New figures released today by Statistics New Zealand show strong progress in Research and Development (R&D) spending under the National-led Government’s R&D framework, while also showing what a Capital Gains Tax will put at risk, National’s Research, Science and Innovation Spokesperson Parmjeet Parmar says.
“Between 2008 and 2018, R&D spending in New Zealand rose from $2.2 billion to $3.9 billion. These results are a reflection of the effective policies implemented by the previous National Government and pre-date any changes by the current Government such as the R&D tax credit,” Dr Parmar says.
“However, the Government puts all that progress at risk with the proposed Capital Gains Tax.
“A Capital Gains Tax would punish start-ups, innovators and small business owners who are willing to take risks and turn their ideas into a commercial business venture.
“It will mean that when a Kiwi start-up, the next Xero or TradeMe, decides to sell their idea or product to the world, the Government would help themselves to a third of the return
“That is not fair.
“It is the entrepreneur and innovator who takes the risk, invests their own money and time and puts in the hard work to turn their idea into a success, not the Government.
“National believes we need to reward hard work, incentivise risk-taking and encourage New Zealanders to invest in new products and new ideas. A Capital Gains Tax would do the opposite.”
The Government claims to be committed to building a more innovative economy, so it should explain why New Zealand’s innovation ranking is sliding, National’s Research, Science and Innovation spokesperson Parmjeet Parmar says.
“New Zealand was ranked 28th on the Bloomberg Innovation Index in 2013, when the former National Government created Callaghan Innovation to help lift our performance. It did, and New Zealand’s ranking improved to 18th within two years.
“Now the tide’s going out again. New Zealand’s innovation ranking has fallen two years in a row. The same trend may be emerging in the Global Innovation Index.
“One of the most consistent themes I hear from New Zealanders about what our economy needs is that we need to move up the value chain by supporting more innovation.
“New Zealand has had some great innovators and we need more of them to add value to our exports of goods and services and to improve our standard of living.
“This Government may be struggling to make progress because of the divergent views within the coalition but that’s no excuse for inertia.
“As a country, New Zealand should back itself in its ability to add more capacity to innovate and add value to what we’re good at and to find new things to be good at. But the performance of the Research, Science and Innovation Minister leaves me concerned as Government policy in this area is somewhat woolly.
“Across Minister Woods’ portfolios, there has been a discernible lack of depth in her knowledge of the scientific principles that should guide policy decisions.
“These global indexes may be pointing to a slowdown in New Zealand’s innovation value chain and shouldn’t be shrugged off. It could make it harder for innovative businesses to attract investment and risk the loss of innovative work in New Zealand.”
The Government’s R&D Tax Incentive policy shows it has taken on board some of the concerns raised by submitters but today’s release leaves too many unanswered questions, National’s Research, Science and Innovation spokesperson Dr Parmjeet Parmar says.
“The policy is short on details of compliance requirements and how Inland Revenue proposes to police the scheme. Without that information, businesses can only hope they comply and are keeping the right records. The scheme has to be more than just a bonanza for tax consultants.
“It is essential that businesses have certainty over the details, especially since the Government is determined to roll this out in 2019 while the Treasury had recommended a start in 2020 to allow proper policy implementation.
“Megan Woods has previously said some 3000 companies were expected to be eligible for the tax credit but seems to have retreated from that target today by saying it will be more than 2000.
“Those that are ‘pre-profit’ will be covered by temporary arrangements subject to review down the track because the issues were too complex to resolve now.
“The Government has lifted its incentive from 12.5 per cent to 15 per cent of eligible R&D spending but that’s still below the 20 per cent rate that applies to Growth Grants under the existing programme.
“Changes in this version of the policy, including dropping the R&D spending threshold to $50,000 from $100,000 and what appears to be an expansion of eligible organisations, won’t come without extra cost yet the Government still claims it will cost $1 billion over four years.
“Australia’s comparable scheme ended up costing twice its original budget, so Ms Woods needs to explain how the Government will stay within budget.
“Small and unprofitable firms were able to find support under National’s innovation ecosystem. We understood that the big companies of tomorrow emerge from the risk-taking entrepreneurs of today.”
The Government has held onto submissions to its research and development tax credit proposal for three months and there’s no sign yet that it has tackled the inequities, National’s Research, Science and Innovation spokesperson Parmjeet Parmar says.
“In the current version of the Government’s plan, firms currently spending less than $100,000 don’t qualify for the same credit as larger companies. That effectively rules out the big companies of tomorrow because it puts a hurdle in front of small businesses today.”
“It makes no sense to treat one dollar of R&D spending any differently to another dollar just because a business is small. If anything, they are the group with the most to gain because small businesses can be hand-to-mouth as they seek to stay afloat and grow.
