callaghan, and, of course, under this new arrangement, we’re going to revert back, basically, to a scheme that previously existed.

There are some issues with this bill. Whilst, obviously, as the Opposition we support all attempts to try and drive innovation in New Zealand, the question, really, revolves around the mechanism that’s best to achieve that, and that’s obviously where the debate has been round this bill. The first issue I want to just ask the Minister who’s in the chair, Megan Woods—which is good to see—is the issue around the quantum. I know there have been various projections around what this scheme will cost and how many entities it’s likely to benefit, and, broadly, there’s been an estimate of around a billion dollars and, originally, it was 3,000 businesses and then over time that seems to have diminished somewhat to, I think, the latest estimate of around 1,500. But the issue I’d love to hear from the Minister on is around the issue of how the monetary quantum of this R & D scheme is going to be managed and to ensure that what is paid out goes to the highest-value proposition.

Now, I think we’re all aware that in Australia, when they introduced a similar scheme to this, the original projection for the Australian Government for the scheme was A$1.8 billion, but that blew out to roughly double—$3 billion. I think it’s very important and incumbent on this Minister that she provides some clarity around how that’s going to happen and, as I say, how it’s going to be targeted.

That’s one of the things around the existing system, with the Callaghan scheme, because that was an attempt, by using independent third-party professional people, to try and identify those companies with the highest potential to deliver the greatest value to the New Zealand economy. There is always going to be an element of prioritisation. It doesn’t matter whether you’ve got a billion dollars or three billion dollars. But this scheme will, because of a monetary cap, have to prioritise. Whether that’s on a “first come, first served” basis or whether that is by a prioritisation of some other arrangement, I would like to hear from the Minister, because I would suggest that if the prioritisation is merely on a “first come, first served” basis, those companies that are the most well-resourced and the quickest out of the block are going to benefit, and that may be to the detriment of New Zealand, because those companies that have very good propositions, in time, don’t benefit. Conversely, what that means is the billion dollars that’s projected at the moment is going to blow out to a much greater figure. That issue is of vital importance if we are to ensure that we end up with a scheme that we can put a line in a budget and actually know it’s going to take place.

I think the prioritisation of it—and this is one of the issues in the schedules. If you look at the schedules, there are 24 activities that are excluded, and there are 11 activities or areas around supporting R & D that have been excluded in the schedules to the bill. Again, this is a form of prioritisation, and I think one of the issues relating to this—and I’d like to return to this issue, if I may—is around how we promote, certainly, ICT companies and those companies that are not of the traditional public-good types of activities that are in R & D but that are actually focused on commercial outcomes. I think this is one of the most important aspects about R & D: what is the type of R & D that we want to take place in New Zealand, and what should the New Zealand Government be best putting its money into to ensure that we can drive the New Zealand economy forward? This is a crucial part of the conversation that I haven’t heard expressed by the Minister.

It’s very well-intentioned to be able to say “We’re going to spend a lot of money on R & D, and, by the way, we’re going to change back to an existing system that was in place a few years ago.”, but the prioritisation—and one of the discussions we had during the select committee process was around the area of what type of research is best undertaken. There was quite a lot of discussion around public good research which of itself does create value, but one of the things I’d also like to hear from the Minister is a cogent description of the specific types of economic activity she would like to see following a billion-dollar investment that this Government’s going to make over time, because I think it would be unfortunate if the Minister only talks about public good.

What are the commercial outcomes that she would like to see and that we would be able to look back in maybe five years’ time and say that we’ve achieved from spending a billion dollars of New Zealand taxpayers’ money? I think that’s the bit I haven’t heard clarity around, and it’s certainly not clear in the bill in the way that the intent of the bill and the direction of the spending is narrated in the bill. So that’s the second issue I would really like to hear from the Minister on: what are the benefits and what are the economic drivers that she would like to see in place or would like to see occur as a result of this investment?

