Tax breaks for feasibility costs now allowed
Law changes to encourage innovation and studies to improve practice: Minister
New tax incentives to encourage business investment and expansion have been described as “a good step forward” by Business NZ chief executive Kirk Hope.
One rule change will allow businesses to claim tax deductions for money spent exploring investment opportunities that don’t proceed.
“Business owners tell us this can deter them from spending money looking at better ways of doing things,” Finance Minister Grant Robertson said.
“We’re changing this so businesses can deduct ‘feasibility expenditure’ from their tax bills, including for projects that don’t end up going ahead.”
The other change will be to the ownership threshold for carrying tax losses over when a business is sold.
The combined cost of the changes for the Government will be about $80 million.
Both moves had been recommended in the Tax Working Group, Hope said.
There was still a challenging policy discussion to come about where the ownership threshold was set for carrying losses over, he said. “If you look at how some of those [start-up] companies work, they burn through a lot of cash and make losses until they’ve established the IP to do whatever they do or they’re acquiring a customer base,” Hope said.
“That’s all loss-making activity but it’s all positive activity in terms of building the future business.”
Allowing losses to carrying over would make New Zealand start-ups more attractive for investors, he said.
Robyn Walker, Deloitte’s Technical Tax Director, said she felt many businesses would see the changes as “quite long over due”.
“I wouldn’t necessarily say it was a tax break,” she said of the new deductibility rule. “It’s more restoring the law to what it was before the Trustpower cases.”
In 2016 the Supreme Court effectively changed the tax rules when it said Trustpower could not claim tax deductions for wind farms it had planned but ultimately not built.
“The outcome of those cases is that it changed the boundary line of when businesses are allowed to take a tax deduction for kicking the tyres around proposals,” Walker said
That had a become a tax on innovation,
We’re changing this so businesses can deduct ‘feasibility expenditure’ from their tax bills. Finance Minister Grant Robertson
she said. “Now if you’re looking at a number of options or you just pick one and abandon the others, you now will get a tax deduction for all the cost of considering those options spread over five years.”
The tax changes follow the Government’s announcement of new immigration rules for employers last week.
That had also been given the thumbs-up by Business NZ.
“I think it’s two very positive steps frankly,” Hope said.
“We were pretty upbeat about that immigration one. It removed a lot of quite artificial classification mechanisms.”
While there were still serious international issues weighing on business confidence, Hope said he felt the Government was making progress on improving the relationship.
“We’re over the hump of some of the more challenging domestic issues I think,” he said.
“In general what we’re seen is the Government is starting to listen to the concerns business had. Certainly we’re seeing them think about some of these challenging policy issues a lot more deeply.”
The new tax measures will be introduced into Parliament early next year, so changes can kick in from the start of the next tax year.