Administration
Clauses 180, 181, 187, 230 and 238
Issue: Information sharing with Callaghan Innovation and MBIE
Submission
(Matter raised by officials)
Inland Revenue proposes sharing taxpayer information under a specific exception in section 81(4) of the Tax Administration Act 1994 for the purposes of:
- referring difficult or marginal decisions on the R&D eligibility of applicants to Callaghan Innovation for advice;
- making use of an existing ICT system owned by MBIE to implement and administer the initiative (rather than develop or adapt an Inland Revenue system); and
- enabling Ministry of Business, Innovation and Employment (MBIE) policy officials to have access to taxpayer information for policy research, development and evaluation purposes.
Comment
The information sharing proposed is of a limited nature and involves only the sharing of company information rather than individual data. This work is a joint initiative between Inland Revenue and MBIE; joint initiatives involving Inland Revenue require transparent information-sharing provisions because of the strict taxpayer secrecy rules in section 81 of the Tax Administration Act 1994. The proposed information-sharing makes use of existing skills and IT infrastructure within Callaghan Innovation and MBIE respectively.
Inland Revenue will use Callaghan Innovation expertise to help build capability to assess R&D expenditure and eligibility. Part of this arrangement includes being able to refer particularly difficult or marginal applications to the Callaghan Innovation Grants group to provide support for Inland Revenue’s decision-making on R&D eligibility.
MBIE owns the ICT system that administers the business R&D grants programme. Inland Revenue’s ICT systems are highly constrained, and making use of MBIE’s existing system is efficient from a customer and cross-agency perspective.
This initiative is the joint responsibility of Inland Revenue and MBIE. It is reasonable for policy officials from MBIE to have access to taxpayer information for policy research, development and evaluation purposes.
Recommendation
That the submission be accepted.
Issue: Statements accompanying the income tax return should be filed with the income tax return
Submission
(Matter raised by officials)
Proposed section 70C(2) of the Tax Administration Act 1994 requires taxpayers to file their statement detailing the tax credit amount they are claiming and any R&D repayment tax (R&D statement) they must pay within 14 days after filing their return of income.
Inland Revenue proposes removing this 14-day period. Instead, it will require taxpayers to file the R&D statement at the same time they file their return of income. This change is recommended after consultation with operational areas of Inland Revenue.
Comment
Removing the 14-day period would prevent the creation of a new due date, while the taxpayer should already have all the relevant information necessary at the time they file a return of income. Having two different due dates increases the risk of the taxpayer neglecting to file the required information.
Recommendation
That the submission be accepted.
Issue: Required statements on R&D information should be simple
Submission
(Deloitte)
Under the previous R&D tax credit regime, statements detailing R&D activities could exceed 20 pages, a significant compliance cost to taxpayers. It was possible that the compliance costs of preparing the information could outweigh the benefit of the tax credit. Consequently, the statements required should be as simple as possible. Statements exceeding four pages would impose significant compliance costs that could outweigh the benefits.
Comment
Officials agree that the statements should be kept as simple as possible and taxpayers will be encouraged to be concise. However, the benefits are significant, with tax credits of up to $140,000 in the first year rising to $560,000 in five years, and ultimately the onus rests on taxpayers to demonstrate that their activity is eligible R&D. We would expect the compliance costs to reduce in subsequent years as taxpayers become more familiar with the statements, especially for taxpayers who cash out losses over a number of years.
Recommendation
That the submission be noted.
Issue: Taxpayers should be able to manually file a separate statement with an income tax return
Submission
(Deloitte)
In practice there are a number of other forms or elections that are required to be filed with an income tax return. It would be appropriate to allow taxpayers to manually file a statement for tax credit and R&D repayment tax purposes with their manually filed income tax return as an appropriate alternative to electronic filing.
Comment
Inland Revenue accepts that taxpayers may have important reasons for filing an income tax return manually, and that requiring taxpayers to file electronically may inconvenience some taxpayers. Manually filed returns of income will be permitted.
The requirement to file the accompanying statement for tax credit and R&D repayment purposes by electronic means will remain in order to employ existing ICT infrastructure owned by the Ministry of Business, Innovation and Employment in the administration of the initiative. Taxpayers will be permitted to manually file the accompanying statement in exceptional circumstances at the Commissioner’s discretion.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Delays in releasing cash-outs should be mitigated
Submission
(KPMG)
Administration of the regime should reflect the fact that a key objective is to ease cashflow constraints on innovative start-ups. Delays in processing and releasing the tax credit should be mitigated wherever possible. Administration of the proposal should not be based on the previous R&D tax credit regime.
Comment
Inland Revenue will endeavour to release tax credits as quickly as possible while taking the necessary steps to ensure the taxpayer meets the criteria for the tax credit.
Recommendation
That the submission be noted.
Issue: A communications strategy to educate taxpayers is necessary
Submission
(PwC)
It is important that taxpayers are sufficiently educated in order to be able to apply the rules and provide the necessary information required. They will be reliant on guidance provided by Inland Revenue. Inland Revenue should put in communication strategies to ensure taxpayers are adequately equipped to apply the new rules.
Comment
Inland Revenue is preparing a communication strategy as part of the initiative’s implementation.
