The Government has set a target of raising the amount of research & development (R&D) activity undertaken in New Zealand to 2 percent of gross domestic product (GDP) by 2028.
Although a survey completed by Stats NZ showed businesses spent $2.4 billion on R&D in 2019, double what was spent in 2012, New Zealand’s total R&D expenditure as a proportion of GDP is still half of the OECD average of 2.4 percent. The R&D Tax Incentive (RDTI) is designed to encourage businesses already performing R&D to do more, and other businesses to start undertaking R&D. Businesses spending between $50,000 and $120 million a year on R&D may be eligible to claim a 15 percent tax credit on eligible R&D core activities.
Businesses tend to underinvest in R&D as the business itself may not capture all the benefits of the investment. Society typically benefits from the knowledge generated from business R&D when it is shared by the business. The government considers these wider benefits to New Zealand to justify the provision of a subsidy.
What are the essentials of the RDTI?
- applies from the 2019/20 income tax year
- 15 percent tax credit applied against income tax liability
- minimum spend of $50,000 on R&D, capped at $120 million per year
- there is no minimum spend requirement if businesses engage through an approved research provider
- 10 percent of overall eligible supporting R&D can be conducted overseas
- cash refundability for loss-making entities
What are eligible R&D core activities?
Core R&D activities must do all the following:
- be performed to acquire new knowledge, or create a new or improved process, service or good
- seek to resolve a scientific or technological uncertainty
- use a systematic approach
- happen in New Zealand
- not appear on the list of ineligible R&D activities
In order for your R&D to be eligible you must seek to resolve a scientific or technological uncertainty.
This refers to a knowledge gap in a particular field. In other words, applying existing knowledge in a new situation won’t fit the criteria.
You must be trying hard to solve a difficult problem or do something that professionals in the same field don’t know how to do without going through an investigative process to find the answer.
Questions you need to ask to find out if your business is eligible:
1) Is your business developing a new or improved product, service or process and/or new knowledge?
The knowledge, processes, services or goods must be new to the world, not merely new to your business or New Zealand. Your business’s R&D would meet this test even if your activity has been done before, but there is no publicly available information on how to do it.
It isn’t necessary that the R&D is successful. Unsuccessful R&D activities can still qualify as it also increases knowledge.
2) Is your R&D trying to resolve a scientific or technological uncertainty?
If a professional in that field, with access to publicly available information, does not know if what you want to do is achievable, there may be scientific and technological uncertainty.
It’s important to note that scientific and technological uncertainty does not exist if:
• The information to resolve uncertainty is publicly available, or
• A competent professional could resolve uncertainty without conducting a systematic process to create new knowledge or test possible solutions.
3) Are you using a systematic approach to conduct R&D?
A systematic approach is a planned, structured and documented process to test possible solutions for scientific and technological uncertainty.
The systematic approach requirement is intended to disqualify accidental discoveries or using methods such as trial and error.
4) Is your activity to resolve scientific or technological uncertainty taking place in New Zealand?
Eligible core R&D activities must be performed in New Zealand. However, up to 10 percent of your total eligible expenditure can be for supporting activities conducted overseas, provided the activity is supporting a core activity taking place in New Zealand.
More information on the RDTI can be found on the IRD & RDTI websites.
Other R&D tax credits and grants:
There are currently two other channels available to companies in relation to R&D:
Callaghan Innovation Grants – The RDTI replaces the Callaghan Innovation Growth Grant which retires in the 2021-22 tax year. If you received or are associated with an entity already receiving a Growth Grant, you cannot claim the RDTI. However, Callaghan grants such as the Project Grant and Student Grant are still available for R&D intensive companies.
Research and Development Loss Tax Credit (RDLTC) – The RDLTC regime has been in place since 2016, with many companies receiving significant cash refunds from the IRD as a result of their R&D expenditure. Cashflow can be a significant issue, particularly for R&D intensive start-up companies. In the past, when an R&D intensive company made a tax loss, it could only carry forward the loss to offset against future years’ income. The RDLTC regime allows for eligible losses arising from eligible R&D expenditure to be refunded in cash each year. It’s important to note you can only claim under this regime if your company is in a tax loss position.
The comments in this article are of a general nature and should not be relied on for specific cases. Taxpayers should seek advice.