Over the last few years there have been various iterations of tax credits for businesses that undertake research and development. The New Zealand government is trying to encourage onshore innovation with dreams of our own Silicon Valley experience. Below is a summary of tax current landscape which sheds some light on what you might be entitled to – and it may be a pleasant surprise.

R&D expenditure

R&D costs money. Lots of it. Trial and error can be very expensive for businesses. Therefore, Inland Revenue has specific rules around deductibility of certain types of scientific, and research and development expenditure. The rules allow businesses to choose to allocate certain research and development deductions to income years after the income year in which the expenditure was incurred. This flexibility creates a better timing match between the income from research and development and the expenditure incurred.

Cash out tax credit

In addition, to assisting with the alignment of income and expenditure, there has been an option in place since April 2015 for innovative start-up companies to convert their tax losses (arising from qualifying R&D expenditure) into refundable tax credits instead of carrying it forward to the next income year. The aim of this is to help with cash flow.

This has been effective for those businesses who choose to utilise this option. Now, some of those businesses are getting into positive tax positions and they no longer qualify for the “cash out tax credit”.

New R&D Tax Credit

The newest tool in the tax toolbox for R&D businesses is the newly introduced tax credit scheme for businesses which undertake R&D but are not in a loss position. It is designed to incentivise a person for performing, or contracting for the performance of, activities to create new knowledge, or new or improved processes, services or goods. The new tax credit rules apply from the 2019/2020 income year. That is this year that we are currently in. The tax credit is effectively a 15% refund of eligible expenditure. The legislation is crafted to ensure that activities do not inappropriately qualify for R&D tax credits. 

In its simplest form, the criteria under the new rules are that a person, or joint venture must:

• Perform a core R&D activity in New Zealand, either themselves or through an R&D contractor who carries on business in New Zealand through a fixed establishment in New Zealand, and
• Carry on a business in New Zealand through a fixed establishment in New Zealand (or be a non-business researcher, that is an industry organisation to which a levy is payable under New Zealand statute).

PLUS, either of the following:

• The person, or a member of the person’s corporate group resident in New Zealand or in a jurisdiction with which New Zealand has a double tax agreement, or a joint venture of which the person is a member, must own the results of the relevant R&D activities, or
• The person or a joint venture of which the person is a member may use the results for no further consideration.
• The key points above are that the core R&D activity must take place in New Zealand. The activity must result in ownership of the results of the R&D, or that the results can be used at no extra cost to the person applying for the tax credit. This is central to the reason for the incentive – Government wants the R&D to take place in New Zealand and not off-shore.

The list of activities which may qualify as core R&D activities is very broad, so the legislation sets out an exhaustive list of activities that do not qualify. Each application will depend on the facts and activities of the business applying for the tax credit, so taking advice on whether your business activities qualify is an important first step.

Ineligible persons

There are always some strings attached. If you have outstanding tax returns you are not able to claim the tax credit. So, make sure your taxes are up to date.

This tax credit regime is only one of several incentives. Most people in the R&D industry will be familiar with Callaghan Innovation. In years gone by there has been a perception, rightly or wrongly, that applying for Callaghan grants was too hard. This is why Government has introduced the new R&D tax credit to assist businesses. The new rules rely on very similar criteria as the Callaghan Innovation Growth Grant. It is because of the similarity, although different delivery mechanism, that a taxpayer who is the recipient of such a grant (or they are directly or indirectly controlled by, or associated with, a recipient of such a grant) cannot apply for the new R&D tax credit. It is a case of one or the other.

The R&D tax credits are also not available to non-residents.

Do you qualify?

If you think that your activities involve research and development that may qualify for the new R&D tax credit, or you are in the business of research and development and you have not yet received advice on any of the above tax incentives, contact your Bellingham Wallace advisor today to discuss this further.

By Graham Lawrence (Director)

and Carla Cross (Senior Tax Manager)