Recommendation
That the submission be noted.
Issue: Uncertainty around the administration process in the first year – extension of time to file
Submission
(Matter raised by officials and the Independent Advisor to the Select Committee)
The retrospective application of this proposed legislation will make it more difficult for taxpayers to comply in the first year of the policy compared with other years. The administration process cannot be established and communicated with certainty until the proposed legislation is enacted.
Comment
In recognition of this, the Commissioner will allow taxpayers without tax agents to extend the time to file their return (and accompanying statement) for the 2015–16 income year until 31 March 2017. This will allow taxpayers further time to prepare their return if required. Taxpayers must still apply to the Commissioner for this extension of time.
After discussing this issue with the Select Committee’s independent advisor, an extension of time to file will be granted when taxpayers have reasonable grounds to believe that an application for the tax credit will be made.
Taxpayers will still be able to apply for extensions of time to file after the 2015–16 income year, but intention to apply for the tax credit will no longer be sufficient to obtain the extension of time to file.
Recommendation
That the submission be accepted.
Issue: Better communicating other types of government R&D assistance
Submission
(KPMG)
The 20 percent R&D wage intensity test means the proposal will be of limited value to most medium and large businesses. However they may qualify for other assistance. Much of this is outside the tax system.
There is a role for the Government and its agencies in better communicating and socialising the available R&D assistance with the business community and advisors.
Comment
The Government has a broad suite of measures to support business innovation and R&D. Most of these programmes are delivered by Callaghan Innovation and are outlined on their website, and are promoted through publications such as their Accelerate newsletter, the Business Growth Agenda publications the National Statement of Science Investments and media articles. A summary of some of the main programmes is provided below.
Callaghan Innovation’s R&D Grants Programme provides three different types of grants which are designed to increase the amount of private sector R&D activity occurring in New Zealand, and incentivise New Zealand companies to spend more on R&D. The three types of grants are:
R&D Growth Grants (about $122m per year):
- provide a long-term and certain incentive for larger R&D performers to expand their R&D programmes;
- the public co-funding rate is 20 percent of the New Zealand company’s qualifying R&D, capped at $5m per year.
R&D Project Grants (about $36m per year):
- targeted at firms with smaller R&D programmes and those that are new to R&D;
- are allocated for specific R&D projects which are beyond the firm’s normal R&D programme;
- fund up to 40 percent of the research project.
R&D Student Grants (about $4m per year):
- provide opportunities for students and recent graduates to work within R&D active firms.
R&D Growth Grants are non-discretionary and are automatically allocated to business applicants that meet the published criteria. These include the requirement to spend at least $300,000 annually and 1.5 percent of revenue on R&D in New Zealand for at least two years.
R&D Project Grants and R&D Student Grants are awarded to applicants following an independent assessment from Callaghan Innovation’s Grants Committee.
All companies receiving R&D grant funding must conduct their research in New Zealand. Claw-back provisions can require firms to pay back their grants if they cease to meet their research commitments.
Callaghan Innovation also backs innovative start-ups by providing funding for company accelerator and incubator programmes:
- There are five founder-focused incubators spread across the country that work with entrepreneurs to develop their business ideas.
- These were recently joined by three technology-focused incubators. These incubators identify a suitable intellectual property-based idea or technology and then work to build a business team around the IP. Repayable grants of up to $450,000 are available for businesses that are incubated by a technology incubator.
- The accelerator programme run by Lightning Lab works with digital and ICT entrepreneurs to develop their ideas over 12 weeks into an investment pitch.
Other key parts of Callaghan Innovation’s work are linking businesses with public and private-sector research experts (through National Technology Networks, Global Expert and Student R&D Grants) and providing specialist research and technical services to firms.
The Ministry for Primary industries provides funding of around $65 million a year for Primary Growth Partnerships to drive substantial economic growth in the primary and food sectors, through joint investment by government and the industry. These partnerships require at least 50 percent industry co-funding and are aimed at market-driven innovations, including R&D, and encourage collaboration and connections between research organisations and business.
Recommendation
That the submission be noted.
Issue: Self-assessment
Submission
(PwC)
Will the application of the rules be based fully on self-assessment?
Comment
To a significant extent, yes. Inland Revenue is likely to pay particular attention to the R&D activity or activities of the taxpayer in order to support compliance.
Recommendation
That the submission be noted.
Issue: Pre-approval process relating to R&D eligibility
Submission
(PwC)
Will there be an initial approval process or “certification” as an R&D company?
Comment
Taxpayers will be required to register for the initiative but no pre-approval of the taxpayer’s R&D activity will take place.
Recommendation
That the submission be noted.
Issue: To what degree will Inland Revenue officials have the capability to make informed decisions on R&D eligibility?
Submission
(PwC)
To what degree will Inland Revenue officials have the capability to make informed decisions on R&D eligibility?
Comment
Callaghan Innovation has agreed to provide investment managers to support Inland Revenue officials with making judgements on R&D eligibility in the early years of the tax credit while Inland Revenue develops capability in this area. Callaghan Innovation investment managers have experience in adjudicating on R&D eligibility for the Government’s Business R&D grants programme. This will enable consistent decision-making across government in relation to R&D eligibility.
Recommendation
That the submission be noted.