Being able to cash in tax losses for startup research-and-development businesses will go a long way to help ease the burden of finding finance to fund valuable R&D; for New Zealand companies.
But should there be a system in place to appraise the merits of their R&D; work beforehand?
Submissions are being sought around the R&D; IRD tax policy paper. They have to be in by August 30.
The proposal will potentially let eligible New Zealand companies receive payments of $140,000 when they make a loss of $500,000 through R&D; work. This will rise in time to a maximum of $2 million in losses (for a $560,000 payout).
R&D; projects are a lengthy and risky investment and a major part of developing groundbreaking new products and technologies.
But there is a possibility of seeing no benefit if the project fails, and this will be the risk to the tax base. This is especially so, given the stock of losses for all firms was $45 billion in May.
The IRD will be the judge and assessor of payment claims. Box ticking and assessing eligibility against criteria will be process-driven.
Differentiating what might be a successful venture from a failure won't be the IRD's role, but providing this incentive might give venture capitalists the confidence to step in with more investment into New Zealand. They will have the business acumen to support investment decisions.
A similar scheme of research and development tax credits were brought in briefly by the Labour government for the 2008/2009 year.
They were then withdrawn because, with the uncertainty of R&D;, a lower personal tax rate was seen as more beneficial.
It was a complicated system subject to creative accounting and therefore faced increased compliance costs, so the R&D; tax credits were scrapped from 2010 onwards.
Cashing in a tax loss on approved R&D; spending or part spending will no doubt help many businesses.
Most startup types fall flat when trying to find initial investment to get a project started.
That's especially true where there is high risk and lack of understanding about the investment, or the asset created is largely intangible.
Currently most funding comes from the bank, secured over someone's house, or other forms of guarantees.
Jeremy Tauri is an associate at Plus Chartered Accountants.