Start-up companies will be able to cash in on their investment in research and development under proposed legislation that has passed its first hurdle in Parliament.

The Taxation (Annual Rates 2015-16, Research and Development, and Remedial Matters) Bill proposes changes to the Income Tax Act that would allow certain New Zealand companies to "cash out" tax losses from qualifying expenditure on research and development (R&D).

The intention of the bill was to enable start-up companies with a focus on R&D to access the benefit of their tax losses on a current-year basis rather than as a future benefit.

The amount was seen as an interest-free loan to be "repaid" when tax was paid on the company's future income.

Carlos Chambers, co-founder of Wellington-based software start-up Common Ledger, welcomed the bill, which he said was "a step in the right direction".

The initiatives would broadly incentivise R&D and innovation in eligible small businesses.

"It's a big and important step by the Government, if they implement these changes, to a non-discriminatory, more of a broad-brush approach to incentivising R&D, and that's not what we have at the moment," he said.

Grants were currently available from Callaghan Innovation that were based on "really specific discriminatory criteria" that a business had to meet to be eligible.

Chambers said he was a big supporter of an "access-for-all approach" to R&D because it was a hard thing to administer fairly if it was being done in a more targeted way.

"It's big," he said. "If we incur $100,000 of tax losses which are eligible under our R&D spend in a year, we would see $28,000 back at the end of the financial year, which is half the price of a cheap new employee."

The changes did not apply to all companies engaged in R&D.

Businesses like software company Xero would not be eligible to claim the benefits proposed as the bill carved out an exclusion for publicly listed companies.

Chambers said the changes were a step in the right direction, and filling out the suite of measures for other companies - not just start-ups - would be a good move in the coming years.

"I think that's when we'll really start to move the dial on entrepreneurship and start-ups and new ventures and people willing to take more risk and get stuck in."

Making sure R&D was incentivised at all levels as part of a comprehensive regime was the goal, Chambers said.

Angel investor Dave Moskovitz said the changes proposed were a "massive" step forward in investing in R&D in New Zealand.

He encouraged lawmakers to keep the regime in place if the law change passed as "chopping and changing" had had a harmful effect on start-up companies.

"Every time it changes it's destructive to the operation of the company," he said.

"You don't want to have to deal with different regulations every three years and having to do different compliance work every three years."

Moskovitz said it was "refreshing" to see new support for R&D for start-ups.

His message to the Government was: "Choose something; if it's working, go hard on it and don't change it around all the time."

The proposed changes were announced in last year's Budget, and the bill passed its first reading in Parliament on Wednesday night.

The long-awaited initiatives are intended to apply from April 1.

Amount of losses that can be cashed out each income year will be the lesser of the company's: