Back in Budget 2007 the then Labour Government introduced a short-lived Research and Development (R&D) tax credit scheme that only lasted for the 2008/09 income year before it was abolished by the in-coming National Government in favour of R&D grants.
Fast forward to 2019 and the now Labour Government has reintroduced a R&D tax credit scheme as a step towards achieving the Government’s goal of increasing New Zealand’s total R&D spending to 2% of GDP by 2028. By providing a tax incentive in the form of a tax credit, the Government aims to lower the cost to businesses of performing R&D which will in turn create an incentive for more R&D to be undertaken.
The scheme, not to be confused with the existing R&D tax loss ‘cash-out’ scheme put in place by the National Government in 2015, will provide businesses with a 15 per cent tax credit to offset the business’ income tax payable. At this stage there is also limited refundability (up to $255,000) available to some businesses who are in a tax loss position, or who have insufficient tax payable to offset all their tax credits. There is an ability to carry forward excess R&D credits in certain situations.
The tax credit is available from the beginning of the 2020 income year, so if your business has a standard 31 March balance date, this means you need to start recording your R&D expenditure now in order that you will be able to complete and file your R&D claim on time.
To qualify for the tax credit a business must:
- Have incurred a minimum of $50k eligible expenditure on eligible R&D activities;
- Perform a core R&D activity in New Zealand, or have a contractor perform one on their behalf;
- Carry on business through a fixed establishment in New Zealand (unless the person is a tax charity or levy body);
- Have controlling rights in relation to the core R&D activity (or ensure these rights are held by a member of the person’s corporate group); and
- Own the results of their R&D activities or have the right to use the results of the activities for no further consideration.
A core R&D activity is an activity performed and managed in New Zealand that is conducted using a systematic approach, has a material purpose of creating new knowledge, or new or improved processes, services, or goods, and resolving scientific or technological uncertainty.
Most types of expenditure incurred on R&D activities are eligible, including expenditure on wages and salaries, consumables, depreciation, and the costs of creating intangible property. Some expenditure is capped, such as R&D contractors, internal software development and R&D performed overseas. Some expenditure is specifically excluded, such as interest, up-front cost of acquiring assets or creating tangible depreciable assets, expenditure that relates to Government grants, and some employee-related expenditure.
Eligible expenditure will be capped at $120m unless approval is obtained to exceed this threshold.
To claim the credit for the 2020 income year your business must file its income tax return on time (within one year after the due date for filing) and must lodge your R&D return via myIR within 30 days of filing the income tax return. For the 2021 and future years, an in-year approval process will be introduced.
Businesses that receive a Callaghan Innovation Growth Grant during the year will not be eligible for the R&D tax credit, nor are businesses which are, or are controlled by or associated with, a Crown Research Institute, DHB or tertiary education organisation.
If you are currently undertaking R&D in your business, or thinking of doing so in the near future, we strongly encourage you to find out now if your business is eligible for the R&D tax credit and start collating the necessary records to support your claim. Contact your Hayes Knight advisor to discuss your eligibility.