Taxation (Research and Development Tax Credits) Bill

Thank you, Mr Chair. I would like to start off with section 68CB, as inserted by clause 43, which is about general approval: “Research and development tax credits: general approval”, which talks, also, about the preapproval process, because, from 2020 onwards, there will be a preapproval process for the tax credit. What we heard before was a big lecture from the Minister in the chair saying that, for grant applications, people have to put in an application; so they have to spend some time filling in that application to access the growth grant. But what’s going to happen with the preapproval process? For the preapproval process as well, people will have to fill out some forms or maybe provide some information in some kind of format for the commissioner to consider that for preapproval. It’s not like the commissioner is going to get a dream—what companies are going to put forward—and will be sending an approval or preapproval to that business without looking through what has been submitted. So of course there is going to be some kind of cost for businesses to submit what is going to be applied for preapproval.

With preapproval, something that is very interesting—and I think it will be good to hear from the Minister; I hope the response is going to be different from what the officials were saying, defending this point—is that there is no time line for preapproval. So, for the commissioner, there is no time line for preapproval for any business when they’re spending their money on research and development. If they are hoping that they’re going to get some kind of incentive, there has to be a time line, because businesses need certainty, and, again, I’m asserting this point of certainty for businesses, because they’re out there taking that risk, spending their own money. It’s not like taxpayers’ money that you can spend without, you know, giving a proper answer about the outcomes that can be achieved. Businesses are answerable at the end of each year to their employees because they want to see that their employees are able to grow and their business is able to grow. They want certainty.

So if a business has applied for a preapproval and they don’t know when the preapproval is going to come, the business will be sitting there thinking whether they should initiate that project—that spending on research and development—or not. So this is what is going to happen when there is no time line for approval. There was a submission when the bill was before the Finance and Expenditure Committee where the submitters said—it wasn’t just from one group; more than one submitter said it—that there should be a three-month deadline for the commissioner to respond to requests to exceed the cap, and this is for exceeding the cap. Also there were discussions around putting a time line around the preapproval process. So for exceeding the higher cap where businesses can get that preapproval so that they know that they can go ahead and spend that money—for that also they need certainty.

So every business, before they go out to spend their money, they need some kind of certainty. What we heard during the select committee process was that imposing in the legislation this kind of deadline for responding to claims is not required. In its administration of the R & D tax credit, Inland Revenue will set a performance standard for processing applications but does not think time constraints should be set in legislation. My question is: why should the time constraints not be put in the legislation? This legislation, to some extent, is quite descriptive; so time constraints should be there somewhere in the legislation or in guidelines because that will help us measure the performance of Inland Revenue, measure the performance of Callaghan Innovation, and help us measure the overall performance of this policy. If businesses have to wait for four or six months, then that doesn’t mean that the policy is as effective as is being claimed by the current Government.

So my point is that there has to be some kind of time line for businesses to know how long they have to wait to get their preapproval—whether it’s about exceeding the cap or whether it is about the general preapproval for their expenses. So a time line will help businesses plan their business activity. It will help them understand what kind of spending they can do on their business, because some businesses could be committing to spend more just because they would be thinking that they are going to get an R & D tax credit, but if it is not approved, they are not going to get that, and then they could actually be putting themselves in financial trouble.

We know that, in New Zealand, most of our businesses are small businesses—96 percent to 97 percent of our businesses are small businesses—and we don’t want to see our businesses getting into that kind of financial trouble just because the legislation doesn’t put any time line for approval or preapproval of exceeding the cap or preapproval spending on—[Time expired]

Thank you. I’d just like to take a short call to answer some of these questions. Part 2, of course, is quite a narrow part of this legislation—it’s around the year 2 and beyond provisions, as opposed to the other provisions we’ve looked at.

