Government To Create A Clearer, Better R&D Regime
"All research and development spending expensed under generally accepted accounting practice will qualify for an immediate tax deduction from 1 April, this year," Revenue Minister Michael Cullen announced today.
"We will bring the tax laws into conformity with Financial Reporting Standard13 so that expenditure which business categorises as R&D and which is immediately written off for accounting purposes will also be immediately tax deductible," he said.
"The Government believes FRS 13 is comparable to other international scientific and accounting definitions of R&D.
"The advantages of bringing the two tax and accountancy regimes into alignment are threefold. It will:
* create significant savings in compliance
* introduce greater certainty as the FRS 13 definition is much clearer and tends to cut in further along the product development process
* provide a firmer guide to the Inland Revenue Department. While in most cases R&D is being fully deducted already, the lack of clarity in the deductibility/non-deductibility boundary creates scope for unnecessary disputes about interpretation between taxpayers and the IRD."
The package also includes moves to clarify that R&D deductions incurred in developing software are not clawed back in the event of sale or deferred in the case of devising an invention for patent.
Dr Cullen said the decision was made after extensive consultation and represented the Government's response to a discussion paper circulated in November under the Generic Tax Policy Process.
Among the issues the Government called for submissions on was the application date for any change. The move would require legislation which, given the size of the Government's legislative programme, would be unlikely to pass until the second half of the year.
"There was strong demand that we bring the effective date forward to 1 April so that it will apply to the 2001-2002 tax year.
"The Government is happy to do this - especially as the change is pro-taxpayer and will be offered on a voluntary basis. Those wishing to remain with the status quo will have that option although I would expect most to move as I think the new regime is superior and offers a better deal to the great majority of taxpayers," Dr Cullen said.
"Our advice was that the course we have opted for is the best way to deliver the Government's policy intention at lowest compliance cost.
"But to ensure that it achieves what we believe it will, I have undertaken to monitor the outcome in conjunction with a group of experts and stakeholders from the private sector," Dr Cullen said.
The group would first meet early next year and would comprise tax practitioners and representatives from the Science and Innovation Advisory Council.
"Today's announcement provides further evidence of the Government's strong commitment to the knowledge society and to the role of R&D in the transformation of the economy.
"It complements the $12 million R&D grants scheme delivered in our first budget and the Government's intention to establish a new seed capital fund for innovation," Dr Cullen said.
The Ministerial Review into the Tax System would provide a further opportunity to discuss the treatment of R&D. The review would produce a preliminary issues paper in June and would deliver its final report to the Government in October this year.