The other thing is around pre-profit of businesses. This is probably the most contentious part, because I think there’s an assumption in the way that the bill is written and the intent of it and who it’s directed to, and I’ve heard my colleague Dr Parmjeet Parmar talk about the issue of small companies getting a minimum of $50,000 and the costs associated with that. That is a very salient point—a very salient point—because the cost to comply with this is substantial, and what we do need to make sure is that it’s not only the big companies in New Zealand that are very good at driving research and development. In many cases, it’s very small start-up businesses, and in some ways they are the most dynamic. Many of those now use ICT as a driver of that business activity, and what worries me most about the intent of this bill is that we have ended up with a proposition that really deals with medium-sized and large-scale entities. They have the resources to be able to fill in forms and bear the cost as part of a longer-term research and development activity and to be able to go to the Government and comply with all those requirements that are, over time, quite strenuous, and I know that from personal experience.

So the issue is—and it always has been—the missing element of how we support those pre-profit companies in New Zealand, and there are many, many thousands of those in New Zealand. We’ve got 530,000 businesses in New Zealand. Many of those are pre-profit and are there creating value and, often, taking a concept and driving it through the different stages of research and then development, and then through what people term the “death valley”, where it goes through to the commercialisation stage before it becomes a fully marketable proposition. How we support, how the Government intends to support—and this bill doesn’t actually deal with it, in my view, but I’d like to hear the Minister’s view on it. How do you support those pre-profit businesses as they evolve through those first three stages before they get to the stage that means that they’re in profit and they have the scale to be able to do the R & D that we’re talking about and be able to access the fund of this nature?

So that’s the other aspect I wanted to hear from the Minister on, if she’d care to address it. What is the proposition around supporting those very innovative, creative young businesses that haven’t reached pre-profit and who are in a situation where they are helping to drive and create many jobs and that, ultimately, will become very large companies over time? So, on that note, I’m looking forward to hearing from the Minister.

I think we’re seeing a number of contributions starting to reiterate the same themes and the same questions are coming through, some of which I’ve already addressed. I’ll just start for the benefit of Andrew Bayly, the member who’s just taken his seat, who asked a question around pre-profits. I have addressed that question in an earlier contribution, but the point of this is actually all about those pre-profits. I’d like to reassure that member that this is the first time that we are actually having a comprehensive policy that is going to look at how it is that we can support some of our most innovative companies in New Zealand. So this has a 2019-20 provision for the tax year of 2019-20, and it sets out in post-2020 how indeed those companies will be supported. Obviously, there’s the cash-out tax credit, but I know that the sector and those in pre-profit in the sector are heavily engaged with us at the moment and are a part of designing what that post-2020 support will look like, and I know that they are hugely appreciative of the fact that they get to be part of that design.

There have been questions—which I have addressed also—around small businesses. I’d like to reassure those members who are signalling very valid concerns around this that this is something that, as a Government, we listened to. That’s why we have reduced the threshold of expenditure from the current $300,000 in the growth grant scheme to $50,000 under the tax incentive scheme. This is a scheme that is more directed to small businesses than the scheme it is replacing, and that’s something I have dwelt on in previous contributions, so I won’t dwell on that.

The member asked about prioritisation and public good. What I would like to point out to that member is that this is not an investment about public-good science. This is an investment around innovation in commercialisation. This Government values public-good science. We invest in that, and we invest in that through our strategic science funds. But this is about backing Kiwi businesses to commercialise that science and to take those ideas into economic reality. So this isn’t about investment back at that level.

The fiscal risk is something that has been raised by a number of members, and this is something where they’ve asked how it is that we get to the estimate. I’d just like to clarify that there are between 2,000 and 3,000 businesses that we estimate will be able to have support from the Government under this scheme, as opposed to the 300-odd that got support under the previous Government’s growth grant scheme. So we’re having a tenfold increase, and I can assure you that we’ve done some rigorous modelling around that. The figures on which we’ve based that modelling are from the 2016 Research and Development Survey, and we’ve looked at how the definition would apply across that, how many it would apply to, and what the quantum would be, which I think a member asked a question around. So that’s something that we have done work around.

