Does your business use a structured and systematic approach to acquire new knowledge or create new or improved goods, services or processes? If so, you may be able to
reduce your tax bill by 15% of your eligible spend or obtain a cash refund from 1 April 2019.
The new Research and Development (“R&D”) Tax Credit regime operates from the beginning of a business’s 2019/2020 income year.
Whilst the legislation is aimed at clarifying who would be eligible and what expenditure would be eligible for the R&D tax credit there will still be a certain amount of work to be done to get your business ready to make a claim and to ensure the maximum claim possible is made. Please do contact us if you would like more information or assistance in getting your business ready to make a claim.
We can assist with:
- determining whether your business is eligible to make a claim;
- whether the activity conducted by your business is an eligible R&D activity; and
- identification and classification of expenditure.
Current R&D Incentives
Currently New Zealand provides R&D subsidies to businesses through Callaghan Innovation Growth Grants, however these grants are not available to the large majority of firms that are currently undertaking R&D or may undertake R&D in the future. The grants are targeted at a specific type of R&D expenditure and entail significant compliance and application costs. These Callaghan Growth Grants will be phased out with the introduction of the new R&D tax credit incentive.
In addition New Zealand currently provides support for businesses performing R&D through the R&D loss tax credits/cash out – effectively 28% of their losses associated with eligible R&D expenditure, which is paid out in cash rather than carrying forward the losses to future years.
The New R&D Tax Credit Incentive
The R&D tax credit incentive has broader eligibility criteria than Callaghan Innovation grants, meaning the R&D tax credits will be available to a greater number of businesses going forward and your business may be eligible to benefit.
However, your businesses may need to adjust its R&D programmes to the new source of funding in the short term.
Key features of the New R&D Tax Credit Incentive
- tax credit equivalent to 15% of eligible R&D expenditure, available from the beginning of a business’s 2019/2010 income year
- A minimum R&D spending threshold of $50,000 per year
- A maximum cap on R&D expenditure of $120 million
- A requirement that 20% or more of a firm’s labour costs must be R&D related
- Definition of R&D to ensure accessibility across all sectors
- In-year approval of the R&D activity to provide certainty to applicants from the 2020/2021 income year
- Businesses with insufficient tax liability to use their credits immediately will be able to obtain
- A refund of their tax credits in year to a maximum of $255,000
- Refundability of tax credits may be extended to pre-profit businesses or businesses in loss in terms of a new bill before parliament for the 2020/2021 tax year onwards
- Various rules that will limit a business’s ability to re-characterise
- Business as usual expenditure as R&D
How will the claim process work?
Inland Revenue will administer the R&D tax credit scheme, supported by Callaghan Innovation for the technical research and scientific knowledge required to administer the R&D tax credit.
In year one your business will be required to register its interest in applying for the incentive by mid-way through the 2019/2020 income year and to file its claims online through IR’s e-service (myIR) at the end of the tax year.
As part of the online claim process your firm will be required to submit and upload supporting information that details the R&D activity and expenditure.
By year three the intention is to allow R&D returns only from approved accounting software packages.
Incentive claims should be filed within 30 days of filing the business’s income tax returns.
In the first year of the tax credit, you will be asked for a description of your business’s R&D activity and expenditure incurred.
The required information will include details regarding:
- What systematic approach was used to conduct the activity?
- What new knowledge, process, service or good did the eligible R&D aim to produce?
- What scientific or technological uncertainty did the activity seek to resolve?
- Why could the scientific or technological uncertainty not be resolved using publicly available knowledge or knowledge deducible by a competent professional working in the relevant scientific or technological field?
- For supporting activities, why were they integral to the core activity?
- Broken down indicatively into categories such as:
- Employee remuneration;
- Net cost of items used in, or subject to, a process or transformation;
- Expenditure on internal software development; and
- Expenditure incurred on R&D activities conducted outside New Zealand.
Eligibility for the purposes of the tax credit
The aim is to increase accessibility by making it easier to understand what eligible R&D activity includes.
