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A clear theme in recent economic policy has been the need to shift New Zealand's output towards innovative, high-value products which compete on the international stage. This has resulted in some proactive initiatives by Government to encourage the development of innovative growth businesses, two examples of which are discussed below.
Availability of NZTE Funding
New Zealand Trade and Enterprise (NZTE) was established in 2003 to integrate the functions of Trade New Zealand and Industry New Zealand. NZTE aims to stimulate economic growth by helping to boost export earnings, strengthening regional economies and delivering economic development assistance to industries and individual businesses. To achieve this, NZTE operates a number of schemes which provide both financial and non-financial assistance to applicants who meet certain criteria.
NZTE's Growth Services Fund (GSF) is one such scheme. The focus of the GSF is helping companies with high growth potential realise such potential. To be eligible for funding under the GSF, an applicant must:
- have high growth potential and a demonstrated commitment to growth;
- have annual turnover of less than $50m and/or fewer than 100 FTEs;
- demonstrate how NZTE funding will lead to significant net economic benefit (for example, creation of employment opportunities or spillover benefits to other businesses);
- demonstrate how funding will add value to existing activities;
- be financially viable and have a management team with a sound track record;be operating in a commercial environment, resident in New Zealand and registered for GST purposes; and
- have proposals and business concepts that are consistent with New Zealand's laws and regulations.
When applying for GSF funding, an applicant must carefully and explicitly address each of the above criteria.
NZTE meets up to 50% of successful applicants' eligible expenses. Eligible expenses include feasibility studies, development of prototype designs and testing, intellectual property protection and preparation of documentation to obtain finance for business development. Ineligible expenses include "business as usual" costs and costs of acquiring capital items.
"Transformational Change"
NZTE has indicated that a requirement to demonstrate "transformational change" will be added to the GSF's eligibility criteria. This addition is driven by the Ministry of Economic Development's "Economic Transformation" (ET) strategy, which seeks to shift the focus of New Zealand's economic output towards lower-volume, higher-value products that compete internationally on the basis of quality and innovativeness.
While NZTE has committed to implementing the ET strategy across the range of services it provides, including the GSF, it remains to be seen exactly what effect the requirement to demonstrate "transformational change" will have on the way that GSF funds will be allocated. However, it is conceivable that NZTE will place greater emphasis on:
- the innovativeness of applicants' products or services;
- the internationalisation potential of applicants' businesses; and
- the environmental impact and sustainability of applicants' businesses.
R&D Tax Credit
Another product of the ET strategy which promotes and rewards innovation is the Research and Development (R&D) tax credit regime, due to come into effect on 1 April 2008. The R&D tax credit is part of a $3.4b package (which also includes a reduction of the company tax rate to 30%) intended to help develop a more innovative and dynamic economy.
The credit will apply at the rate of 15% of eligible R&D expenditure. To be eligible for the credit, a taxpayer must:
- carry on business in New Zealand;
- incur more than $20,000 of eligible R&D expenditure (see below);
- have control over the relevant R&D activities, bear the financial risk and own the results of those activities; and
- carry out most of its R&D activities in New Zealand.
The scope of eligible R&D expenditure is complex but fairly broad. With some exceptions, R&D expenses will be eligible for the tax credit if the R&D activities to which the expenses relate:
- are systematic, investigative and experimental;
- are directed at acquiring new knowledge or creating new or improved materials, products, devices or services; and
- are intended to achieve an advance in science or technology by resolving scientific or technological uncertainty and/or involve an aspect of novelty;
- or are activities which are wholly or mainly for the purpose of, or required for, the preceding activities. Notably, certain activities, such as market research, quality control testing and activities relating to statutory compliance are specifically excluded from the regime.
The availability and scope of the tax credit under New Zealand's regime compares favourably with other jurisdictions such as Britain and the USA. As such, New Zealand is likely to be seen as a more attractive environment in which to carry out R&D than it has been in the past.
Key Contacts
Note: The information provided in this article is intended to provide general information only. This information is not intended to constitute expert or professional advice and should not be relied upon as such. Specialist legal advice should always be sought for your particular circumstances.
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