Government announces R&D tax incentive scheme details
Tax Alert - October 2018
By Aaron Thorn
On Wednesday 3 October 2018 the New Zealand Government announced updated details of the research and development (R&D) tax incentive scheme that will be available from the 2019/20 income year. Following a period of consultation the Government has made a number of positive changes to the design of the scheme that should address many of the concerns affected businesses had with the scheme as originally proposed in April 2018. You can read the high-level outline of changes made in this document. More detailed documents will be released shortly.
The Government intends that the scheme will go live from the beginning of the 2019/20 income year, which means for taxpayers with an early balance date it will be relevant very soon (and for those with an October balance datewill apply from 1 November 2018). This timeframe will depend on the Government being able to draft and pass the legislation in a reasonably speedy fashion. This means businesses undertaking R&D need to get ready to be able to adopt the new rules quickly, to take full advantage of the new R&D tax credit.
- The tax credit rate will now be 15%, rather than the 12.5% rate originally proposed.
- The definition of R&D is to be widened, as are the rules around ownership and eligible expenditure. The rules will now allow for R&D to be conducted by a multi-national group in New Zealand where the resulting intellectual property will be held off-shore in a group company in a country with which New Zealand has a double tax treaty.
- The minimum R&D spend that will qualify for R&D credits is now $50,000 (down from the $100,000 originally proposed).
- Cap of $120 million per year per business for R&D expenditure eligible for a credit, although there will be provision for businesses to apply for an extension if they can demonstrate that New Zealand will “derive a substantial net benefit from the intended completion of the R&D”.
- All legal entities are eligible, including State Owned Enterprises, however Crown Research Institutes DHB's, tertiary education organisations and majority owned subsidiaries are ineligible. This is an extension of the original proposal which suggested that all such Government-related entities should be excluded from the regime..
- All Callaghan R&D Growth Grants in place on 1 April 2019 will be automatically extended for two years, until 31 March 2021. Businesses can however only claim under one regime - either the Growth Grant or the R&D tax credit regime. Companies that do not meet the criteria for renewal of a Growth Grant will be allowed a contract extension until 31 March 2019 or the end of a recipient’s 2018/19 income year, whichever is the latter.
Definition, ownership and eligibility
The definition of R&D has, as expected, been improved from the original proposals. The requirement for the R&D to be conducted using “scientific methods” has been replaced with the requirement to use a “systematic approach”. Core R&D activities must be performed for the purpose of “acquiring new knowledge or creating new or improved processes, services or goods and must seek to resolve scientific or technological uncertainty”. If the information is available publically or could be deducted by a competent professional, it will not be R&D.
The rules around ownership have been relaxed to acknowledge corporate structures can include more than one company. R&D expenditure will be eligible for a tax credit if the resulting R&D is owned by the business undertaking the activity, the business can use the R&D for no cost, or another company in the same group owns the R&D (so long as that company is resident in a country with which New Zealand has a double tax agreement).
Eligible expenditure will include a broad range of R&D costs, including salary and wages for employees undertaking R&D, depreciation on assets used for R&D, costs of consumables used in R&D, and overheads.
The accounting treatment of the expenditure will not determine its eligibility but R&D costs that are capitalised and are expected to create a tangible asset will be ineligible (expenditure on a capitalised intangible assets will be eligible). This may have adverse outcomes for businesses that traditionally capitalise their R&D spend to strengthen their balance sheets, which may result in reclassification and apportionment issues.
Originally the Government proposed that the R&D credit regime wouldn’t have refundable credits, although credits would be able to be carried forward to future years for businesses in loss. The Government has confirmed that it will look at this in more detail and potentially introduce a refund mechanism from April 2020 (a year after the regime begins). In the meantime businesses in loss can continue to access the R&D tax-loss cash-out scheme that is currently in place in addition to the R&D tax credits.
The R&D tax-loss cash-out provides a payment of up to $225,000 (on R&D expenditure of up to $1.7 million). To qualify for this R&D tax-loss cash-out, the business would have to meet the following tests in the Income Tax Act 2007:
- Corporate eligibility test: Broadly this means the business is a New Zealand resident company, is not a listed company, is not treated as resident in another country, and is not one of various Government-related entities or more than 50% Government owned; and
- Wage-intensity test: 20% of the company’s expenditure on wages and salaries must be on R&D. This includes expenditure on employee and shareholder-employee salaries and 66% of contracted R&D. It does not include labour employed on non-eligible R&D activities.
It is important to remember that R&D tax losses that have been cashed out are no longer available to be used to reduce future taxable income and the cash-out amount is repayable in certain circumstances, such as liquidation, moving offshore, or selling assets such as IP so the R&D tax-loss cash-out often operates like an interest-free loan rather than a grant.
- Up to 10% of an annual R&D claim can be related to R&D carried out overseas. It was originally proposed that this be limited to overseas expenditure relating to projects that were predominantly undertaken in New Zealand, however this project-related restriction has been removed.
- Inland Revenue will administer the R&D tax credit, with support by Callaghan Innovation.
- Taxpayers will initially be able to retrospectively lodge R&D claims in respect of an income year up to one year after the latest date for filing that year’s income tax return. However from 2021 businesses will be required to seek Inland Revenue approval of their R&D activities’ eligiblity within the income year in which the R&D is conducted. The intention is that this will give businesses certainty that the expenditure will qualify. Businesses with expenditure over $2 million will be able to follow a different, more stream-lined, process.
- Expenditure with a dual purpose (ie both R&D and ordinary commercial activity) was originally scoped out of the rules, but any such will now be eligible expenditure, to the extent it relates to R&D and relates to incremental R&D spend (i.e. more than would otherwise have been spent under normal commercial activities).
What should you do now?
The new R&D tax incentive regime is coming soon, so now is the time to get prepared. Documents and processes should be in place to enable your business to identify eligible projects and expenditure as soon as the rules are in force. Documentation will become very important, as will the ability to separate eligible and non-eligible expenditure.
Although there is a reasonably long period to make the R&D claim for the first year, from the second year this process will have to take place within the income year that the R&D is conducted. If you need any help in understanding the new rules and getting ready for them, contact our R&D National Leader, Aaron Thorn, or your usual Deloitte advisor.
October 2018 Tax Alert contents
- Government announces R&D tax incentive scheme details
- Shining a light on the Tax Working Group Interim Report
- Payday reporting for employers and intermediaries is going digital … Are you ready?
- Accounting for deferred tax on employee share schemes
- Global Tax Reset - Transfer Pricing Documentation Summary
- A Snapshot of Recent Developments