Dunne Peter: Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill — Second Reading 
Dunne Peter: Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill — Second Reading 
[Volume:643;Page:13406] 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I move  
That the Taxation (Annual Rates Business Taxation KiwiSaver and Remedial Matters) Bill be now read a second time 
. This wide-ranging taxation bill introduces several of the reforms that were announced in Budget 2007. These include measures that emanate from the business tax review—namely the new 15 percent research and development tax credit—and changes resulting from the reduction in the company tax rate to 30 percent. They also include changes to KiwiSaver legislation to require employers to match employee contributions up to a certain amount and to provide an employer tax credit of up to $20 a week to reimburse employers for those contributions. Increased tax incentives to promote charitable giving by individuals and companies were also announced in the Budget and are a feature of this bill. The bill also introduces a number of other important tax changes chief of which is the proposed liberalisation of tax penalties to promote voluntary compliance. The bill also sets out the tax rates to apply for the 2007-08 year. 
The Finance and Expenditure Committee has considered the bill and has recommended a number of amendments to the proposed legislation to ensure that it operates as intended and as well as possible. The committee’s main recommendations apply to the research and development tax credit and to the KiwiSaver proposals. The aim of the proposed research and development tax credit is to help raise the amount of private sector research and development investment in New Zealand which at present is only a third of the OECD average. That in turn is expected to have wider benefits for the economy and will help to increase productivity and our international competitiveness. 
Introducing the tax credit will bring us into line with the many other countries that offer tax concessions of some form or another for research and development. Sustainability of the tax credit will be a critical factor in its success and is of obvious concern to the Government. It is essential therefore that the credit rewards research and development not routine business activity or expenditure that may be dressed up as research and development. If the credit is not fiscally sustainable it will be reduced in scope and business confidence in it will be eroded. That is confirmed by overseas experience. For this reason the proposal comes with built-in safeguards in the form of detailed eligibility criteria and detailed definitions to ensure that the credit is as effective as possible. 
The committee’s main recommendations focus on generally tightening the rules to ensure that the credit will be sustainable. The committee has for example recommended tightening the eligibility test for support activities to ensure that routine business activities will not be eligible for the tax credit. Likewise the committee has recommended changes to make the proposed $2 million cap on internal software development more difficult to circumvent. That would include for example making absolutely clear to businesses what constitutes internal software so as to prevent them seeking to make questionable sales of that software in order to make its development appear eligible for the research and development tax credit. 
At the same time however the committee has recommended raising the internal software development cap to $3 million of eligible expenditure in order to reflect the fact that a wider range of activities will now be subject to the cap. The committee has also recommended clarifying the proposed rules on when eligible capital expenditure on prototypes will attract the credit. The committee has recommended changes in order to better reflect commercial practice when research and development is undertaken in collaboration with others. Parties undertaking research and development through joint ventures will be able to apply the tests that determine who gets the credit at the joint-venture level. Those undertaking research and development in partnership with others can apply those tests at the partnership level when all the partners are eligible for the credit. 
In some areas the committee has recommended changes that add greater flexibility to the rules as has happened with the proposed rules on research and development that is conducted overseas as part of a New Zealand – based project. The committee has recommended allowing excess overseas research and development expenditure to be carried forward so that it could become eligible for a credit in subsequent years. The committee has also recommended that there be a regulation-making power to exclude expenditure on overheads that is not sufficiently linked to the research and development. Those exclusions will be broadly the same as they are in Australia. 
Those are some of the main recommendations in relation to the research and development tax credit. Other features of the proposal remain largely unchanged; for example the rule remains that Crown Research Institutes tertiary institutions and district health boards and their associates and entities controlled by them will not be eligible for the credit although the committee has recommended strengthening these rules to also exclude partnerships with these entities. However New Zealand businesses that commission research and development from these institutions may well be eligible for the credit depending on the circumstances. 
The rationale for the exclusion of these Crown entities is that the tax credit is intended to encourage private sector investment in research and development and is therefore targeted at firms controlled by the private sector. As I have pointed out on other occasions the research and development tax credit is completely new to us all in New Zealand—to business to the Government and to the tax administration alike. It is therefore inevitable that the tax credit will need finessing as time goes by given the complexity and the scope of the rules that govern it. 
We will evaluate the success of the tax credit in 3 years’ time once the credit has had time to bed in and it has become clear what the country is getting for its investment. But in the meantime once the legislation has been enacted the Inland Revenue Department will seek public feedback on a set of draft guidelines on the details of how the new credit will be administered. That feedback will be used in the development of administrative guidelines which should go some way towards dealing with the concerns of those who have stressed the importance of clear legislation and clear guidelines the development of which has involved wide consultation. 
The other major focus of the committee’s consideration was the proposed legislation relating to employers’ contributions and to the employer tax credit which were part of the package of changes to KiwiSaver announced in the Budget. The changes in this bill complement the Budget legislation that was enacted in May to introduce tax credits to match savers’ contributions of up to $20 a week. All these changes are aimed at promoting personal retirement savings by making it easier and more rewarding to save through KiwiSaver. 
In examining this bill the committee’s stated concern was to ensure that the changes were practicable and that compliance costs for employers employees and providers were minimised. Many of the committee’s main recommendations in this area are aimed at fine-tuning the proposed law on the treatment of contributions that employers make to schemes other than KiwiSaver and at superannuation scheme arrangements that were entered into before the Budget announcements. In a similar vein the committee has recommended a staged transition to the minimum 4 percent contribution on the part of employees. In another area the committee has recommended changes in order to make it easier for complying superannuation funds to calculate employee deductions and to match employer contributions. 
These then are the committee’s main recommendations for changing the proposed legislation and I have to say I think that they will make a big difference as to its effectiveness. I want to acknowledge the work of the committee in dealing with a number of very technical and complicated measures associated with this bill. The committee has given these matters careful consideration the consequence of which has been a much better piece of legislation. I welcome that and I am more than happy to recommend both the bill as amended and the select committee’s report to the House.