Eligibility
Clauses 192 and 213
Issue: Qualifying companies should be eligible
Submission
(Chartered Accountants Australia and New Zealand, EY)
Qualifying companies should not be excluded. Losses from qualifying companies do not flow through to shareholders as they do for look-through companies and limited partnerships. The intent behind their exclusion is not clear.
Comment
The initiative is targeted at simple companies without complicated structures. The decision to exclude qualifying companies was based on the fact that they have their own regime. Eligible qualifying companies in a current tax loss position may have been in a tax loss position for a number of consecutive years as new companies have not been able to elect into the regime since 2011, while many qualifying companies will have transitioned into the look-through company regime so that losses can continue to flow through to shareholders.
Evidence provided by submitters indicates, however, that qualifying companies remain a large group of taxpayers. Based on this feedback, and that qualifying companies no longer have flow-through treatment of losses, officials support including qualifying companies.
Recommendation
That the submission be accepted.
Issue: Excluding companies within a group that includes a foreign company is not appropriate
Submission
(Chartered Accountants Australia and New Zealand, Deloitte, EY)
Companies in a group that includes a foreign company should not be excluded. It will prevent companies from expanding offshore, which is common as the domestic market is small. There are a number of reasons why New Zealand companies may set up offshore subsidiaries:
- Locally incorporated companies are often preferred by overseas investors and venture capitalists.
- Overseas businesses may prefer to enter contracts with companies incorporated in their own jurisdiction.
- Attracting overseas clients through sales and marketing subsidiaries.
It will also cause a difference in treatment between companies owned by non-resident non-corporate bodies including individuals and partnerships, which are eligible, and non-resident corporate bodies, which are not.
Comment
The exclusion was intended to prevent subsidiaries of non-resident parent companies from being able to cash out their losses. These subsidiaries were not within the target group of the reform as they were considered to have sufficient funding for their R&D activities.
R&D expenditure undertaken overseas is excluded when calculating the amount of the tax credit. This exclusion, in conjunction with the requirement for companies in a group to meet the wage intensity criteria on a group basis, should be sufficient to achieve the policy intent of targeting the relief at R&D performed in New Zealand by New Zealand-based start-ups. We can therefore relax the requirement to exclude companies with a foreign company in the group.
The proposed amendment will allow New Zealand-based start-ups with an overseas subsidiary to qualify if they satisfy the eligibility rules. It will continue to prevent New Zealand subsidiaries of non-resident parent companies from accessing the scheme as the group will not be able to satisfy the wage intensity requirement.
It will be necessary to change proposed section MX 6(a)(ii) to ensure that establishing an overseas subsidiary does not trigger R&D repayment tax.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Provide clarity on the exclusion of special corporate entities (and companies majority-owned by a special corporate entity)
Submission
(Chartered Accountants Australia and New Zealand, EY and TaxTeam)
The exclusion of special corporate entities (and companies which are indirectly or directly 50 percent or more owned by a special corporate entity) should be reconsidered and/or revised. This could exclude incubator entities in the health and tertiary sector operating on commercial terms. It could also prejudice the ability of R&D companies owned by an incorporated society that does not issue shares to apply for a tax credit.
It should also be clarified whether the exclusion of companies 50 percent or more owned by a special corporate entity is also intended to cover a situation where multiple special corporate entities own 50 percent or more of the company when aggregated.
Comment
The main target of exclusions within the special corporate entities rules is publicly funded entities like public and local authorities, Crown Research Institutes, and state-owned enterprises, as they have access to other types of R&D funding. The exclusion will be refined to exclude only these entities. Companies that are majority-owned by one or more of this group of entities will also be excluded from the initiative.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Look-through companies have not been excluded
Submission
(New Zealand Law Society)
The commentary on the bill states that look-through companies are excluded from the proposals but they are not excluded in proposed section MX 2.
Comment
Only a “company” is eligible for the tax credit. Look-through companies are not included in the definition of “company” in the Income Tax Act for the purposes of cashing out R&D tax losses. Therefore there is no need to explicitly exclude them in proposed section MX 2.
Recommendation
That the submission be declined.
Issue: Inclusion of limited partnerships within definition of “group of companies” for R&D tax loss credit purposes
Submission
(EY)
It is not clear how including “limited partnerships” in the definition of “group of companies” for cashing out R&D tax losses purposes will apply without modifying defined terms like “voting interest” and “shareholder decision-making right”, and related provisions for determining groupings of companies.
Comment
Our concern is that companies could use a structure involving a limited partnership and an R&D subsidiary to avoid the grouping requirement, and access a cashed-out loss they would otherwise not be able to access. The submitter has pointed out that the existing drafting is difficult to apply to partnerships as they use different terms and concepts than companies. We will update the drafting to ensure it achieves the policy intent of grouping associated partners and companies.
Recommendation
That the submission be accepted.
Issue: Requirement that companies must have complied with tax obligations
Submission
(Independent Advisor to the Select Committee)
The proposed eligibility rules require taxpayers (and other companies in the taxpayer’s group) to have complied with all of their tax law obligations. This should be amended to disqualify taxpayers only in cases when the non-compliance has been material. Otherwise, there is a risk that taxpayers could be excluded from applying by, for example, a dispute over an unrelated matter or a delay by Inland Revenue in processing a payment.
Comment
Officials agree that taxpayers should only be excluded from cashing out R&D tax losses in cases when the non-compliance has been material. However, defining materiality or compiling an exhaustive list of material offences is unlikely to provide the necessary level of certainty, or even be possible. Instead, existing provisions already allow the Commissioner of Inland Revenue to use certain refundable tax credits to satisfy a tax liability. This tax credit will be included as one of those refundable tax credits. This should be sufficient for the purposes of preventing non-compliant taxpayers from accessing a tax credit with an outstanding tax liability.
Recommendation
That the submission be accepted.