Mood of the Boardroom: Targeted tax solution to aid R&D

By James Penn

CEOs have creative ideas for accelerating research and development, writes James Penn. But at the heart of their comments a single theme recurs: tax incentives.
New Zealand's tax settings have become more favourable in recent times. Photo / 123RF
New Zealand's tax settings have become more favourable in recent times. Photo / 123RF


A third of CEO respondents to a question on what more should be done to accelerate New Zealand's research and development (R&D) efforts and attract capital to early stage companies referred to the need for more favourable tax treatment.

One energy sector chief executive suggested that improved tax treatment needed to be targeted at longer term research studies -- "especially technology pilots".

New Zealand's tax settings have become more favourable in recent times for those involved in research. Since April 2015, companies have been able to "cash out" losses in R&D, providing some relief for cash-short start ups. Previously, it was only possible to carry these losses forward to apply against future profits and reduce the subsequent tax burden.

But the chief executives of New Zealand's largest companies believe more can be done.

When asked which tax settings need attention in the near term, R&D incentives is the clear front-runner, with over 70 per cent of survey respondents nominating this measure.

Stuart Broadhurst of Fisher & Paykel Appliances, calls for "tax relief on capitalised product development, and accelerated tax depreciation over the effective life on new assets".

It is argued that allowing accelerated depreciation would encourage more companies to invest in capital assets, as more of the upfront purchase price could be deducted from taxable profits.

A recent delegation of business leaders to Israel, led by Spark CEO Simon Moutter, offered some useful ideas about how to grow capital access for our innovation ecosystem.

A report from the delegation said that among notable characteristics in Israel there was a culture of entrepreneurship and a national bias for commercialisation.

"Their school students aspire to building a startup from a young age, research incentives support the commercialisation of IP, and they have institutionalised commercialisation," the report said.,

Some chief executives support Moutter's own push for big NZ corporates to assist fledgling companies. NZME chief executive Michael Boggs suggested New Zealand CEOs should encourage their businesses to invest and partner with early stage companies supplying physical and human capital to aid in the development of these companies. "Recent evidence suggested this has started," he adds.

Changing the rules around KiwiSaver is another popular suggestion. Here, the recommendations were more varied. One legal executive called on the Government to mandate that KiwiSaver adopts a default whole-of-life approach, "so a disproportionate part of KiwiSaver funds are not in low-returning bonds".

Others look forward to a time when KiwiSaver accounts can be segmented and placed with different providers for different forms of investment.

Transparency means fund managers won't be able to hide behind quasi index investing, which actively discourages risk-taking.

"Allowing people to have more than one KiwiSaver provider will open up innovation in the market, potentially leading to specialisation, causing more of the savings to flow to growth versus being captured in bank schemes," said one finance sector executive.

Once the pool of capital invested in KiwiSaver reaches a certain scale, it will be possible to have separate fund managers for each investment segment.

That could mean different managers for each of a KiwiSaver's domestic debt, domestic equity, and offshore investment segments -- as opposed to the current structure where a single firm will manage all the segments themselves.

It is also thought that a movement towards this model -- often seen in Australia via "self-managed super funds" -- would increase competitive pressure on each provider, leading to fewer "vanilla" portfolios. This could lead to more funds flowing into innovative, R&D heavy companies and sectors of the economy.

Businesses, whether new or mature, need to develop and innovate to adapt to the rapidly changing business environment.

Sam Stubbs, managing director of non-profit KiwiSaver plan Simplicity, says we are on the verge of "a financial renaissance for R&D-based companies."

However, that relies on more transparency in the KiwiSaver system.

"Transparency means fund managers won't be able to hide behind quasi index investing, which actively discourages risk-taking," he says.

He points to the United States as an example, where increased investment fund transparency has forced mainstream players to be more active in their fund management.

"That means more risk, and more R&D-heavy, early-stage investing.

"This can only be exacerbated by low interest rates, where fund managers need to find a way to justifiably maintain a high-fee environment," says Stubbs.

"They need to take more risks, to make more money, to justify their fees."

Also of importance to encouraging R&D in New Zealand is thinking globally, according to many of the respondents. One company already doing that is Vector, which has partnered with a United States-based energy technology accelerator (aptly named Excelerator) to bring their portfolio companies' clean energy technologies to New Zealand shores.

Vector has also formed a strong relationship with Tesla.

Vector's Simon Mackenzie notes that the importance of attracting capital to fund R&D and accelerating innovation should not be limited to early stage companies.

"Businesses, whether new or mature, need to develop and innovate to adapt to the rapidly changing business environment."

Among other comments:

• "There should be a campaign to persuade more multinational companies to invest in R&D in New Zealand, form strong relationships with technology companies offshore and raise the profile of New Zealand's innovation capability, both domestically and internationally."

• "The issue isn't capital but the factors required to globalise ideas. This requires collaboration. New Zealanders aren't actually that collaborative -- we like working in our own garages, even if we know the same thing is being done in a garage across the road."

• "New Zealand companies need to have aspirations to launch globally and that may mean locating business offshore to access larger economies and likely investors."

- NZ Herald

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