The tax rules, as they stand, are seen to discourage R&D-intensive start-up firms because they have more difficulty than most accessing bank lending, can often expect to make losses for longer than other types of businesses in their start-up phase, and are therefore less likely to succeed.
That’s because losses in their early years can only be deducted against income tax once the company becomes profitable, if ever, or is sold for a profit.
Instead, the new proposals suggest allowing companies to “cash up” $200,000 of tax losses in their first year of claims, rising over time to $500,000 a year, on the understanding that the deductions will in effect be repaid once the company is in profit.
The tax rules, as they stand, are seen to discourage R&D-intensive start-up firms…
“A cashed-out loss can be thought of as an interest-free loan from the government to be repaid from the taxpayer’s future taxable income,” says the discussion paper, which seeks submissions by August 30. “It is intended to provide a temporary cashflow timing benefit when the company is in tax loss.
“However, if the R&D expenditure never results in a viable product, the interest-free loan effectively becomes a grant.”
The system is considerably simpler than R&D tax credits introduced by the previous Labour-led government but canned by the incoming National Party administration in 2009.
A wide range of exclusions to eligible expenditure that accompanied the earlier scheme would apply to the proposed one, and would add exclusions for clinical trials and late stage software development, such as code-writing.
© BusinessDesk 2013