“The Government needs to abolish the $100,000 threshold and also needs to find a way to deliver some form of assistance for start-ups that may undertake large amounts of R&D but are yet to record a positive cash flow. Currently, they’re entitled to growth grants.
“Businesses, particularly start-ups, need certainty because they tend to be investing for the long term. Often they need to know what the business environment will be like for next 3-4 years to have the confidence to invest.
“Megan Woods pushed out the deadline for the Bill by a month but her officials will still be under pressure. It is now expected in October to be enacted by April 2019.
“Ms Woods is in a difficult position because the current design of the policy has already been costed in Budget 2018 at $1 billion over the next four years.
“Removing the $100,000 threshold and/or extending growth grants now will significantly increase the cost of the policy and put further strain on the Government’s Budget Responsibility Rules, which it already looks like breaching.
Megan Woods appears to expect pre-profit start-up companies to hope and pray they won’t be overlooked by the Government’s proposed R&D tax incentive plan, National’s Science and Innovation spokesperson Dr Parmjeet Parmar says.
Dr Woods told Parliament that of the 300 businesses currently receiving a growth grant through Callaghan Innovation, some 200 aren’t yet profitable. These 200 businesses will not be able to receive a tax credit under the Minister’s proposal.
“This could be the tip of the iceberg because not all start-ups seek grants during their growth phase and the Minister has no numbers for the total proportion of NZ businesses undertaking R&D during their growth phase.
“They won’t take any comfort from Dr Woods’ assurance that she’s ‘committed to finding solutions’ or that officials are still working on that bit of the plan. Assurances don’t help New Zealand innovators when they’re trying to project their cash flows.
“It also isn’t clear that start-ups who have reached profit will be as well off under the Minister’s plan since the growth grants are currently set at 20 per cent and the tax incentive put out for consultation was at a 12.5 per cent rate, a gap noted in MBIE’s advice to Dr Woods last November.
“What a tragedy it would be for New Zealand if the next big thing ended up walking away or quitting because of this lack of certainty. They deserve better.”
Last night the Government voted down my Members Bill that would improve health outcomes for mothers and their babies by ensuring that newborns are enrolled with a GP before they are six weeks old, National MP Parmjeet Parmar says.
“Despite the Government claiming that it wants to do more for the health and wellbeing of children and after the three Government parties unanimously supported this Bill in its first reading, they have now all voted down this Bill.
“In an attempt to pretend to address this issue the Government is planning to take a watered down approach by looking to implement an extremely low target for newborns to be enrolled with their GP before they are six weeks old.
“The Government members on the Health Select Committee have agreed to introduce two performance measures for newborn enrolments through DHB annual plans. These would aim to have 55 per cent of newborns enrolled with a GP by six weeks of age and 85 per cent of newborns enrolled by three months of age.
“Their suggested target of 55 per cent as a performance measure is far too low. Six weeks is a significant amount of time for a newborn to not be enrolled with a GP and for the health system to be unaware.
“My Member’s Bill would introduce a very basic legislative framework to remove some barriers and implement the necessary systems to ensure that newborns are enrolled with a GP as early as possible and before six weeks of age.
“Having a system in place to track GP enrolments and encouraging earlier enrolment would immediately bring about better health outcomes for new babies.
“It would not only ensure that health and development checks were carried out early but would also provide a vital opportunity for GPs to inform and connect the family with a range of other support options including both health and social interventions.
“The improved health outcomes are compelling reasons for us to have a legislative framework to enrol newborns before they are six weeks old.
“The Government should adopt the principles of my Members’ Bill that it has just voted down and start work to improve health outcomes for newborns.”
The only publically released submission so far on the proposed R&D tax credit scheme will worry the Government as it highlights some industry concerns about whether the tax credit system will boost R&D investment, National’s Research, Science and Innovation Spokesperson Dr Parmjeet Parmar says.
“The Government will be concerned that NZTech – an organisation that represents over 800 technology organisations in New Zealand – has raised a number of concerns it has with the Government’s proposed tax credit scheme.
“Among NZTech’s many concerns is R&D tax credits will not benefit high growth firms that run at losses during periods of rapid investment in R&D.
“Because tax credits do not offer any cash flow relief to start-ups who are yet to return a profit, there are serious questions as to whether R&D tax credits will do anything to lift R&D spending given the importance that start-up firms play in driving R&D spending in New Zealand.
“NZTech’s submission raises further concerns on the high level of uncertainty during the transition period away from growth grants. Members also have issues around what will be classifiable as R&D expenditure and the fact that a tax credit rate of only 12.5 per cent will offer significantly less material benefit than growth grants which will therefore reduce the incentive to invest.
