Loss-making tech businesses listed on NZX are eyeing planned changes to the tax incentives for research and development to see whether they might be eligible.
The stock exchange includes quite a few such businesses ranging from perennial loss-maker Wellington Drive Technologies, which had $115.2 million in accumulated losses on its balance sheet at Dec. 31, to accounting software company Xero, whose balance sheet showed $343.9 million of accumulated losses at March 31.
Other loss-makers include Pacific Edge, Eroad, Finzsoft, Geo, ikeGPS and Plexure.
The government wants to see spending on R&D jump to 2 per cent of GDP by 2027 from 1.37 per cent in 2018. Changes to tax legislation introduced into parliament last month will allow loss-making firms to claim cash refunds in proportion to the amount of payroll tax they pay.
Current legislation passed by the previous National-led government has a similar scheme but it only applies to a few businesses – listed companies are specifically excluded – and the refund is capped at $255,000 a year.
But under the amendment, the cap comes off from the 2021 financial year and listed companies with qualifying R&D will be able to claim 15 per cent of payroll taxes, a useful addition to cash flow.
The government expects about 3,000 firms will be eligible.
Accountants certainly approve. EY's New Zealand tax policy leader David Snell says that change is "essential if the R&D tax incentive is to produce the intended innovation boost.
"Cash-constrained loss-making companies are just the types of company which will benefit most from the R&D tax incentive. Refundability was something we (EY) asked for at the time the original incentive was introduced," Snell says.
"While refundability should have been central to the R&D tax incentive from the start, this one-year delay is manageable. Only fair to point out that the government always intended to implement refundability from year-two" and the delay will give it more time to get the design right, he says.
Robyn Walker, the national technical director within Deloitte's tax team, says that the regime is designed to "recognise this business is a real business" because although it isn't making profits, it is paying payroll taxes and so must be employing real people.
The current legislation had required that at least 20 per cent of a firm's labour costs had to be spent directly on R&D and that restriction is also being lifted.
Walker expects the incentive changes should help larger, more established businesses that are still making losses. But new start-up businesses which are less likely to have employees will still face issues.
Payroll taxes that qualify include things such as PAYE tax and fringe benefits taxes. Payments to contractors will also qualify as long as the company is deducting withholding tax.
Walker's colleague, Deloitte tax partner Aaron Thorn, is convinced the new incentives will encourage greater spending on R&D.
"Almost every OECD country has something like this and they've been found to be effective."
The experience in Australia has been that most companies have a list of projects they would love to do but they're all competing for funding. If the cost is 15 per cent cheaper, more such projects will be approved, Thorn says.
Xero is an obvious candidate to claim the new incentive after reporting a $27.1 million net loss in the year ended March, although its New Zealand operations have actually been turning a profit for a few years and it will have to use up its Callaghan Innovation funding first.
"Xero has historic tax losses that can be used to offset New Zealand profits," the company says. "We expect the extension of the R&D tax credit regime will apply to Xero if these losses are not fully used by the time its current funding arrangements have expired." That happens in March 2021.
Xero certainly has an extensive payroll – at March 31, it had 2,531 employees worldwide and most of its R&D staff are New Zealand-based.
But as is the case so often with tax, the devil will be in the detail.
Wellington Drive company secretary Ron Jackson says whether his company can take advantage of the new regime will depend on how R&D is defined.
"We've run into problems with that in the past. We would certainly hope to make use of" the new incentives, Jackson says. The company has a meeting planned with its advisors to sort out whether it's eligible, he says.
Wellington Drive was carrying $101.6 million in unrecognised tax losses in its accounts at Dec. 31 because of "the uncertainty of their recoverability in the immediate future."
Certainly, not all loss-makers will qualify. Eroad is convinced it won't make the cut. That's despite the $4.9 million net loss reported for the year ended March and $27.7 million of accumulated losses on its balance sheet.