Three tests have to be satisfied which cover:
- The person who is claiming the credit;
- The type of activity that qualifies as eligible R&D; and
- The type of expenditure that qualifies as eligible R&D expenditure.
Who is eligible?
Your business will be eligible if it
- performs a core activity in New Zealand, either itself or through an R&D contractor;
- carries on a business in New Zealand through a fixed establishment in New Zealand; and
- has R&D controlling rights in relation to its core R&D activity.
What type of activity qualifies as eligible R&D?
The core activity definition is expected to apply to a wide range of R&D activities in a variety of industries, and is not limited to basic research. It is broader than the 2008 definition.
Broadly R&D will be defined as activities:
- conducted using a systematic approach;
- that are performed for the purpose of acquiring new knowledge or creating new or improved goods, processes or services;
- intended to advance science or technology through the resolution of scientific or technological uncertainty; and
- that have their day to day management conducted in New Zealand.
If a competent professional is unable to tell your business whether it is possible to achieve the desired result without tests, analysis or building a prototype, there MAY be R&D that meets the definition.
This definition remains loose, however is less restrictive than before and indications are the enabling legislation will include a list of items that will be specifically excluded, making it easier to determine whether your expenditure will qualify.
In addition, from the start of the 2020/2021 income year, your business will need to obtain approval of its R&D activity ahead of making claims – which is designed to give you confidence that your business’s activities are eligible R&D and reduce the costs of repeat applications for grant funding.
What type of expenditure qualifies as eligible R&D expenditure?
A list of categories of eligible expenditure or loss will be detailed in a schedule21B, part A, to the Income Tax Act.
The schedule provides that the following expenditure, to the extent spent on R&D (i.e. must have a direct link to your business’s R&D), is eligible for the R&D tax credit regime:
- depreciation loss for items used in performing R&D. (An R&D tax credit is not available on an asset which is available for use in R&D but not actually used in the relevant income year.)
- expenditure or loss on acquiring goods and services used in performing R&D; and
- amounts paid to employees to the extent an employee’s employment relates to performing an R&D activity (some employment related costs are ineligible).
Expenditure is also excluded via schedule 21B part B.
What if my business makes tax losses?
If your business is a loss-making entity, the scheme will allow it to obtain a cash refund of its tax credit up to a maximum of $255,000 in the 2019/2020 income year, however it will need to meet various complex eligibility tests, including a requirement that it carries on business through a fixed establishment in New Zealand and meets a corporate eligibility criteria. Your business will be able to apply for both the tax credit and the R&D tax loss cash-out in the same financial year. However you may need support to assist with submitting full application information required for both.
What records does my business need to keep?
It is proposed that taxpayers must keep sufficient records to support their claim for an R&D tax credit.
Claiming an R&D tax credit A person claiming an R&D tax credit will need to keep records for seven years to substantiate the following:
– R&D activity; and
– R&D expenditure.
The type of evidence required to substantiate the above will include project documentation (such as log sheets, project plans and test results), as well as minutes of meetings, internal reports, receipts and contracts.
The onus is on the person claiming the credit to have sufficient records, therefore where your business has engaged a contractor to perform the R&D activities, you will need to ensure that the contractor provides you with sufficient information.
Most of our IP developed in New Zealand is owned offshore – is my business still eligible?
Your business would be eligible for the R&D tax credit where
- the business undertaking the R&D owns the results of the R&D; or
- the business undertaking the R&D can use the results for no consideration; or
- another company in the same group owns the results of the R&D and is resident in a country with which New Zealand has a double tax agreement.
This is a significant concession to reflect the reality that often New Zealand subsidiaries would conduct R&D activities on behalf of offshore parent entities who would ultimately own any IP created.
Can we conduct any of our R&D offshore and still be eligible?
Some R&D is simply not available or cost effective to be performed in New Zealand, however forms part of a wider R&D project based in New Zealand. This concession aims to allow funding of up to 10% of an annual claim for overseas R&D costs.
If you would like to discuss how this may be relevant for your business please contact me so I can help maximise your business’s benefit from this incentive.
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