A recent survey undertaken by Statistics New Zealand showed a 29 percent increase in the amount businesses spent on research and development (R&D) in 2016, boosting total R&D expenditure in New Zealand to $3.2 billion.
However, New Zealand’s total R&D expenditure as a proportion of GDP is still just 1.3 percent; far behind the OECD average of 2.4 percent.
The growth in R&D will be welcome news to the Government given the commitment it has made to support and incentivise business to undertake more R&D.
If you are in business wanting some assistance in relation to you R&D activities, what channels are available to you?
The R&D loss tax credit regime is one such channel. It was introduced in 2016 as part of the Government’s Business Growth Agenda. It’s been in place for over a year now, with a number of companies receiving significant cash refunds from Inland Revenue as a direct consequence of their R&D spend.
For R&D intensive companies – in particular start-up companies – cash flow can be a significant impediment. Before the R&D loss tax credit regime was introduced, R&D intensive companies that made a tax loss could only carry the loss forward to future income years to offset against future years’ income.
However, this was often of little benefit as for many companies it could take years of sustained R&D before they came up with a marketable product or service that derived a profit. Even then, there is no guarantee that a company would survive long enough to make it to market.
To help alleviate this problem, the R&D loss tax credit regime allows eligible tax losses arising from eligible R&D expenditure to be refunded in cash to the company each year, thus providing R&D intensive companies with much needed cash.
To recap, New Zealand companies can receive a cash tax credit where they have incurred tax losses as a result of eligible R&D expenditure and at least 20 percent of their wage bill is spent on R&D. The amount of loss that can be cashed in is the lesser of:
• Net loss for the year x 28 percent; or
• Total R&D expenditure of the year x 28 percent; or
• Total R&D labour expenditure for the year x 1.5 x 28 percent
The maximum available cash loss tax credit is $224,000 for the 2016/17 tax year, increasing by $84,000 for every tax year thereafter to a maximum of $560,000 from the 2020/2021 year onward.
Funds & grants
The Ministry of Business, Innovation and Employment is responsible for encouraging innovation in New Zealand businesses and has a number of grants and funds available to support businesses innovation and R&D.
The Endeavour fund is one of these, investing in research aimed towards transforming New Zealand’s economic performance, sustainability and integrity of the environment, and strengthening society.
Funding is available through two different areas MBIE refer to as: 1) Smart Ideas; and, 2) Research Programmes:
• The Smart Ideas investment mechanism is aimed at innovative research ideas that have a high potential of benefiting New Zealand. Applicants can request between $400,000 and $1million over two to three years.
• The Research Programmes investment mechanism is aimed at more credible, well-defined research ideas, which have a high potential of positively transforming New Zealand’s future in areas of future value, growth, or critical need. Applicants can request over $500,000 per year for a term of three to five years.
For businesses undertaking research in conjunction with other overseas parties, the Catalyst fund (previously known as the International Relationships Fund) is available to support activities that are aimed towards creating multilateral partnerships between New Zealand and other countries, to improve the quality of New Zealand’s science and innovation.
Further, the Government agency Callaghan Innovation offers a range of R&D grants aimed at hi-tech businesses, including:
• Getting Started Grants, aimed at New Zealand businesses who are in the early stages of, or new to, R&D. These grants are intended to support start-up businesses through the initial R&D roadblocks, such as troubleshooting, prototyping, initial testing, or strategy development.
• Project Grants, intended for businesses looking to expand their R&D, or who need support in developing specific R&D projects. They are designed to help businesses push boundaries and break new ground in R&D projects. To qualify, a business must not have received, or be eligible for a growth grant.
• Growth Grants, aimed at experienced R&D businesses, who want to increase their R&D investment and gain a greater market impact. Unlike the getting started or project grants, the growth grant lasts for three years, and can be extended by another two years. To qualify for the growth grant, the business must have spent at least $300,000 per annum and 1.5 percent of revenue on eligible R&D in each of the preceding two years, or plan to exceed these levels over the next year.
More information on each of the funds and grants can be found on the MBIE and Callaghan Innovation websites.
The R&D loss tax credit regime together with the funding and grants available provide much needed assistance to the businesses that will drive New Zealand’s future growth and prosperity. Businesses should be taking advantage of these, and any other leg-ups they can get.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.