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Labour vows return to tax credits as R&D spending slips

08 Apr 2015

Labour's finance spokesman Grant Robertson said Labour would look to boost its policy on research and development tax credits because the current government wasn't doing enough to shift the dial on business R&D spending, which continues to fall below OECD average levels.

Robertson is critical of the government's new R&D policy that allows start-ups to cash in 28 percent of tax losses for income received from the start of the 2015 financial year until they become profitable or sell the business, at which time the tax would have to be repaid. The intent was to help start-ups benefit from their tax losses at the time they need it most when cash flow is tight.

Staples Rodway director of taxation services Andrew Dickeson also criticised the new policy as not going far enough to significantly boost investment in R&D, although it was a step in the right direction. Robertson said Dickeson was "exactly right" in saying people would be slow to change their approach to R&D based on what some would see as "a bit of interest-free money".

"These half-baked tax credits come with some serious small print - when the business becomes profitable it has to pay them back. That's not an incentive, it just encourages creative accounting," Robertson said.

Economic Development Minister Steven Joyce said the new policy had to be taken in context with other R&D tax measures which would collectively lift R&D spending.

Robertson said the government was letting down businesses by having because a piecemeal rather than comprehensive approach to encouraging R&D spending which could be better achieved with across the board research and development tax credits.

Labour campaigned at the last election on reintroducing the R&D tax credits National removed when it came into office. National favoured grants because of concerns that tax breaks lead to firms claiming back existing R&D spending rather than promoting new investment. Robertson said today the party would look at taking its proposed 12.5 percent tax cuts even further to get a significant long-term economic shift towards high-paying jobs.

He said business feedback he's had on the government's push towards growth grants for R&D instead of comprehensive tax credits has not been favourable.

"There's a level of compliance with grant applications that appears to be wasteful and criticism that the government has been picking winners with signs of favouritism to certain companies."

Green Party economic development spokesman James Shaw said while it supported National's start-up tax credits policy to select committee stage, his party would rather see comprehensive tax credits reintroduced, combined with grants.

He claimed the government's R&D strategy had failed, with no growth in the proportion of businesses investing in R&D since the first year it came to office.

The most recent Statistics NZ figures show that, in 2014, 8 percent of businesses invested in R&D, exactly the same as five years ago.

The government's goal has been to lift business R&D investment to one percent of GDP but the latest biennial Statistics NZ Business Operations Survey show it has actually gone the other way, falling from 0.57 percent in 2012 to 0.54 per cent in 2014, a period of strong economic growth. It has increased only 0.6 of a percentage point of GDP in the past 12 years.

The survey showed business sector R&D expenditure had risen 4 per cent or $53 million from 2012 to 2014 to $1.2 billion. That amounts to just under half of all R&D expenditure in New Zealand, which was slightly down in 2014 at $2.6 billion compared with $2.6 billion in 2012. Government sector spending on R&D fell 7 percent over the period to $556 million while universities' spend was down 2 percent to $817 million.

Joyce said many of the government's recent initiatives to encourage business R&D, such as Callaghan Innovation's growth grants, the National Science Challenges, and the ability for start-ups to cash out some R&D tax losses, were yet to feature in the statistics.

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