06 November 2018 New Zealand introduces new research and development tax incentive The New Zealand Government introduced, on 25 October 2018, the Taxation (Research and Development Tax Credits) Bill. The Bill contains the new Research and Development (R&D) tax incentive, a 15% tax credit available from the 2019/20 income year. The incentive is an additional initiative to the existing small-scale R&D tax loss cash out regime. The R&D tax incentive will apply at a rate of 15% on expenditure on qualifying R&D activity, with a cap of $120 million1 expenditure per company. The changes will over time move New Zealand's support for R&D from a grants-based to a tax-based approach. The Government has targeted increased spending on private sector R&D to make New Zealand more competitive internationally for innovative business. New Zealand's current spending on R&D is comparatively low in relation to other Organisation for Economic Co-operation and Development (OECD) countries. The Government sees innovation as important in increasing New Zealand's productivity, which is low by OECD standards. The Government has set aside $1.1 billion over four years in operating expenditure to incentivize innovation (an increase from $373 million in 2017). This increase in spending will enable a wider range of businesses to access R&D incentives. Previously, a smaller number of Growth Grants were available through Callaghan Innovation (a Crown-owned entity). While valued by recipients, such grants are time limited and have a complex application process, therefore many innovative companies do not receive a grant.
The incentive will apply at a rate of 15% on eligible expenditure, which will bring the scheme broadly in line with existing Growth Grants (subject to comments around refundability below) and with a previous R&D tax incentive available for the 2008/2009 year. The existing small-scale R&D tax loss cash-out regime will continue to operate and will be able to be utilized in tandem with either the R&D tax incentive or, in the short-term, Growth Grants. Growth Grants will be phased out and replaced with the R&D tax incentive. Growth Grant recipients can continue to receive their grants until 31 March 2021. Businesses will not be able to claim both a Growth Grant and the R&D tax incentive in the same income year, so they will have to make a choice during the transition period. The R&D tax incentive differs from Growth Grants in several key areas, including a lower minimum expenditure threshold, a wider test for eligible activity that does not require scientific methodology, no intensity requirements for total R&D spend, and the allowance for some R&D to be undertaken outside of New Zealand. The R&D tax incentive features several eligibility tests that must be satisfied to claim the tax credit. The tests include eligibility of the person claiming the credit, eligible R&D activity, and eligible R&D expenditure. The general requirements are that a business be performing a "core activity" in New Zealand, that they carry on business in New Zealand through a fixed establishment, and that they have certain controlling rights in relation to their core activity. New Zealand subsidiaries of multinational organizations will be able to access the tax credit, even where ownership rights are held by overseas parent entities. A business may also perform their core activity through a contractor, in which case the principal business is eligible to claim, but the contractor may not claim in respect of the contracted activity. Businesses will need to perform eligible activities to be able to claim the tax credit. Businesses must perform a "core activity," which is an activity that:
The test will not be satisfied if the knowledge required to resolve the uncertainty is publicly available or deducible by a competent professional working in the relevant field. Businesses may also claim in respect of "supporting activities," which are only or mainly for the purpose of, required for, and integral to a core activity. Activities conducted outside of New Zealand cannot be core activities, but may be eligible as supporting activities. There is also a schedule of activities that are specifically excluded from being core activities and supporting activities. The tax credit may only be claimed for expenditure in relation to an eligible activity. A schedule lists specific items of expenditure that are eligible and ineligible. There is a general requirement that a business incur a minimum of $50,000 in eligible expenditure for the income year, or have approved research provider expenditure. For partnerships and look-through companies, the minimum threshold can be satisfied by looking at the total eligible expenditure of the business. There is a limitation on expenditure that can be claimed where an R&D activity is performed in the course of commercial production. Internal software expenditure is excluded where it relates to ordinary internal administrative functions, and is otherwise subject to a $3 million cap. Expenditure on R&D activities performed through a contractor is limited to 80% of the amount paid to the contractor by the principal. Expenditure incurred on R&D activities performed outside New Zealand is limited to 10% of a business's total tax credit claim. From the 2020-21 income year, businesses will need to have their core activities approved prior to making a claim in respect of those activities. Subject to some conditions, businesses with R&D expenditure greater than $2 million can opt-out of the core activity approval requirement. These businesses may also apply for optional criteria and methodology approval in respect of determining their activities and apportioning their expenditure. A tax credit of 15% of the eligible expenditure that was incurred during the income year can be claimed, up to an expenditure cap of $120 million; effectively meaning that a business may receive a maximum of $18 million in tax credits each year. Businesses may apply to exceed the cap if they can show that the activity the expenditure relates to will give rise to a substantial net benefit to New Zealand. Where businesses have more R&D tax credits than their income tax liability, their tax credits are refundable up to a maximum of $255,000, provided certain criteria are satisfied. The criteria for refundability includes:
R&D tax credits that are not refunded can be carried forward subject to the pre-existing tax loss shareholder continuity rules. The Government intends to undertake further policy work on refunding R&D tax credits and the level of refundability may increase from the 2020/21 income year. Businesses that engage in R&D in New Zealand, or are considering doing so, should begin preparing systems and documenting their activities now. Preparation of evidentiary documents in real time will be crucial. The R&D tax incentive is intended to increase business spending on R&D. Preparation should therefore include modelling the potential impact of the R&D tax incentive and Growth Grant options, with a view to assessing whether previously marginal projects will now become viable. Businesses in receipt of Growth Grants need to determine which program will give them the better outcome and decide on their transition path. The R&D incentive applies from the 2019/20 income year, which commences from as early as October 2018 for some early balance date taxpayers. Businesses will be required to file their R&D supplementary returns within 30 days of filing their income tax returns. The Government anticipates the Bill will be enacted by mid-2019. For companies with the New Zealand standard balance date of 31 March, the R&D tax incentive will take effect from 1 April 2019. It is likely that some changes will be made to the Bill before enactment as a result of Parliamentary Select Committee scrutiny over the coming months. Document ID: 2018-2221 | ||||||||||||||||||||||