We certainly have made sure that we’ve built headroom into the funding that is available for this, so that we know that we will be able to support all businesses and that we won’t have to prioritise and tell some businesses that they’re out, because this is not like the previous Government’s growth grant scheme. This is not about the Government picking winners. This is about leaving innovative businesses to do what they do well, and that’s innovate without Government making decisions about whether that is best.

One of the members pointed to a schedule of excluded activities that are covered by provisions in this Part 1; absolutely right, and this is international best practice. So I think an Opposition member asked a question, to give an example, around oil and gas exploration activities—what that would look like. Well, actually, that’s in the schedule of excluded activities, and that is what happens across the world. So there are a number of industries that are in that schedule of excluded activity.

The definitions are something that members have asked some questions around and how it aligns between different pieces of legislation. What we have to realise is that, actually, there are different purposes and different functions of definitions within different pieces of legislation. The purpose of the definition in this piece of legislation is to ensure that we are capturing and measuring the research and development that leads to economic outcome. Statistics New Zealand have to capture a broader range of metrics around that for very good reason: there is no inconsistency or incompatibility of using some different measures. What the most important thing is is, actually, we’ve looked at international best practice. By and large, this is based on Frascati definitions of R & D, and this is what is common within all of our science system. In fact, we would look at that right across how it is that we fund science.

We did listen through the submission process, and we moved away from strict application of the scientific method, but have had to put some rules around that. But I think the most important thing for me as Minister is that we were having a scheme that lined up internationally. Compliance is something that has been raised as well, and one of the things that I would like to point out is—and I have given this reassurance in an earlier contribution—that there are a number of integrity measures built into this bill.

Someone brought up the issue of Australia and the cost blowouts and the lack of compliance there. Officials from New Zealand spent a lot of time talking to their Australian counterparts, who were incredibly giving of their expertise and their experience. Some of it was on what not to do and we really valued that input, and it is a number of the measures that are being questioned by members of the Opposition now. We actually took good advice about how it is that we could put in place the most robust scheme, and that we could ensure one that allowed businesses to get on, to transform our economy, to innovate—not to sit around filling in forms for grants, because that is feedback we were getting very strongly from businesses. They didn’t want Government picking winners. They wanted to be able to get on and do in their business what they did well, and they wanted a rules-based system where they could be treated with the respect within the rules-based system as they are within the tax system more generally. So I am confident that we have the right suite of integrity measures contained within this legislation.

Finally, the one new question that has come up has been about outcomes. We have been very clear of what the outcome of this piece of policy is around and this measure is about: it is about being more ambitious for New Zealand than we currently are in terms of our R & D spend. We languish amongst the OECD in how much we spend on R & D. We spend only around 1.53 percent—I think 1.53 is our latest estimate of what we spend—as a proportion of our GDP. We aim to get to 2 percent within a 10-year period, and this requires that we do things differently. Doing what was previously happening was not putting us on a track so that we could be internationally competitive.

We don’t look to some of the countries that I think we like to measure ourselves against in the OECD; they’re currently in 2 and 3 percent and have ambition way above that. We have to fundamentally change things to even get ourselves to the 2 percent, and this Government is committed to this. We can’t keep doing the same thing and expect we’ll get there, and this is why we’re putting in place a transformational programme that backs New Zealand businesses to spend more on R & D.

I move, That the question be now put.

CHAIRPERSON (Adrian Rurawhe): I’m not going to accept that motion, but I’m going to put the question.

The question was put that the amendments set out on Supplementary Order Paper 204 in the name of the Hon Dr Megan Woods, and the following amendments in her name, to Part 1 be agreed to:

In clause 10, new section LY 1(2)(c), replace “6, and 7” with “LY 6, and LY 7”.

In clause 23, replace “37” with “37B”.