12 May 2005
Media Statement

Budget 2005 to focus on long game

“Budget 2005 will focus on the long game,” Finance Minister Michael Cullen told a meeting of the Canterbury Manufacturers’ Association in Christchurch today.

“That means creating an environment in which businesses can make investment decisions with increasing assurance. It means long term fiscal and monetary stability, and a programme of careful public investment in those things which underpin a modern, knowledge based economy,” Dr Cullen said.

He announced provision in the budget to improve access to tax deductions for R&D expenditure where companies bring in new equity investors after their initial development stage, as commonly happens in the technology sector. [Refer attached fact sheet for more details.]

Dr Cullen said the change built on the new R&D rules introduced by the government in 2001 and was part of a multi-faceted package of business tax cuts provided for in the budget. Measures designed to reduce compliance costs, especially for smaller firms, had already been announced with a further suite of announcements scheduled for budget day.

He said the budget would continue a “conservative fiscal approach.” The budget numbers would show the rate of debt reduction flattening out, leaving little room for large new initiatives, including tax cuts, if the government was to stick to its long term debt commitments.

“In fact, the budget will signal an intention to lower the growth trajectory in high spend areas such as health and tertiary education. Spending in both these sectors has expanded considerably in recent years. We need to be satisfied that the taxpayer is getting value for money and that efficiency gains are realised, reducing the need for ongoing, large increases in expenditure,” Dr Cullen said.

ENDS

Attached: Fact sheet on the R&D tax change.

Removing barriers to R&D investment

Companies that bring in new equity investors will have better access to tax deductions for R&D expenditure under tax changes to come into effect from this year. Technology companies, in particular, often have a long lead-in period in which they incur major expenditure before realising income from it. Under current law, however, they can lose R&D deductions if they bring in extra investors after their initial development stage.

The changes will cater for the growth cycle of technology companies and remove a barrier to R&D investment by allowing R&D deductions to be matched with income from that expenditure.

How will it work?

Taxpayers will be able to allocate certain R&D tax deductions to income years after the year in which the related expenditure is incurred. Deductions will not be lost if there is a shareholding change between when the expenditure is incurred and when the deduction is recognised by the taxpayer.
The tax treatment will be optional.
Those who choose this approach must allocate R&D deductions against income resulting from the R&D expenditure.
Most of the pre-commercial production expenditure of start-up technology companies, which typically incur significant expenditure for a long period before any income is realised, will qualify.

Example

A start-up technology company incurs significant expenditure on biotechnology products in the first five years of its existence. At the end of this period it has developed several innovative products with significant commercial potential. The company now needs to bring on board new investors to fund the next stage of development. Under current law, introducing new investors could result in deductions for previous R&D expenditure being forfeited. However, the change will preserve these tax deductions until they can be offset against income resulting from the company’s R&D products.

Where to from here?

The new rules for R&D investment will be included in a taxation bill to be introduced this month. Once enacted, the new rules will apply from the 2005-06 income year.

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