Budget '07: Three per cent tax break, more R&D funding, the offerings for business

Crown cash position

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The key element of the 2007 Budget for New Zealand business is the introduction of the government's much-heralded Business Tax Reform.

The primary instrument of this is a reduction in the tax businesses pay to 30 per cent from 33 per cent at present.

The government claims their reforms "provide incentives for our businesses to increase investment, increase innovation, and increase productivity."

Today's announcement marks the first time the current government has moved on the corporate tax rate since 1988.

The package includes reducing the company tax rate from 33% to 30% (at a cost over the forecast period of $2.1 billion) and also the allowance of $630 million over four years in tax credits for research and development (R&D).

"These changes will encourage the innovation we need to keep our firms dynamic, competitive, and productive", finance minister Michael Cullen said today.

There's also a fillip for companies such as Fisher & Paykel, who have recently relocated offshore.

Dr Cullen has introduced a tax exemption for the active income (income derived from active business, such as from manufacturing or industrial activity) of New Zealand-controlled foreign companies.

This will cost $112.5 million over four years, and is being done "to allow New Zealand-based firms to globalise at a lower tax and compliance cost."

Other crumbs for the business sector in today's Budget included:

* Providing an additional $87.8 million over four years for the Market Development Assistance Scheme (MDAS). MDAS is aimed at encouraging firms to take new products to new markets; and

* Spending $53 million over four years to boost participation in industry training.

Forecasters had suggested both the above areas may have been given some tax relief - instead, specific amounts have been allocated.

In any case, nothing comes without a cost - and incoming governments which assume the Treasury benches in the near future will inherit a set of accounts that are fading from black and turning distinctly red.

Declining operating revenues from business tax, combined with the extra spending required for social initiatives like Working for Families and the retirement savings scheme KiwiSaver, mean that over the forecast period - up until 2011 - the nation's accounts will move from cash surpluses to deficits.

Beyond 2006/07, the government is forecast to record cash shortfalls averaging $1.4 billion per annum for the next four years.

- NZHERALD STAFF