The Labour Government is looking to withdraw Callaghan Growth Grants in favour of tax exemptions, as part of efforts to address the country's lagging R&D spending and match OECD levels.

Callaghan Innovation, alongside the Government, announced their intention of introducing a 12.5 per cent research and development tax incentive from April 1, 2019, aiming to "give businesses better access to support, greater predictability and consistency".

Ultimately, the proposal aims to meet a target R&D expenditure of 2 per cent of GDP by 2028. Companies would have to meet certain criteria to be eligible for the scheme, including a requirement to spend a minimum of $100,000 per year on eligible R&D. The credit is capped at $15 million per company each year.

This change follows comments by the Minister of Research, Science and Innovation, Megan Woods, regarding the urgency of encouraging greater business innovation expenditure by New Zealand firms.

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"Business expenditure on R&D has been steadily rising, but at 0.64 per cent of GDP it is low — too low — when compared to other small advanced economies, and is well below the OECD average of 1.65 per cent."

The discussion document released alongside the proposal outlines the benefits of R&D to New Zealand, such as maintaining our innovative international reputation, diversifying the economy by producing new, more efficient systems, and ensuring New Zealand companies can compete on the world stage. In particular, the report highlights the lack of innovation by large companies, which make up only 18 per cent of national R&D spending, compared to 50 per cent by their counterparts in Denmark and Switzerland.

It is hoped a tax credit will bring "greater predictability and consistency" to these companies' research expenditures.

Though Woods discussed this idea as a "step change in New Zealand's approach to innovation", the Government is encouraging debate regarding the consequential phase-out of Callaghan Growth Grants, introduced by National in 2013.

Under the proposal, all new grants will cease by 2019, with a final phase-out by the following year. The Government is seeking feedback on the impact the proposal will have on current grant holders and companies interested in investing in R&D.

They also outline priorities for the changeover process, such as ensuring the transition phase does not have the adverse effect of decreasing R&D. BusinessNZ Chief Executive Kirk Hope says the new system would provide wider funding, but the consultation process is needed to understand the impact, especially on smaller businesses.

"The proposed tax credit system is focused mainly on helping larger companies, while smaller companies would continue to utilise the Project Grants system under Callaghan Innovation," he says.

"The consultation may help determine whether these are the best ways of supporting large and small companies respectively."

Following the feedback process, the Government is hoping to have the changes before Select Committee by late 2018, with the full legislation in place by April 2019.