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: 01 December 2015. Volume:710;Page:8436. Text is incorporated into the Bound Volume.]GRANT ROBERTSON (Labour—Wellington Central): I am sure my colleague Dr Clark will join us shortly in this discussion on the Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill. I want to talk mainly in this first contribution around the quite large set of clauses and amendments relating to the cashing out of research and development tax losses. But before I do that I actually want to pick up where my colleague Stuart Nash just left off and talk about clause 76.I have to say that at the Finance and Expenditure Committee we did not have a long discussion about clause 76. It did come up and there were a couple of amendments made to the clause as a result of the brief discussion we had. But I do think it is important to put on the record the concern that the Labour Party has that in making a change that is as Mr Nash noted primarily about ensuring that there is consistency in the way that tertiary institutions are treated in terms of tax: be it in their role as a tertiary institution educating people be it a polytech or a university undertaking lectures and providing the normal kind of degree qualifications if it was a university that we would expect the income they derive is regarded as being exempt. What this clause does is put in place a regime for the subsidiaries of tertiary education institutions. Again as Mr Nash has noted these now come in many forms. They run all the way from start-up companies based upon the research of a particular researcher at a university all the way through to small limited companies set up by polytechnics to provide a particular kind of educational service that might be a bit outside the norm. So it could be the provision of a particular service to international students that is regarded as more of a company-based arrangement than the traditional polytech structure.In trying to create a mechanism that encompasses all of those different new subsidiaries of tertiary institutions something is missing in this clause. There is an attempt to deal with the breadth of these institutions in the amendment that is now in new section CW 55BA(2) where a tertiary education subsidiary is a company “(a) in which the tertiary education institution alone or together with other tertiary education institutions holds—(i) voting interests in the company adding up to 100%; or (ii) market value interests in the company adding up to 100% when a market value circumstance exists;”. That deals with the issue of universities or polytechs cooperating with one another. What it does not deal with is what is becoming more commonplace in the tertiary settings particularly in the university settings which is different styles of ownership. These include where individual academics are now starting to take some sense of ownership of these companies so they have their own identity separate from the tertiary institution that they work for. It is also the situation now that private investment does come in from quite an early point. Another kind of investment comes in. We have large research programmes in our tertiary institutions at the moment that are funded by research funding organisations from other countries.If we take the example of the terrific longitudinal study run down at the University of Otago that study has been largely funded in recent times by the American National Institutes of Health by the UK research foundations. How are they going to be treated under this kind of situation? How will a company that spins out from the genetic research that has arisen out of that longitudinal study be treated in a tax sense? We do not want a free ride here for companies that should legitimately be paying tax but where they are genuinely research organisations developed out of a tertiary institution that has a slightly different ownership or share arrangement than 100 percent what do we do? Perhaps the Minister in the chair the Hon Paul Goldsmith might want to take a call to say whether or not there is a different set of structures for those sorts of companies to be considered. But certainly on this side of the Chamber we want to put on the record that we want to see an encouragement of the development and commercialisation of the research that happens inside our tertiary institutions and any tax treatment that discourages that as could be possible under this clause provides us with some concern.I note in terms of this clause that there is a section around who controls the company and there is an important change that was made by the Finance and Expenditure Committee to delete—[Bell rung]The CHAIRPERSON (Hon Chester Borrows): This is your fourth call.GRANT ROBERTSON: My fourth call on this part?The CHAIRPERSON (Hon Chester Borrows): I just thought I would let you know.GRANT ROBERTSON: Gracious it has been so long since those first two calls that I was not aware that it was my fourth call. I will briefly then complete the comment that I was making there that there was a change made removing the question of whether an individual was going to benefit or be advantaged from the work of a company. That will help in the situation that I mentioned before where specific academics might have taken a share within a company separate from the university they work for. So I do recognise that matter has been dealt with but I would ask that we get some clarification around making sure we are not setting up a regime that provides a disincentive to universities commercialising their research.In the brief period that I have remaining to me to speak on this part I did want to come back to the question of the cashing out of research and development tax losses and largely because this is an area where the committee did make a large number of changes. The purpose of this is supported by members on this side of the Chamber. The idea is that we can provide at the early stage of a company’s establishment the ability to cash out the losses from research and development. We want to see those companies investing in research and development from day one and if this is one way that we can do that then we can support that. I would say that the Government’s reluctance to go down the path of a comprehensive research and development tax credit leads it to have to put in pages and pages of definitions and difficult-to-understand processes which people will have to go through in order to work out whether or not they are actually eligible for this.It is worth noting the changes that the committee made. So we are clear that under the proposals research and development start-up companies can claim up to 28 percent. That is the current company tax rate and it helps to be clear and simple about that. The main eligibility requirement is that the company must be a loss-making company resident in New Zealand with a sufficient proportion of expenditure on research and development. That was one of the areas that again presented some difficulty for us because of the potential for a range of ownership arrangements that would make a company primarily a New Zealand one clearly being resident in New Zealand.And then there is that question of what is a sufficient proportion of expenditure on research and development. The amount of losses that can be cashed out has been capped at $500000 for the 2015-16 year increasing by $300000 over the next 5 years to $2 million. When we were discussing this in the committee the issue that I wanted to raise was how research and development was defined and who would make up their mind as to whether or not this genuinely was research and development. And in the end what we drew out as the discussion went on was that that role was effectively being outsourced to Callaghan Innovation.Callaghan Innovation is a relatively new organisation—a good organisation in my view doing some good things in our community. But there are still some issues for us on this side of the Chamber as to whether or not Callaghan Innovation is the right organisation to be doing that checking and whether it has the scope of expertise to always know whether a particular or given company actually is undertaking research and development in its sphere. And for me this highlights the concern we have that by creating a system where we do not have a broad-based research and development tax credit we create a large number of hoops and we create a new role—a bureaucratic role essentially—for Callaghan Innovation whose job should be to be out there in the community supporting researchers to do research not acting as some kind of judge in a sort of Dragons’ Den contest about whether something is or is not research and development. So again we could have come up with something simpler something that did not involve so much hoop jumping. We understand that Callaghan Innovation is going to be paid for its work which is fair enough—it is a Crown research institute that has to make sure that it pays its own way. But we think there is the potential for this to be a fairly substantial distraction from the kind of work that it is going to do.Just briefly the other clauses in here—and I would urge the Minister in the chair the Hon Nathan Guy or another member of the Government who was on the select committee to actually work through—Hon Clayton Cosgrove: David Bennett.GRANT ROBERTSON: No no not David Bennett. Not David Bennett. I urge another member of the committee except for David Bennett to stand up and work our way through the eligibility criteria the wage intensity criteria why $500000 was listed as the amount to be cashed out and then particularly of interest to me are the excluded activities. I would like to know about those.