Don’t miss out on ‘free money’ from the R&D tax incentive
A surprising number of Kiwi businesses are missing out on the research and development (R&D) tax incentive. It provides a 15% benefit for every dollar spent on R&D, up to a maximum benefit for $18 million for $120 million of R&D investment. A wide array of R&D will be eligible for this incentive, particularly in:
- engineering
- construction
- manufacturing
- process improvements
- food technology
- telecommunications
- agritech.
Why are local companies not taking full advantage of this tax credit? One main reason is getting the tax credit approved can be a headache if you don’t have any help. Claiming requires your business to supply specific information to Inland Revenue. It’s easy to provide the wrong information, delaying the claim as IR asks for more details, sometimes for so long the window of opportunity has closed.
Many companies have been burned in the past which compounds this problem. One client simply told us, “We tried. We found it too hard and gave up. Every time we applied, we just couldn’t get it approved.” Another client was in a fourth round of back-and-forth with Inland Revenue attempting to provide the right information. In both cases, once the right information was identified and provided, the tax credit was approved without any delay. The value to each company was worth hundreds of thousands of dollars, making a significant difference to how much they could reinvest and grow.
We also know some companies claimed the tax credit and were turned down because their R&D didn’t meet the criteria at that time – but it would now. The tax incentive has been available for around five years, but in its earliest days the definition of R&D was interpreted more narrowly. Now the definition has broadened, it’s likely that many businesses don’t realise the parameters have changed – not knowing your R&D work is eligible is another major reason for the low uptake.
There’s a government website to help you find out if your R&D is eligible, but the answer is not always black and white. Plus, being well-organised can really maximise the size of your eligible claim. By embedding systems to capture R&D spending, you can claim as much of that ‘free money’ as possible without having to put in a lot of extra work. And if your business operates in other countries, you can also tap into their R&D tax incentives, so you can optimise your R&D spending anywhere in the world.
Inland Revenue is on the hunt – make sure you’re compliant
During the pandemic, Inland Revenue took a friendly, hand-holding approach to tax compliance. Its methods are much more assertive now, as it continues to ramp up its focus on compliance and investigations. Liquidations and bankruptcies are also up, signalling that prosecutions will also increase.
IR received another $35 million in Budget 2025, which is an excellent investment for the Government: it generates $4 in extra tax for every $1 of funding, and IR plans to double that return to $8.
IR collates its information in a number of ways, in addition to the tax return and financial information taxpayers provide to them. It receives weekly updates from LINZ with property tax statements, it gets anonymous tip offs, it can scan media publications, and it gathers information from loyalty schemes, eftpos transactions, and crypto platforms to name a few. IR is using this information more efficiently to get more targeted in their approach. This means we are likely to see more audits and reviews where they know what they want to focus on as they continue to develop their AI and analytic capabilities.
It has never been more important to be tax compliant. And excuses that worked in the past won’t wash any more. “It was an honest mistake” might have earned you some leeway a few years ago, but now you may well be stung with a sizeable ‘lack of reasonable care’ penalty.
Tax tweaks that could affect your business
The team at IR has been busy, and it has floated or enacted an array of tax changes.
Fringe benefit tax
The existing 1985 rules haven’t evolved alongside employment practices, and IR has proposed updates to simplify FBT. The biggest impact is likely to be on cars there will be three categories to pick for determining use, rather than needing to measure it daily. If you use your car to go on holiday and tow the boat, you’ll need to pay FBT, even if it’s a sign-written double-cab ute.
Amendments to the FIF rules
Previous rules discouraged migrants and returning Kiwis. Reforms have introduced a new method for working out their taxable income, which can be applied from 1 April 2025. Annual income will be dividends received, plus realised capital gains.
Mutual associations
Member subscription fees are likely to be treated as taxable income. This will have a major impact on cashflow for our largest unions, regulatory bodies and other associations.
Employee share schemes
By shifting the date for paying tax on shares, this may help start-ups with cashflow.
Thin capitalisation settings for infrastructure
Existing settings might be discouraging foreign investment in infrastructure, so proposed changes would aim to mitigate that. There’s not a lot of detail about this yet, but IR’s forecast tax revenue reduction of $65 million may be light.
Changes to charity taxation
These have been kicked down the road for now, but they’re still on the horizon and could resurface at any time.
KiwiSaver
The budget announced changes to the contribution rate, up to 3.5% and then 4% with the employee required to match the increased employer contribution rate, but there is an opt out. The government subsidy is reducing and will now also be available to 16/17 years olds, with this funded by those earning over $180k that will no longer be eligible for the subsidy.
Investment Boost
A tax incentive to invest in productive assets like machinery, tools and equipment, Investment Boost provides a one off 20% deduction in year one, with your ongoing depreciation calculated based on the 80%. It is accelerating depreciation, and will assist with cashflows by reducing the tax payable in that first year. It is wide ranging, applying to new assets, including new commercial buildings (although not if just new to you), and improvement to existing assets. There is no cap, it’s available for all businesses where assets are available for use post-Budget day. Needless to say, care will be required to determine when something is available for use, and the depreciation recovery rules will still apply on an ultimate sale, but overall it’s a move in the right direction.
Although tax is a moving feast, changes are signalled well in advance. With forward thinking and planning, your business can stay on top of your compliance obligations, maximise your tax advantages, and continue to grow and succeed.
