Nash Stuart: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In CommitteeText is incorporated into the Bound VolumeNash Stuart: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In Committee[Sitting date: 03 November 2015. Volume:709;Page:7678. Text is incorporated into the Bound Volume.]STUART NASH (Labour—Napier): Research and development tax credits and black-hole expenditure were a big part of this bill and I will talk about those in a second but there is one clause that I would like to talk about which has sort of flown under the radar but I think deserves a bit of attention and that is clause 69. What this clause does is it amends the available capital distribution amount and it is actually to do with the buying and selling of livestock—around the capital gains and capital losses associated with the buying and selling of livestock. The interesting thing about this clause is that it actually comes into force on 28 March 2012.Now as we know there are a number of pieces of tax legislation that are retrospective for a number of very good reasons and we accept that even though one of the underlying principles of tax legislation is that it is not ideal to have retrospective legislation because people have tended to make decisions based on the current law—as they should.This has eluded my attention I must admit. Maybe I was a bit remiss at the select committee when I looked at this. I am not too sure why we have got a piece of legislation that is actually retrospective for what will end up being about 3½ to 4 years. That is a long time. I am assuming that there is a reason behind this—whether that is case law and I suspect it must be. I am assuming what happened is that a farmer went to court because he or she was very dissatisfied with the outcome of a decision that the tax department had given was taken to court and the court made a decision. That decision has to be ratified through legislation and that is why it has gone back to 2012. But it is rather unusual.I must admit that in my short time in this House including my time as Labour’s revenue spokesperson I have not come across a piece of legislation that is so retrospective. I wonder whether it has any implications for farmers or Queen Street farmers and the dealings they have had over those last 4 years or whether there are going to be any unintended consequences. I suspect there are not but it is just worth noting that it is reasonably retrospective. I wonder whether the chair of the Finance and Expenditure Committee David Bennett has anything to say on that considering he must have bought and sold quite a lot of stock over the last 4 years.What I would like to talk about—and this came up a lot in discussion including in submissions—is the eligibility of the research and development credit. As mentioned we talked long and hard about this. We believe on this side of the House that we need a regime for rewarding research and development. The last speaker from New Zealand First talked about New Zealand’s research and development spend at 1.5 percent of GDP. I suspect that it is actually a lot higher than that. The reason I say that is that in this country you have to capitalise research and development. I believe that if we change the law—and this bill does not do that—to allow people to expense research and development then I think you would find it went through the roof. I suspect that at the moment there is a lot of research and development undertaken that is not counted as research and development but is expensed in some way shape or form. But that is a point for another day.I want to talk about Subpart MX2 the corporate eligibility criteria. In the select committee what we were really keen to ensure was that only New Zealand companies took advantage of this because the purpose of this is to grow New Zealand companies to the point where they can take on the world. Certainly there is a recognition that early-stage companies are often the ones that are the shortest of cash or suffer cash-flow crises but that they are also the ones that are spending a lot of money on research and development. So what we wanted to ensure was that a big corporate did not set up in New Zealand simply for the purpose of leveraging off this research and development tax credit. This is Subpart MX2.We had a definition of corporate eligibility criteria and excuse me but I am just going to read this out because I do think it is quite important just to clarify what we are talking about with eligibility. The first point is that the person is a company that is resident in New Zealand and that there is no double tax agreement under which for the purposes of this a person is treated as a resident of a foreign country or territory. This comes back to the point I was making: we did not want a large corporate to set up a subsidiary here with a view to claiming this research and development tax credit.The third point—this is an “and” not an “or”—is that the person is a member of a group of companies and the group does not include a company that is not resident in New Zealand. We talked quite a lot about this and determined at what level we should take this. There was an agreement that in fact what happens with a lot of these early-stage companies is that they set up offshore marketing or sales forces or incorporate small companies to actually commercialise or sell the research and development in another country. We needed to make sure that we allowed that but however avoided the circumstance I was talking about before. We said also that the company cannot be a company that is treated for the purposes of a tax double agreement as a resident of a foreign territory. And of course that the person is not a special corporate entity that the person is not a qualifying company and there are a number of other provisions.I suppose what the select committee wanted to do was to make sure that we set up a regime that was easy to implement. We talked about the cost of setting this up and we did not want a regime where the cost of setting it up was actually greater than the benefit received which would have defeated the whole purpose obviously. But it needed to be easy to access it needed enough money so that it was worthwhile but the costs and compliance needed to be such that the benefit created was way above that.There were thresholds on this. For example if I am right in saying this—Mr Bennett might be able to correct me on this—and if my memory serves me you can collect only $500000 per year up to a total of $2 million. So again we are talking about really the small and medium enterprise sector. If we say the small and medium sector is defined by having 19 employees or fewer—there may be some companies that go above that but by and large we are talking about small growth companies—it is up to a maximum of $2 million.What the commissioner can do is stated in Subpart MX 5: “The Commissioner must extinguish the person’s tax loss for a tax year to the extent of the amount given by dividing the amount of the tax credit for R&D tax losses for the tax year by 0.28.” So we are using the corporate tax rate on that. There are a lot of clauses that talk about how this is going to be administered and how much is available but I think I will let my other colleagues talk about this. I just want to say that we do believe there does need to be a research and development regime in place implemented by the Inland Revenue Department but we think it could have gone a whole lot further. Thank you very much.