The 2014 Budget has given a tax boost to innovative companies by introducing new measures enabling them to cash-out their research and development tax losses.
The 2014 Budget has given a cashflow boost to innovative start-up companies by introducing new measures that allow them to “cash-out” their tax losses from qualifying research and development (R&D) expenditure.
The new measures mean that companies can receive an up-front cash payment rather than having to carry any tax loss forward to apply against future assessable income.
Innovative start-up companies will be able to cash-out up to $500,000 of eligible tax losses in the first year, with the cap rising by $300,000 each year to an eventual maximum of $2 million (a cash-out of $560,000 per year).
There are eligibility criteria that apply – namely a wage intensity threshold (20% of the company’s wage and salary expenditure must be on R&D), and the company must carry out eligible R&D (as defined in relevant accounting standards).
If a company makes a capital gain by selling intellectual property, by selling 90% or more of its shares, is liquidated or becomes non-resident for tax purposes, then the value of the cashed-out loss is clawed back.
The new measures provide a timing benefit only and do not introduce a tax credit or grant scheme, but they do provide access to tax payments much sooner.
Purpose of changes
The tax system in New Zealand is based on the principle of broad based, low-rate taxation (as set out in the Government’s Revenue Strategy) – with the intention of taxing the alternative forms of income and expenditure as evenly as possible. Before the new measures were introduced, this meant that the tax treatment of R&D expenditure was largely consistent with the tax treatment of other forms of expenditure.
In introducing the new measures, the Government has recognised that start-up companies with a focus on innovative R&D are likely to have uncertain cashflows and limited access to further development funding. In particular, those companies may:
- expect to be in a tax-loss position during the R&D phase;
- not have other revenues to apply the tax loss against;
- be at risk of failure given the risky nature of R&D investment; and
- in many cases, do not realise a gain on the investment until they sell the output of the R&D.
A key purpose for the new measures is therefore to encourage innovation in New Zealand by easing capital constraints and helping cashflows through the use of tax losses at an earlier stage.
R&D is recognised internationally as an important driver of economic growth, with investments in R&D being a key factor that drives innovation.
According to Statistics New Zealand in 2012, expenditure on R&D in New Zealand reached a high of $2.6 billion (comprised of $1.2 billion from businesses, $600 million from the Government and $800 million from universities’ R&D activities). However, New Zealand still lags behind other small countries with advanced economies. In 2012, New Zealand hosted a meeting with Ireland, Finland, Denmark, Israel and Singapore to discuss common challenges and opportunities, including R&D investment of these countries. If the business sector spending of these countries is compared, then New Zealand’s is low (at around ½% of GDP), compared to Ireland and Singapore at over 1%, Denmark and Finland at over 2%, and Israel at over 3%. However, New Zealand government R&D spending was much higher – broadly in line with the others.
Along with the new measures allowing businesses to deduct tax for R&D black hole expenditure (read more), the Government has estimated that $58.1 million will be returned to New Zealand companies over 4 years. This spending may help New Zealand productivity and close the gap against other small countries with advanced economies.
The new measures provide a timing benefit only and are not a tax credit or grant, so companies must eventually return the value of any cashed-out loss taken by either taxes paid or from any gain on sale.
While they do not introduce a return to an R&D tax credit regime (which was stopped in 2008), the new measures are to be welcomed as a step in the right direction. Any measures which help to create an environment that reduces the fiscal bias against R&D investments and assists innovative companies with their cashflows is a positive one. The question is whether they go far enough to help to really drive innovation in New Zealand.