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.
Let’s talk about tax (expenditures).
Now these were hinted at in Monday’s post on Mr Woodhouse and behind the deathless Treasuryspeak of the term is something all good citizens should know about.
Government expenditure comes about through something delightfully known as Votes. Not Budgets or Accounts but Votes on the equally delightful notion that Parliament determines spending. Not the government, or the Minister of Finance or even the PM himself – but Parliament. Of course that completely overlooks prosaic notions of Confidence and Supply agreements with support parties – and this is totes supply – but work with me.
Each department has a vote and they are combined in an Appropriation bill that is introduced after a Budget is read. Parliament debates it by the government side telling everyone how fabulous John Key is and the opposition telling us how much better everything was last time they were in charge and/or they would do it better.
Sometimes the actual expenditure is discussed but that is not compulsory. Then after third reading there is a vote and – who would have thought – those in favour have greater numbers than those opposed. And so Parliament approves the expenditure and isn’t democracy wonderful.
As an aside at Treasury all these votes/ dept budgets are monitored by delightful young people called vote analysts. It is a job they pass through on to their way to better things which has included being the opposition spokesman for Dunedin and interrogating Todd McClay.
Anyway that is how it is supposed to be done although the interrogating Todd McClay is optional. There is though another sneakier way of the government spending money and that is through the tax system.
Now the received wisdom is that this is a BAD THING and this is very much one case where your correspondent agrees with the grown ups.
The way it is done is through giving specific groups concession directly in the Tax Act. So instead of collecting tax and the paying say one legged men a parrot allowance which would go through the annual appropriation bill a government could exempt the income of one legged men.
To the one legged man and his political supporters this is awesome. It will have to go through a tax bill once but even then it would be combined with another million other thing so may not really get much notice. The legislative equivalent of there only being one front page.
After that no nasty Parliamentary scrutiny; no department arguing with delightful vote analysts; and no transparency of the government’s largesse by the wider community. What’s not to love!
Lot’s really for everyone with two legs and no political support. So as always Treasury being the Guardian Angels that they are publish a tax expenditure statement with the Budget documents.
There are what you would expect – tax exemption for Charities, donor rebate for Charities and Working for Families tax credits paid out through the tax system.
But there are also things you wouldn’t expect – and TES 2015 was quite notorious – exempting accommodation allowances to defence force personnel, ministers of religion, and Canterbury rebuild workers. Longstanding expenditures include the income equalisation scheme for farmers and accelerated depreciation for bloodstock. And do not get me started on the upfront deductibility of all forestry expenditure – including capital expenditure.
I am sure in other countries it is much worse but it is far from clear to your correspondent what makes these government expenditures so special that they should bypass Parliament every year.
But at least dear readers they are called out every year. And I would encourage you to look at them every year and ask questions. Because Parliament can’t.