R&D Bill reported back

Tax Alert - October 2015

On 4 September 2015, the Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill (“the Bill”) was reported back to Parliament by the Finance and Expenditure Committee (“FEC”).  The Bill was first introduced on 26 February 2015 and contains amendments aimed at improving the current tax settings within a broad-base, low rate framework.  The FEC has recommended the Bill be passed with some amendments.  The Bill includes the following proposals:

  • Allowing tax deductions for certain “black hole” business expenditure;
  • Allowing bodies corporate to choose whether they register for GST;
  • Simplifying the administration of the child support scheme;
  • Extending the choice of method for calculating fringe benefit tax to a wider range of employers;
  • Repealing the “simplifying filing requirements for individuals” legislation enacted in 2012, which has yet to take effect;
  • Reducing the number of individuals required to file income tax returns;
  • Making some improvements for families receiving Working for Families tax credits;
  • Clarifying the rules for apportioning expenditure on mixed-use assets; and
  • Conferring charitable donee status on several charities.

In addition to the above, a major component of the Bill includes proposals allowing companies to “cash out” their tax losses from research and development (“R&D”) expenditure.  As a reminder, proposals will allow New Zealand resident, start-up companies engaged in R&D to cash out their R&D expenditure by claiming 28% of expenditure as a tax credit (subject to certain limitations).  The tax credit will be a timing benefit and will have to be repaid when the business makes income in relation to the R&D expenditure in later income years.

The eligibility criteria of the proposed rules originally excluded group companies where a member of that group includes a foreign company.  This would have severely limited the applicability of the regime because overseas businesses prefer to invest in or enter into contracts with companies that are incorporated within their jurisdiction and R&D start-up companies often have offshore subsidiaries for sales or marketing purposes.

For the above reasons, Deloitte prepared a submission on the proposals and submitted that the above eligibility criterion should be removed as it restricts high-growth companies and start-up R&D companies that are raising funds and/or doing business offshore from applying the proposed rules.  Officials agreed with this suggestion and modified proposals to ensure group companies, where a member of that group includes a foreign company, are not excluded from the application of the proposed rules.

If you have any questions about the proposals to allow the cashing out of R & D tax losses or the bill’s other contents, please contact your usual Deloitte tax advisor.

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