Start-ups pouring money into research and development will get a cash-flow boost under a tax measure that is seen as a "great response" to the sector's challenges.
The Budget provision means start-up companies investing in R&D can "cash-out" tax losses.
This means they can get an upfront payment rather than tax losses being carried forward and applied against future income.
The Government also said businesses would be able to deduct tax for "R&D black hole expenditure" and estimated the two policies would return $58.1 million to companies over four years.
They will come into effect from April next year.
The Inland Revenue Department said the "cash-out" payment was not a grant and companies would eventually return it through taxes paid.
IRD said it would be able to reclaim the payments if a company sold intellectual property, 90 per cent of its shares, moved overseas for tax purposes or was liquidated.
EY executive director of tax Angela Williams said the policy would help companies investing in R&D get benefit of tax losses "early in the piece".
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"It's also helping their cash-flow constraints, because there's recognition that, particularly for a lot of small and medium enterprises, they don't have ready access to cash funding at that early stage," she said.
The chief executive of business incubator The Icehouse, Andy Hamilton, said it showed the Government was aware of the challenges of the sector.
"I think it's a great response," he said.
"Cash is king for start-ups, especially when you are doing heavy R&D.
"We know R&D-intensiveness is a really positive thing for the economy. I think that's fantastic and it recognises it takes those companies a long time to get to a commercial outcome."
Employers and Manufacturers Association chief executive Kim Campbell applauded the Government for making the change.
"These long overdue measures on their own could well result in a highly desirable pick-up in private sector investment in R&D and innovation," Campbell said.
University of Auckland physics professor Shaun Hendy said it was interesting to see the Government "dancing around the edges" of the R&D tax credit scheme it axed in 2008.
"Most people in this sector think R&D tax credits would be a good idea," he said. "They've edged a little bit closer."
• Start-ups will be able to "cash-out" some of their tax losses arising from qualifying R&D expenditure.
• This means they get an upfront payment rather than the losses being applied to future income.
• Start-ups will be able to cash-out up to $500,000 of eligible tax losses in the first year of the initiative. This translates to a cash-out of $140,000 based on a 28% company tax rate. The eligible cap of tax losses will rise by $300,000 each year up to an eventual maximum of $2 million.
• The $2 million cap translates to a cash-out of $560,000 per year.
• To qualify, 20% of a company's wage and salary expenditure must be on R&D.
• The company cannot be publicly listed.
• IRD can recover the payout if a company is sold, sells intellectual property, moves overseas for tax purposes or is liquidated.