If the New Zealand Government cuts R-D funding and instead replaces it with tax credits, hundreds of upcoming tech companies will be affected – and not in a positive way, says NZTech chief Graeme Muller.

The government's planned changes may work for larger and more mature organisations, but it will have the opposite effect on small firms – which is something NZTech says will not be conducive for the fastest-growing sector in the country.

According to the Ministry of Business, Innovation and Employment, the Research and development tax incentive is designed to help more businesses undertake more R-D, and may be introduced in 2019.

Although tax credits do have a place, New Zealand needs to be as competitive as other countries if it wants to grow the economy faster.

Muller says NZTech has ‘critical' concerns that companies currently receiving the growth grant will get less support in future, which will reduce overall investment in R-D.

“As it is a tax-based scheme it will also automatically exclude most high growth software firms that which run at high levels of losses as they aggressively invest in product development (R-D) and market expansion,” he says.

Muller also believes that there needs to be more work to better understand the impact of tax credits on high-growth tech firms – software firms in particular.

“New Zealand has a growing number of successful software firms like Xero, Pushpay, Soul Machines and Vend who spend significant amounts on R-D as their products need constant development,” Muller explains.

“These firms run at a loss as they invest in global market growth and product development and yet will have no access to tax incentives as they are loss-making.

He believes that the current consultation process presents opportunities for a review of the structural setup and equity for all high-tech companies.

We also need to make sure the R-D incentives help both research and development – they currently focus on research and ignore development,” Muller says.

“We need to make sure that research and development software activities are adequately addressed and recognised in the further work currently being undertaken by officials and changes to growth grants are delayed until this process is complete.

Australia offers 38.5% R-D tax incentives with beneficial cashback schemes, Muller says. Canada's incentives can be up to 60.

“While we acknowledge there are differences in the details, the top line number does send a signal of how serious other countries are about the importance of R-D,” NZTech concludes.