Replacement for R&D tax credits sought

An alternative to the scrapped research and development tax credit is key if New Zealand’s life science industries are to realise their potential as drivers of future productivity and growth, business leaders warn.

A report published this week by biotechnology lobby group NZBio says for New Zealand to harness the biotech sector’s strengths, more work is needed to stimulate investment in research and development. This includes putting in place a regulatory landscape which allows emerging technologies to thrive, and finding something to replace the recently repealed R&D tax credit.

Recommendations in the report are wide ranging. It calls for increased capital investment in bio-based enterprises from local and international angel investors, and superannuation funds. And it promotes accelerated depreciation and investment tax credits for capital equipment.

However, it is NZBio’s calls for a long-term alternative to the recently repealed R&D tax credit which commentators viewed as most significant.

In October last year the National Government ditched a 15 cents in the dollar research and development tax credit, and it has also scrapped Labour’s promised Fast Forward Fund aimed at promoting research to help food and farming. Fast Forward would have invested $700 million with matching contributions from industries to create a $2 billion fund over 10 to 15 years.

‘‘If you want to leverage some kind of economic advantage for little old New Zealand then intellectual property [IP] and innovation are key,’’ says Business NZ chief executive Phil O’Reilly.

‘‘It’s hard for us to build value out of costs and even harder to build value through distribution, given our distance from markets. It’s in that context we need to think on how to encourage businesses to invest more in R&D.’’

When it comes to investment in R&D, New Zealand lags well behind its OECD peers (see graph). In the United States, the Obama Administration has targeted 3% of GDP as the necessary spend on R&D, while the Australian government announced a A$42.4b (NZ$52.2b) investment in innovation in this year’s budget.

Innovation Waikato chairman Andrew West says New Zealand’s investment in R&D remained at around 1% between 1980 and 2008; private sector input is a lowly one-third of the OECD average, while government investment is four-fifths.

Deloitte national R&D leader and tax partner Aaron Thorn says the reason why OECD countries run tax credit, or tax deduction regimes around R&D is that the grants-based approach which New Zealand relies on is flawed.

‘‘You’re asking the Government to pick winners,’’ he says.

Tax credits, meanwhile, provided a lower incentive level – it was 15% in New Zealand – but were available to any project that met the necessary criteria.

‘‘Instead of buying winners we need to change business behaviour so that people can start to factor tax credits into their project costs and thereby increase funding.’’

Thorn says it is unlikely that a one-size- fits-all approach can work because regardless of how a government invests in R&D there will always be inefficiencies.

The NZBio report says bio-based industries are in an unparalleled position to provide a platform for sustained growth, with more than 70% of current export earnings derived from bio-based industries.

Meanwhile, the OECD says that with an effective regulatory environment, the contribution of the bioeconomy to New Zealand’s GDP could top $182 billion by 2030.