R&D tax plan helps cash-strapped start-ups
Proposed law changes offering loss-making research and develpment-focused start-ups some tax relief are much-needed, but more thought is required on some of the changes, tax experts say.
Under current law, tax losses must be carried forward and deducted against future taxable income.
But Inland Revenue this week released an issues paper proposing that loss-making start-ups that are focused on research and development should be able to access the tax refunds immediately.
Eligible losses would be capped at $500,000, representing a refund of $140,000, but would rise incrementally each year from implementation to a maximum of $2 million.
Grant Thornton tax partner Geordie Hooft said the proposed changes, mooted as part of the Budget in May, offered much-needed cashflow to start-ups, which often struggled to generate funds in other ways.
"When you're in that research and development phase, it takes quite a bit of trial and error and it's pretty hard to persuade an investor or a bank to fund trial and error," he said.
"This would put some much-needed cash into those businesses. It seems to be a solution that, assuming these businesses go on to commercialisation, has no net cost to the Government.
"All they are doing is giving up cash today in return for not having to give up cash in the future in the form of tax benefits."
The R&D tax proposal improved on the tax-incentive scheme introduced by Labour and removed by National, Hooft said.
"That scheme aimed to incentivise R&D, but all it really did was allow companies to rename things they were already doing as R&D to attract the tax credits," he said.
"This seems more of a recognition that R&D costs money and businesses undertaking it need cash at a time when cash is hard to come by."
There were some points of the proposal that needed clarification, he said.
The proposal requires that businesses must be directing 20 per cent of their wage bill to R&D. The figure was insurance that companies were committed to R&D and to weed out those just looking to cash out their tax losses.
Hooft questioned whether it mattered whether they were spending 20 per cent or 10 per cent.
He also queried the exclusion of listed companies from the proposed changes.
"We've already had one of our list-company clients expressing disappointment that they won't be eligible," he said.
"The fact is they are contributing as much to the knowledge and the economy of New Zealand as a small R&D start-up. They would appreciate the cash as much as anyone."
Andrew Dickeson, director of Staples Rodway chartered accountants, said there could be a catch for some businesses in the proposals recovery rules, which suggested any income paid to a business that had cashed out their tax losses in the form of share sales would then attract tax.
"I suspect there will be a fair bit of discussion around that. It could be a catch for some businesses suddenly faced with an unexpected tax bill," he said.
He expected plenty of debate on the proposal's list of activities excluded from the tax breaks. These included prospecting and drilling for minerals, petroleum and natural gas, as well as market research and arts and humanities research.
"There will be a fair bit of feedback from businesses and industry groups working in some of those excluded areas saying that's unfair," he said.
Overall, Dickeson said, the proposal would be a useful boost to start-ups, particularly small and medium enterprises.
R&D funding traditionally went to larger corporates that had the time and staff needed to "jump through the hoops" to successfully apply for grants, he said.
"This is really aimed at those people essentially working out of their garage, trying to develop new products. They generally don't have the time do what it takes to attract funding," he said.
"It should help those R&D-intensive start-ups to survive. You can have the best idea in the world, but if you don't have income coming in, it's just wasted."
Dickeson urged business owners to make submissions to the proposal.
"It's really a once-in-a-lifetime opportunity to make your thoughts on the issue known."
Submissions on the proposed changes close on August 30.
A spokesman for Revenue Minister Todd McClay said there was no set time frame for implementing the proposed changes, although they were expected to come into force no later than the 2015-16 financial year.