Cullen unveils R&D tax rethink

Government has about-faced again on research and development tax breaks, issuing a proposal document that sees all research becoming immediately deductible and most development also being deductible, at least until the product reaches a saleable stage.

Government has about-faced again on research and development tax breaks, issuing a proposal document that sees all research becoming immediately deductible and most development also being deductible, at least until the product reaches a saleable stage.

“If you have development expenditure and you reach the point where you’ve created an asset and you’ve got a market and you’re selling it, from that point on you have to depreciate,” says David Carrigan, tax advisor to minister of finance Michael Cullen.

Any development expense will continue to be deductible until it meets all five points listed in paragraph five of the Financial Reporting Standard (FRS) 13, the current accounting standard for R&D released by Inland Revenue.

“There is a significant amount of flexibility as to when that point is reached,” says Carrigan.

“The accounting standard works on the theory of conservatism so you don’t include an asset unless you’re absolutely sure you’ve got one. It’s quite hard to get an asset in accounting — it’s almost a presumption of deductibility.”

The turnaround was announced at the business leaders’ forum in Auckland this week, and returns the government to the position it held while in opposition.

While only a proposal at the moment, Carrigan says an issue paper will be released and submissions from the public invited towards the end of the year.

“Then legislation would follow early next year.”

This won’t mean an end to the R&D grants scheme currently offering $12 million in grants and seen by many as a poor cousin to the tax breaks originally suggested by government.

“Response to [the scheme] has been strong and has enabled the government to give private sector R&D ... a much-needed boost,” says Cullen.

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