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Solution sought over start-up tax reprieves

25 Jul 2013

The government has welcomed the release of an Inland Revenue Department tax policy paper, seeking to improve cash flow and remove tax distortions on research and development costs for start-up Kiwi businesses.

Requesting public feedback regarding the proposals, consultation on R&D tax losses has been welcomed by both Science and Innovation Minister Steven Joyce and Revenue Minister Todd McClay.

The proposals, which were first signalled in August last year, recognise the specific difficulties faced by innovative start-up businesses when seeking access to capital and maintaining cash flows during a crucial phase of their development.

“Under the current rules, tax losses must be carried forward and deducted against future taxable income," Joyce says.

"Early-stage businesses often endure particularly long periods of tax loss meaning they cannot access the benefit of these loss deductions when they need it most."

The issues paper outlines a proposal to relieve current tax distortions by allowing 100% of eligible tax losses arising from R&D expenditure for these businesses to be accessed up front instead of carried forward.

Eligible losses will be capped at $500,000 initially (equivalent to a refund of $140,000), but rising incrementally each year to a maximum of $2 million (a $560,000 refund).

“For R&D-intensive firms, the tax rules can act as a particular impediment to future development because these businesses often have insufficient income to apply the tax loss against, or they may not be able to use their tax losses in a timely way,” McClay says.

“The proposals seek to address this problem by allowing innovative start-up businesses engaging in intensive research and development to use their tax losses early, provided they meet certain criteria.”

These include the requirement that applicants must be a company resident in New Zealand for tax purposes, but cannot be a look-through company, listed company, qualifying company or a special corporate entity.

“The proposals to remove this distortion in the tax system are another part of the Government’s agenda of building a more productive and competitive economy that supports innovative Kiwi businesses, investment, jobs and growth,” Joyce adds.

Submissions close on 30 August.