Robertson Grant: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In CommitteeText is incorporated into the Bound VolumeRobertson Grant: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In Committee[Sitting date: 03 November 2015. Volume:709;Page:7672. Text is incorporated into the Bound Volume.]GRANT ROBERTSON (Labour—Wellington Central): I was just pausing briefly there to see whether any member of the Government would like to stand up and talk about substantive changes to the Income Tax Act that are all about according to the commentary around this bill improving research and development making the taxation system more efficient dealing with GST and bodies corporate changing Working for Families tax credits—anything? Nothing at all from the Government. It is absolutely remarkable Mr Chair that as you yourself have just alluded to there are 150-odd clauses—or something more than that—in this particular part of the bill. The Finance and Expenditure Committee spent significant time going through a number of issues within this bill checking and then rechecking as to how it would be implemented and not one member of the Government wants to get up on their hind legs and tell us why they are doing it.What does that tell us about what those members are doing here? What does that tell us about their commitment in particular to research and development which is one of the major issues dealt with in Part 3?Dr David Clark: All for show.GRANT ROBERTSON: All for show—that is what it is because if they actually wanted to do something substantive about research and development we would actually be hearing from them about research and development tax credits because that is actually something that the sector wants. It would give some certainty for investment in research and development but there is nothing about that here.One of the main features of Part 3 and the one that I want to talk about in this first of my calls is around the cashing-out of losses for research and development expenditure. There is no doubt that there was a considerable level of sympathy inside the committee for this particular clause. Everybody knows particularly when you are starting a business that being able to invest the money into research and development that you need to create the value in your business to build it and to bring on new products is difficult at the start when cash flow is tight when you have got other things on your mind and when you have probably financed the business out of an extra mortgage or something like that. That ability to be able to deal with research and development or actually get into research and development is limited.So we all know that in the first years of life of companies in New Zealand most of them make losses. It is one of the things that when you do not follow closely the fortunes of particularly small businesses a lot of New Zealanders would not understand. Actually the hard graft of the early years of a business includes almost inevitably making losses year on year at the beginning. It is very difficult at that point to be able to put that money into research and development that is required. So the idea of cashing out losses for research and development expenditure is something that we would certainly support.What this bill does and what this part does is allow certain loss-making companies—and we will come back to that in a minute—to cash out tax losses for research and development expenditure to a limit of $500000 in the first year and $300000 in subsequent years. The important point here is that although those losses can be cashed out and repaid once the company makes a return on its research and development investment it does have to repay it. So that is the point. Companies can cash it out at the point at which it is a cost to them—it is part in effect of the fact that they have made a loss—but then they have got to return it and this to me is the weakness in the National Government’s regime that is being put in place here. By all means have that as part of the process by which companies can make investment in research and development but where is the other end of the equation? Where is the ability of all companies to have some certainty that they can invest in research and development? Because it is not here.It is in fact a deficit model in all respects. It is a deficit model in the sense that it deals with losses but it is also a deficit model in terms of the value of research and development. It is just the smallest of possible gestures that could be made to support research and development. Yes it is welcomed by those companies and those firms that will inevitably take it up and cash out the losses but where is the imagination? Where is the vision for really kick-starting research and development? One of the lowest levels of private sector research and development expenditure in the world is in New Zealand and this legislation says: “Well we’ll do this small piece of tinkering that will help a few companies deal with their inability to really invest in research and development in the early stages of their business.” So I would welcome a member of the Government getting up and telling us—is this it? Is this it in terms of research and development? Is this as good as it gets in terms of how the Government thinks we should be encouraging and facilitating one of the things that will truly drive economic growth in New Zealand and that is investment in research and development? So that would be one particular area that I think we do need a little bit more work on.We certainly got submissions at the select committee that were concerned about issues like the thresholds how the thresholds could be increased over the years and how we were making assessments about whether this really was research and development. One of the things that the committee dwelt on was who would be brought in to make the decisions about this. It will be—I can say that the Inland Revenue Department told us at the select committee—Callaghan Innovation that will play that role. The committee members were relatively assured of that. Callaghan Innovation has a broad range of experience when it comes to research and development.There were some concerns raised at the committee as to whether or not Callaghan Innovation has the capacity for this in terms of its own work. We were assured that effectively the Inland Revenue Department would be paying for the services. There would be a retainer in effect. The other concern that was raised by committee members was the timeliness of Callaghan Innovation’s ability to actually be there make the decisions and enable a business not to have to sit around and wait to see whether or not the work it was doing or the expenditure it was undertaking really was research and development. Again we were assured by Inland Revenue Department officials that that would be dealt with. But I do think there is a real cause here for a Government member to get up and tell us how this in effect does improve research and development in New Zealand and what else the Government may have planned because goodness there had better be something other than this.There are several other issues in this part that I will come to over the next couple of calls. The next thing I want to do is talk about the question of “black hole” expenditure which again the committee spent a little bit of time dealing with. The bill amends the rules relating to “black hole” expenditure and for those who want a definition of that which the committee itself did when we were dealing with it “black hole” expenditure is business expenditure that is not immediately deductible for income tax purposes and cannot be deducted over time as depreciation. The proposals are effectively dealing with a number of anomalies under the current rules that were to be fixed. I guess where the committee got to was around questions like patents trademarks and how we deal with those from a tax deduction perspective. What we got in terms of submissions was that there had been a lot of uncertainty in the accounting profession around exactly what was covered and what was not and the amendment of these rules effectively allows an extension of an asset’s cost to include the underlying item of what is called “depreciable intangible property”. That sounds extremely technical but it was from the submitters who came to us a point that they wanted some clarification on.I will be frank. I do not think committee members across the parties when this was being raised were able to be completely assured that there would not still be loopholes because it is such a technical area. The idea that accountants will now scour through this to see whether there are loopholes and whether things can and cannot be taxed within those areas like patents and particularly when patents are looked at versus knowledge that already exists—how do you construct a taxation regime around that? We have to have some confidence in the officials here that the treatment of “black hole” expenditure is now going to be clearer but I think it does draw to the attention of the House the importance of definition in making sure that taxation law works. We have been assured that we have got that here and I hope we do.The final area I want to talk about in this call—and I definitely want to hear from a member of the Government on this—is the question around GST and bodies corporate. What the amendments here are slated to do is to clarify that services provided by bodies corporate are supplies for consideration for GST purposes and give bodies corporate the option to register for GST. This is effectively about rules that protect the tax base from the adverse consequences of allowing this choice.