McClay Todd: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — First ReadingText is subject to correctionMcClay Todd: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — First Reading[Sitting date: 10 March 2015. Volume:703;Page:2101. Text is subject to correction.]Hon TODD McCLAY (Minister of Revenue):I move That the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill be now read a first time. I nominate the Finance and Expenditure Committee to consider this bill. The purpose of this large omnibus bill is twofold. First it continues the Government’s work in supporting New Zealand businesses to grow by delivering the initiatives and the policy reforms that will help to create a more productive and competitive economy. Second it focuses on the important job of maintaining the tax system over time so that our tax rules remain clear certain and current and so that they work as intended for all taxpayers. With both these considerations in mind the principal items in the bill deliver important changes to ensure that the current tax system does not get in the way of innovative start-up businesses investing in research and development.Proposed changes to the tax rules for research and development were announced in Budget 2014. As part of the Government’s Business Growth Agenda they focus on enabling business innovation. The first set of proposals that the bill deals with are timing difficulties for small innovative start-up firms. These businesses are often unable to use their tax losses in a timely way—or at all—because the tax rules require them to carry their tax losses forward to deduct against future income. For innovative start-up companies this can pose a significant barrier to undertaking research and development compared with larger firms which generally have the ability to offset losses against existing income streams. For this reason the bill addresses this problem by proposing to allow eligible start-up firms undertaking research and development to claim up to 28 percent of their losses from eligible research and development expenditure in any given year. This cash-out will be delivered in the form of a refund and the losses cashed out will be capped at $500000 for the first year increasing by $300000 over each of the next 5 years to $2 million.These proposed changes are intended to provide a temporary timing benefit only and may be thought of as being in the same category as an interest-free loan from the Government. When the business makes a return on its research and development it will be required to repay some or all of the amounts cashed out by either income tax paid by the business or from any gains on a sale. The proposed changes will apply to income years beginning on or after 1 April 2015.Further measures are designed to relieve a problem with the tax rules for businesses undertaking research and development whereby some development expenditure is never able to be deducted for income tax purposes. This sort of business expense is commonly referred to as black hole expenditure. To deal with this problem the bill proposes to enable capitalised development expenditure either to be deducted over time as depreciation or if no depreciable and tangible asset is created including when a research and development project ultimately turns out to be unsuccessful to be taken as a one-off deduction upon write-off for accounting purposes.The proposals in this bill reflect submissions made in response to the Government’s initial proposals to deal with the problem of black hole research and development expenditure. Most significantly the scope of the initial proposals has been widened to also provide tax deductibility for capitalised development expenditure on intangible assets with uncertain useful lives if the intangible asset has been written off for accounting purposes. These proposed changes to the tax rules for research and development will be welcome news for our innovative start-up firms.A third set of changes proposed in the bill will give taxpayers greater certainty over their tax affairs by clarifying the GST rules for bodies corporate. These proposals will give assurance to bodies corporate by confirming that services provided are supplies for GST purposes and by giving bodies corporate the option of registering for GST. This approach should give some comfort to New Zealand’s 13800 bodies corporate on their GST position. Registered bodies corporate will be able to remain registered although those currently unregistered for GST will not be required to do so. This means that the majority of bodies corporate will not need to take any action. There are also several rules to protect the tax base from the adverse consequences of bodies corporate being offered this choice.Although these are the main items in the bill further business-friendly changes are also proposed. These include changes to tax pooling rules to enable pooling funds to be used to meet outstanding interest liabilities arising from an amended tax assessment or resolution of a dispute and to extend the grace period for community housing providers that are removed from the charities register so that they are not subject to the new tax rules on net assets. Other proposals focus on the important task of ensuring that tax rules operate as they should.These amendments reflect part of the tax policy process that reviews the law after implementation to identify any remedial issues that need correcting or clarifying to ensure the original intent is achieved. They include changes to strengthen the controlled foreign companies test grouping rules to prevent unintended tax advantages as well as measures to clarify the tax treatment of income received by individuals from a superannuation scheme residing outside New Zealand.Measures are also proposed to ensure that the intent of the reformed child support scheme is achieved and to focus the Inland Revenue Department’s effort on reducing child support debt which is currently $3.2 billion and rising. This is the first time the system has been reformed since child support was introduced in 1991 and it will deliver a child support scheme that is much fairer to both custodial and liable parents and their children. Along with the changes proposed in the bill it will also ensure greater compliance and a reduction of outstanding child support debt.There are also changes to Working for Families tax credits and the general filing requirements in order to simplify the administration and to remove unnecessary requirements. This includes reversing the filing changes that were enacted in 2012 but are not yet in operation. These changes will be dealt with as part of the Inland Revenue Department’s wider transformation programme. Clarifications are also being made to the recently reformed tax rules relating to Working for Families mixed use assets and employee allowances and to the livestock herd scheme rules.Collectively these changes recognise the importance of maintaining the tax system for all New Zealanders. They are the result of much consultation review and reprioritisation by the Government with businesses and taxpayers so that our tax system remains current and continues to support New Zealand’s economic growth. I commend this bill to the House.