“In light of the concerns raised by NZTech in their submission on the Government’s proposed R&D tax credit scheme – which is the only publically released submission to date – we encourage the Government to publically release all submissions.
“Without such transparency, the public will be left in the dark as to whether abolishing the growth grant scheme, which has a proven track record of lifting R&D spending, is actually supported by industry players that undertake R&D.”
The Research and Development (R&D) tax credits policy introduced by Megan Woods is still short on detail and long on generalities after today’s estimates hearing, National’s Research, Science and Innovation Spokesperson Dr Parmjeet Parmar says.
“Today I asked the Minister several key questions on the policy, but she quite simply has not nutted out the finer details.
“She could not provide any information on the spending that will go into existing R&D in tax credits, any information on the estimated spending that will go into possible re-classification of work as research and development, and she could not give any assurances that she will be able to monitor rorting of the tax credit system to the fullest.
“When asked about the public investment increase required in research, science and innovation each year up to 2028 to increase R&D to 2 per cent of GDP, her answer was ‘significant’.
“And the threshold set for businesses of $100,000 R&D expenditure during a tax year is now open for discussion according to the Minister, as she tries to win support from innovative smaller businesses.
“The sector deserves a Minister with a better grasp of the figures from than what she demonstrated today.
“The financial risk of R&D is being shifted onto the businesses themselves, leaving them with the burden to develop new, innovative products and technologies with no promise of support from the Government.
“It’s simply not acceptable for New Zealand businesses that the Minister has done no homework on her flagship policy for the portfolio.”
The Government’s R&D tax credit policy has major flaws – it only benefits a small group of large companies, does nothing to help smaller businesses looking to grow, and will likely lead to rorting of the system, National’s Science and Innovation Spokesperson Parmjeet Parmar says.
Submissions are closing on the Government’s discussion documents today, and Dr Parmar has serious concerns about accessibility for a large section of the science and innovation sector.
“The removal of Callaghan Innovation Growth Grants mean many research intensive businesses will actually get less support for Research and Development,” Dr Parmar says.
“Most of our highly research active companies are currently getting 20 per cent of their R&D funding back through the Callaghan growth grants – which Megan Woods is axing. This will drop back to 12.5 per cent and only if you’re making a profit to set the credit against.
“Sadly most of the extra money will only go to companies that spend their time researching how to reclassify existing expenditure as R&D and give themselves a tax break. Indeed, Australia currently has had to redesign their own R&D tax credit scheme because of concerns with firms abusing the system.”
Dr Parmar says huge parts of the science and innovation sector are missing out completely because of Labour’s 12-year fixation on R&D tax credits.
“That’s not a commitment to innovation and high value products and services. It’s a plan for New Zealand to fall further behind other technologically advanced countries.
“This is a purely political move – Megan Woods is dumping the successful Callaghan Innovation Growth Grants only because they were put in place by National.
“We have been seeing big lifts in business R&D under the current grant-based system. The Government needs to convince the tech sector and the public that this change won’t just slow New Zealand down.”
The Government is planning to reduce support for business research and development in New Zealand’s fast-growing R&D intensive tech firms, National Party Research, Science and Innovation Spokesperson Parmjeet Parmar says.
“Hidden way down the back on page 31 of their proposal to introduce R&D tax credits is the news that they plan to cancel R&D growth grants at the same time,” Ms Parmar says.
“This will negatively affect hundreds of New Zealand’s most innovative technology focused companies.
“All of those companies will drop from getting 20 per cent of their research and development expenditure re-funded down to 12.5 per cent.
“And start-ups making a loss may have to wait until they are making a profit to cash-in any tax credit, that could take years compared to the current system which provides grant funding immediately.
“How is this supposed to grow R&D? How is it supposed to speed up development of our high-value tech sector?
Ms Parmar says that the change from growth grants to R&D tax credits will also lead to a big boost in business for accountants.
“When suddenly everyone can get a tax credit for any R&D, it will be amazing how much R&D your average business will find it was doing.
“All over the world these tax credit schemes are ripe for abuse, with their introduction always leading to a lot of ordinary expenditure being ‘reclassified’.
Ms Parmar says that it is telling that the Government’s first practical move in the science and technology sector is to reduce investment rather than increase it.
“These people have talked a big game in science and innovation for a long time. It’s sad for the science and tech sectors, and for New Zealand’s future, that their first move is to take us backwards.
“While small as a percentage of the economy, R&D has been rapidly growing under the previous Government’s settings. Ms Woods needs to explain how it will grow faster when they are reducing the incentive.”