R&D taxbreaks welcomed, with caution

The government's u-turn on R&D tax incentives has been welcomed by the IT industry, though some are wondering if it goes far enough.

The government's u-turn on R&D tax incentives has been welcomed by the IT industry, though some are wondering if it goes far enough.

Finance minister Michael Cullen has announced that from April 1, businesses meeting certain accounting criteria will be able to immediately write off expenditure categorised as research and development costs.

However, the 100% tax deductability falls well-short of the 125% and 175% available across the Tasman, leading to some business fears that New Zealand would still miss out on foreign IT investment. US accomodation management software company GHS Global says it may now reverse an "interim" decision to create "several hundred" jobs in Australia instead of Queenstown, as originally planned, because Australia offers better R&D tax breaks.

Cullen says the move should bring New Zealand into international practice, provide greater certainty and create significant savings in compliance costs.

The package also includes moves to clarify that R&D tax deductions incurred in developing software will not be clawed back when they are sold or deferred if creating an invention for a patent.

The Treasury estimates the tax breaks will cost it less than $10 million in 2001-02 and less than $5 million the following year. Cullen's office also says firms could save many millions more in compliance costs from the simpler structures.

ITANZ director Jim O'Neill called the change a step in the right direction. "But it won't turn New Zealand into a hotbed of IT development," he says. R&D would be "stimulated" here but more has to be done to make our tax system competitive with Australia. There, proposals exist to push the R&D taxbreaks above 200%, he says.

"New Zealand has got to operate on a playing field where we play by the same rules. The rules are against us, but this change removes one stumbling block," O'Neil says.

GHS Global chief executive Jason Neal says his firm and investors had this week decided to invest in Australia rather than New Zealand because of the tax breaks issue. However, the technology park could still come to New Zealand if the government provided it sufficient detail of its new proposals and gave sufficient encouragement about future tax breaks. "We are still weighing up. This news provides a good platform. It is great news," he says.

Francine Corbett, a tax partner at PricewaterhouseCoopers who prepared the firm's submission to government on tax policy, also welcomed the changes as a positive move that would simplify accounting processes.

However, Simon Carlaw, chief executive of the New Zealand Manufacturers Federation, says the new policy still falls well short of earlier government promises on R&D tax breaks.

"A knowledge economy will not occur by itself. It will take more than a small package of timid measures to transform the economy and to generate sustained growth at the pace New Zealand requires if it is ever to rejoin the top twenty in the OECD," he says.

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