Just in terms of the question that the member Parmjeet Parmar has raised in terms of clause 43 and no preapproval time line within that, I’d just like to offer that member some reassurance that this is an issue that we have discussed, both with IRD and Ministry of Business, Innovation and Employment officials. While there’s not a legislated time line in there, there is an operational standard that will see IRD looking to give a decision within six weeks on this. So this is an issue that we have given consideration to, and this is more rightly put into an operational standard than appearing in the legislation for obvious reasons. Obviously, a fixed time line within there could have some perverse outcomes in terms of the integrity standards that we’re trying to look at. We don’t want to have anything in there that could encourage gaming and poor applications. That is more rightly done within that operational standard that the department will operate.

The other issue that the member brought up—that I’d just like to respond to in terms of certifying and preapproval that will operate in this post - year 2 and beyond provision—is, of course, actually something that business asked for. This was something that we went out before the select committee process when we did the engagement—and a very broad engagement with business, actually. Business came very clearly to us and said, “Look, we want to have provisions in there where we can preapprove.” It’s not like applying for a grant, where every time you have to put the application in. There can be for certification or there can be preapproval for smaller businesses, and this was very much part of our responsiveness to the sector and listening to businesses around what they wanted. So I just wanted to give some reassurance on those questions.

Thank you, Mr Chair. Now, moving on to another point that I want to raise—it’s about having certified people that can approve a research and development tax credit. So here—the certificates for research and development coming through certified people—it looks like the Government is creating another layer of people that businesses should be accessing to access research and development tax credits. So businesses already have other expenditures: they have accountants; they have lawyers. So now they will have to go through these certified people—I mean this will be an option—to apply for their R & D tax credit. Here I believe this is a job that the Government should be doing—the various people through Callaghan Innovation should be looking into it—rather than creating another layer, another expense for businesses to access certified people that can approve their research and development expense claim.

So here what is happening is we are creating more cost on business. The first point which I raised in my previous contribution was that, yes, they will have to provide information in some kind of format. It might be different from what is there currently for growth grants, but there has to be some kind of format otherwise the commissioner will know what the commission is going to preapprove. Then this point is about creating another layer where businesses will have to access a tax credit as an option through a certified person that is approved. On the other hand, these people are not going to be part of any appropriate professional body, which was raised during the select committee process as well, because the point was that we want to make sure that these people are bound by professional ethics, so that these people are bound by professional ethics and that they should be part of a professional body. This was actually rejected during the select committee process. It will be good to understand, from the Minister, that it is expected that most R & D certifiers will be members of an appropriate professional body—what does this mean? “It is expected.”—that is the response we got. So expectation doesn’t mean they are necessarily going to be a member of a professional body. So that means the Government is leaving it to them to choose whether they want to be a member of an appropriate professional body.

So the second point that comes is about the penalty regime. Yep, there is a penalty. So the argument we heard was that this is going to be sufficient to ensure R & D certifiers will be acting in a professional, ethical manner. This is only if they are caught—only if they are caught—but if there is another layer created by this Government for businesses that is going to cost them, then why not make it more effective, more assuring? Here it doesn’t give us any assurance that people that will be acting as R & D certifiers, because it is their choice to be part of a professional body or not to be part of a professional body, and the second thing is the penalty regime, which comes in only if they are caught. So the businesses will have to rely on these people—this other layer which this Government is creating, which, in my view, is totally unnecessary. Actually, it should be the Government’s job to ensure that people’s needs—businesses’ needs—for their R & D tax credit claim or refundability are met.

The second point—we have heard a lot from the Minister about growth grants. Growth grants provide money at the start, and that is what start-up companies need—not money at the end. So big companies, yes, they have money, they have resources, they can spend in the start and then claim R & D tax credits at the end of the year, but that policy was focused on providing help at that point when they really need that financial help.

Now, this policy that was put in place by the previous National Government—growth grant scheme, which has proven to be very successful—is going to be phased out, in section LZ 13, where it talks about part-year override of section LY 3(2)(b). There it just talks about part-year, but it doesn’t talk anywhere about part-project. When a project is put forward, it’s not always about the time line; it’s also about the progress of the project, and there could be some simultaneously on-going projects. So it will be good to hear from the Minister on this issue as well.

The question was put that the amendments set out on Supplementary Order Paper 204 in the name of the Hon Dr Megan Woods to Part 2 be agreed to.