KEY POINTS:
The National Party's plan to scrap tax credits for research and development to pay for personal tax cuts has come under heavy fire from the business community.
National had initially planned to reduce the R&D tax credit announced by the Government in last year's Budget from 15 per cent to 10 per cent, but discarded the scheme completely following the worse than expected shape of Treasury's accounts.
Manufacturers and Exporters Association chief executive John Walley said while tax cuts were needed to stimulate the domestic economy, the funding for these cuts had come from the wrong places.
"New Zealand was once at the bottom of the OECD in terms of policy support for R&D spending, this change will put us back in last place. At a time when other countries such as Australia are about to increase their support for innovation, New Zealand firms will once again be at a competitive disadvantage in this respect."
Walley said investment in the tradeable sector required a long-term commitment, so removing these incentives would hurt firms that had already priced in the tax credit.
National leader John Key, in announcing the move to drop the scheme yesterday as part of the party's tax policy, said he had been concerned with the scheme's effectiveness.
"It's clear that the tax credit has created a lot of business for tax accountants and tax advisers, but evidence of real increases in R&D is harder to find."
Walley said Key's comment was "daft", as the R&D credit only applied for the first time in the 2008 income year.
"We have already sunk the setup costs, abolishing the credit now is extremely wasteful and confusing."
Alasdair Thompson, chief executive of the Employers & Manufacturers Association (Northern), said it would be disappointing to lose the tax credit as it was the one thing New Zealand businesses held over their Tasman neighbours.
"We thought it was a good idea because we need to build innovation by New Zealand firms, and research and development is critical to doing that." KPMG tax partner Paul McPadden said the move was "hugely disappointing" as abolishing the tax credit effectively meant a tax increase for businesses doing research and development.
It would also leave New Zealand out of step with many western economies, where R&D tax incentives were considered part of "mainstream" tax policy, he said.
Listed animal and farm improvement co-operative LIC had anticipated a benefit from the scheme, but chief financial officer Janie Elrick did not believe its abolishment would have a significant impact on its investment strategy. But long-term, tax credits could change where some businesses chose to do research and development, Elrick said.
"There are certainly other businesses ... that would have started to look at potentially putting R&D spend into New Zealand to take advantage of that 15 per cent tax credit and that wouldn't happen now."
Business NZ chief executive Phil O'Reilly said the move was unfortunate and unhelpful.
- Jacqueline Smith and Owen Hembry
