Tag Archives: Callaghan

Bright and shiny and new

Let’s talk about tax.

Or more particularly let’s talk about incentives for research and development.

Your correspondent has just arrived in Sydney for the start of what her husband delightfully refers to as her ‘retirement cruise’. That would be broadly accurate except for the fact that I am not fricken retiring – I’m on a gap year ok! and there will be no boats involved. Planes – yes – and lots of trains – yay I love trains – but nothing actually ocean going.

But with an aunt, uncle, cousin and now son and his girlfriend in Sydney I have now more family there than I do in parts of New Zealand.  So it is only logical that I should come here more often than in the past and the fact that the weather is better plays no part in it. Given it is Sydney I should also reference shopping but I hate shopping – other than online shopping, probs a future GST post I think – so I won’t.

Being in Australia figured I should do a compare and contrast tax post. What to choose? What to choose? Tax free threshold?; extremely high top marginal rate?; stamp duties?; payroll taxes?; offshore banking unit?; GST exemptions?; carbon tax?; substance based approach to instrument classification?  All important issues and ones I will only really ever be able to properly discuss if I am actually in Australia – so happy to take that for the team.

But today dear readers you get research and development tax credits which lots of countries – including Australia – have.

Now other than during a brief period at the end of the last Labour government, New Zealand does not give explicit tax incentives for research and development. R&D expenditure does however get more concessional treatment than other business expenditure:

  • it is deductible until it is capitalised for accounting
  • Consequential losses are not lost on a change in shareholding and 
  • Losses can be cashed out up to a limit.

Plus as discussed on Monday gains from successful entrepreneurship in the form of serial business owning are unlikely to be taxed and there is no clawback of any residual losses if the business rather than the company is sold.

And none of this is included in the billion dollars – pg 27/28 – a year that the government already spends on innovation. And yeah it is a year – none of this ‘over the forecast period’ stuff where you multiply annual expenditure by four the way they do with other initiatives. So big money.

Furthermore (wow did I really say furthermore on a blog?)  growth grants look awfully like a R&D tax credit. But as this government repealed the last government’s tax credit, by definition, New Zealand does not have R&D tax credits.

Now dear readers you may be wondering why this expenditure should be treated better than any other business expenditure. And the official answer as to why it isn’t just another form of corporate welfare goes something like this:

R&D creates these things called spillover benefits that roam free like pokemon in the wild that anyone can capture. Because anyone can capture it, businesses don’t do as such of it as they ‘should’. And because wild pokemon are good for the economy governments need to pony up with a subsidy to make sure enough of it can happen.

Whether any of this is actually true – I wouldn’t have the first clue. Work of far cleverer people than me would indicate that it isn’t wrong.

What I do have the first clue on though is delivery mechanisms. 

And from that first clue I say  – please next lefty government – please don’t do this stuff  through the tax system. Now I know my priors were fully on display last Friday – but just please don’t.  And not because it fails some ‘purity of the tax system’ thing. Please don’t do it because – as we say in yoga – it doesn’t serve you.

Yeah I know both Labour and the Greens seem to be sympathetic to using the tax system more for this stuff. And while Gareth Hughes  is quoted as saying delivery through the tax system is better because it is ‘simpler and less bureaucratic‘ – it is a view I hear quite often and not just from the Left. Sigh.

Now I just don’t get  simpler as both Callaghan and the Income Tax Act use the accounting defintion of R&D which is trying to  get at is whether something really is bright and shiny and new and not simply improving on existing stuff. Less bureaucratic however needs a bit of unpacking.

First a bit of background. Our tax system works on a self assessment basis whereby you work out how much income you have based on your – or your agent’s – intimate detailed and expert knowledge of the minutiae  and nuance of the tax laws. And then you pay tax on that number. To ensure you don’t entirely take the proverbial the Commissioner has a bunch of powers at her disposal. Her  – never gets old.

Now while she – still loving it – has a bunch of powers at her disposal she – ok I’ve stopped now – also has limited audit resource and can’t review every claim. And let’s put to one side that a tax dept unlike Callaghan is not known for its scientific expertise. So because of this, all things being equal a claim for R&D that isn’t quite right is more likely to get government funding through the tax system than through a grants system. Now I totes get why business would like that – just not entirely sure why the rest of us including a Minister of Finance would.

And now here’s the thing in terms of  less bureaucratic. If she does decide to use her powers to challenge a tax credit that wasn’t in her view correctly claimed – game on. Potentially a complete world of pain for the receiver of the credit – aka the disputes process And at the end of that world of pain – they might have to pay the money back even if they have spent it. 

Now there is a way of avoiding this risk generally in tax and making sure it is less likely to happen. That is through getting an upfront binding ruling which – facepalm – would be very similar to a grant process. 

So instead of simpler and less bureaucratic – I would say – higher fiscal risk for government and greater uncertainty for business. Awesome  – sign me up now.

And I am not just being a pain here. In Australia CBA is apparently having ‘issues’ with the ATO involving serious cash that I can only assume it has spent. I also get that Australia changed has changed its rules but please note Green Party both these links talk about the mining industry being major receivers of these benefits. Something borne out by the Mining Institute  who are very clear that: 

The R&D tax incentive supports the development of world-leading technology in the minerals industry.

So lefty parties please just think about this very carefully before you go this way. It’s not like you will have heaps of spare cash if you do make it to the Beehive next year.

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