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R&D tax concession confusion contrasts poorly with Australian initiative
Since news broke recently that the Australian government is devoting nearly A$3 billion to help develop a knowledge economy across the Tasman, the debate over grants versus tax break to encourage R&D has raised its head in New Zealand again.
This has been exacerbated by Science Minister Pete Hodgson's comments at a world research and development conference in Wellington last week suggesting that Australia was almost alone in being preoccupied with allowing firms to deduct more than 100 per cent of R&D costs from their tax bills.
He went on to state his position firmly. "If you come to New Zealand," he is reported as saying, "you will find that in my view we are preoccupied with grant systems as opposed to loans and as opposed to tax incentives."
Once again, the result is that New Zealand businesses will be confused by the exact boundaries of Government approved research and development and, instead being in charge of their own destiny, will have to go cap in hand to Wellington bureaucrats. And, of course, the result will be that few companies will be encouraged to invest with the existing levels of government initiatives.
New Zealand companies will look across the Tasman with envy.
Not only does the Australian package includes a loan scheme of almost $1 billion for postgraduate students and $A736 million for research grants over the next five years, it also comprises a new 175% tax concession for some businesses. And it has widened the eligibility for the already established 125% tax break.
Leading Australian experts have said the package will keep highly qualified workers in Australia and will increase investment from multinational companies while adding only 13% on to the existing Government innovation spend by 2005-06.
Now let's talk New Zealand.
Instead of allowing business rebates on R&D expenditure - giving them the freedom to spend it as they see fit, New Zealand prefers an unoriginal plan requiring businesses to apply in advance to be innovative. The Government provides them with a dismally limited tax concession and then slaps in a $12 million R&D grants programme in the first budget to boost the morale. Unimpressed, New Zealand business fails to respond. The Government regroups and at last puts forward what it should have proposed in the beginning - namely, to allow business to deduct research and development expenditure to the extent it is expensed for accounting purposes. But of course no increased deduction to incentivise business.
Despite the Government's declared determination to lift New Zealand into the first division of knowledge-based, sophisticated economies, what sort of message does this approach give to business innovators in New Zealand. How serious are we about developing a leading edge knowledge economy? And how do we compare to Australia?
New Zealand has what it takes to promote itself as a knowledge-based economy. That's a given. And thanks to the continuing effects of globalisation we are now in a prime position to take advantage of the new economic order. We're the first to see the sun and catch up on the news. We're renowned internationally for our innovative image and we have a manageable population of sophisticated consumers that can quickly tell you what works and what doesn't. We have the makings of a sound economy that just needs the confidence and commitment of the Government behind it.
To get ahead New Zealand must develop a vision for the future by identifying and creating markets that aren't yet there. To do this, businesses need to conduct research and development. It is unrealistic to expect businesses to constantly run to the government requesting the money to be innovative. Business doesn't operate that way.
The answer is to provide tax concessions and understand that business is in the best position to know how to manage their business. As a consequence, one has to urgently clarify the situation regarding tax concessions; sorting out all the uncertainties associated with the tax concessions such as the difference between capital and revenue, the definitions of 'research', 'development' and 'production' costs, and that 'black hole' expenditure issue.
Businesses need simplicity. They need to know just two things:
- whether any proposed R&D expenditure is deductible; and
- whether any government incentive is readily available.
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
