Earlier this year, the Government released a proposal to incentivise R&D activity for New Zealand based companies via a new tax credit regime. Draft legislation has since been released, with the new R&D tax credits expected to be available from the tax year commencing 1 April 2019.
Increasing R&D activity in New Zealand through government incentives has been the subject of various initiatives over the years. The Labour Government previously introduced similar measures in 2008. These were only in operation for one year before being repealed by the subsequent National Government. Some years later, National introduced their own R&D ‘cash out’ incentive, aimed at start-ups with high R&D intensity activities. These latter credits continue to be available for now, but as is the nature of these politically charged incentives, indications are the existing ‘cash out’ system will soon change to align with the new R&D credit regime being introduced.
There is potential for taxpayers to receive significant benefits from this regime. Any business involved in or considering R&D activity seriously consider whether they can take advantage of the tax credit or cash out provisions to increase funding in their business or reduce their overall tax cost. With broader eligibility criteria, even businesses who have been unsuccessful in previous R&D tax credit claims may find new opportunities with this regime.
- R&D credits can be used to reduce a qualifying taxpayer’s tax liability by up to 15% of qualifying R&D expenditure (up to a $120million maximum)
- The credits will be available for use in the year the expenditure arises, or in future years (provided minimum shareholder continuity requirements are met)
- To qualify for the expenditure, a business must have a minimum spend of $50,000 on R&D. Lower R&D spends may qualify if the activity is undertaken through an approved research provider
- Tax credits will be refundable up to $255,000, with requirements mirroring the R&D tax-loss cash-out scheme already in place. This will be reviewed, with potential changes from 1 April 2020
- A person is excluded from the R&D tax credit regime if they receive a Callaghan Innovation Growth Grant for the relevant income year; the Growth Grants scheme will be phased out as the tax credit comes in
So who will qualify for the new R&D credits, and is it worth the time and effort to get them?
To receive the R&D tax credit, a business must meet tests under three categories: the person who is claiming the credit, the type of activity, and the type of expenditure. Importantly, business as usual expenditure will not qualify.
The key requirements are as follows.
- The person who is claiming the credit:
- performs core R&D activity in New Zealand, or a contractor performs a core activity on their behalf
- carries on business through a fixed establishment in New Zealand
- has R&D controlling rights over the research and development activities. This broadly means they either own the results of the R&D activities, are able to use the results without providing additional consideration, or a company in the person’s corporate group owns the results and the company is resident in a country with which New Zealand has a double tax agreement.
- The type of activity that qualifies as eligible R&D:
- is conducted using a scientific approach
- resolves scientific and technological uncertainty.
- The type of expenditure that qualifies as eligible R&D expenditure:
- includes employee salaries, expenditure on consumables and depreciation loss for assets used in R&D
- does not cover specific exclusions; some of these include routine software and computer maintenance, patenting and licensing costs, market research, management studies or activities relating to organisational design. In the 2008 R&D tax credit regime, it was estimated that that over 40% of claims related to software development – we are expecting this may also be a significant area for R&D tax credit claims this time around. Interestingly, expenditure on certain internal software development will qualify under this R&D tax credit regime - subject to a $3 million cap. Given the size of the cap, for many small to medium size businesses it may still be worth considerating whether upcoming software expenditure could qualify.
Where to from here?
Now that draft legislation is available, we are predicting an increase in businesses wanting to assess their eligibility for the credits.
1 Start early and plan well
It pays to start planning early. It’s important to ensure that the claim is well framed and that the relevant details about the expenditure are recorded as they are incurred.
2 Take advice on eligibility
Given the detailed nature of the expected rules - at least in the first year - most businesses will need specific tax advice about whether a credit is available before making a claim. Not all expenditure of the types listed above will be included; availability will come down to the facts about the expenditure and the wider question of where ‘scientific or technological uncertainty’ lies.
A tax advisor will be able to let you know at an early stage if there are criteria which disqualify the expenditure, and they can work with you to refine the expenditure types to only those with a viable chance of a claim.
3 Collect data on the types of R&D activity in your business
There is an array of different R&D projects and activities that will qualify for the R&D tax incentive – the challenge for many businesses will be determining whether they have one of these. Some may have recurrent expenditure of the qualifying type, and identifying this early will have ongoing benefits.
Places to look will include in expenditure on experimental development, basic or applied research or knowledge acquisition. This will particularly be the case where the activity is implemented to produce new or enhanced:
- products or devices
The best approach is to summarise all types of expenditure which may fall into these categories so these can be fully considered.