Research & development tax incentive
Tax Alert - May 2018
Details of tax incentive released
From April 2019 businesses may be eligible for a tax incentive for qualifying R&D expenditure. Now is your chance to have your say on the design of the regime and what should qualify.
On 19 April the New Zealand Government released a discussion paper entitled “Fuelling innovation to transform our economy – a discussion paper on a Research and Development Tax Incentive for New Zealand”. The release was a joint affair between the Ministry of Business, Innovation and Employment, Inland Revenue and Callaghan Innovation and seeks public feedback on proposals for implementing a research and development tax incentive to encourage businesses to invest more into R&D.
The key proposals are as follows:
- A 12.5% non-refundable tax credit on eligible expenditure (up to a maximum of $120 million of R&D expenditure each year / $15 million tax benefit) will be available to businesses doing R&D in New Zealand, if they spend a minimum of $100,000 on eligible expenditure within one year. We set out further details of what may be eligible at the end of this article.
- This credit will be available for eligible expenditure incurred from 1 April 2019.
- A business’ imputation credit account will be credited by an amount equal to the tax credit, so that shareholders receive a benefit from the tax credit when dividends are distributed.
- The discussion paper suggests two options for incentivising R&D spending above the $120 million cap, being:
- A ministerial discretion to waive the cap for genuine claims; or
- To require pre-registration for large claims.
The Government’s goal for the R&D tax incentive is to increase R&D expenditure to 2% of GDP by 2027, to create a diverse, sustainable and productive economy. The discussion paper notes that across the OECD, almost all countries have a tax credit as part of their support for R&D, and this tax incentive will be part of wider government support for New Zealand research, science and innovation.
For those with long memories, the tax incentive has largely been modelled on the R&D tax credit regime that existed for the 2008 income year, however there are some modifications to ensure the incentive is appropriately targeted, easily accessible and lessons learnt from 2008 and other international regimes are incorporated.
In response to the introduction of the R&D Tax Incentive there will be a transition away from existing Growth Grants administered by Callaghan Innovation.
What is research and development?
R&D will be defined as:
Core activities: those conducted using scientific methods that are performed for the purposes of acquiring new knowledge or creating new or improved materials, products, devices, processes, or services; and that are intended to advance science or technology through the resolution of scientific or technological uncertainty.
Support activities: those that are wholly or mainly for the purpose of, required for, and integral to, the performing of the activities referred to above as ‘core activities’.
What expenditure may be eligible?
The discussion paper sets out two potential approaches for what will be considered eligible expenditure. The first is a simple direct R&D labour costs approach – the focus being on employment of staff performing R&D (this approach may allow a higher tax incentive to be available given it is a much narrower set of eligible costs). The second approach is to include a broader range of direct and indirect costs. Under this second approach:
- Eligible costs will include salary and wages / payments to contractors directly and actively engaged in core R&D activity; depreciation on tangible property used in conducting R&D, employee training, recruitment, relocation and travel incurred directly as a result of R&D activities, materials incorporated into prototype products and plant, items consumed and the net cost of items processed or transferred in the R&D process and payments to a person for outsourced R&D services.
- There is a proposed allocation of overhead costs under this approach (either based on apportionment or as a percentage of the direct labour costs).
- Some expenditure will be specifically excluded, including interest expenditure, donations / grant funding, depreciation attributable to the time an asset is not used in R&D and expenditure that relates to R&D activities for which the entity conducting the activity has received or could reasonably be expected to receive consideration.
For more potential exclusions (and eligible costs) see the discussion paper.
What about growth grants?
Because the Government is committed to introducing an R&D Tax Incentive there will be changes to other Government R&D funding arrangements, in particular Growth Grants administered by Callaghan Innovation.
The Government has issued a separate consultation paper “Managing the transition from Growth Grants to the R&D tax incentive”.
It is proposed that businesses with an active Growth Grant contract on 31 March 2019 can continue to receive their Growth Grant until 31 March 2020. Applications for Growth Grants and extensions to Growth Grants can continue to be made until 31 March 2019.
Existing Growth Grant recipients in a tax loss position, or who have an insufficient tax liability to take advantage of the R&D Tax Incentive, can opt in to a temporary grant that mirrors the R&D Tax Incentive for the 2019/20 year. Under this arrangement the R&D Tax Incentive rules would be followed, but the grant would be paid on a quarterly basis in the same way the Growth Grant is.
The Government is interested in receiving feedback on whether funding arrangements will be adversely affected by the transition.
Areas for further work
The discussion paper highlights two significant areas where officials will be undertaking further work: software and businesses in tax losses.
Software R&D has become increasingly important – accounting for approximately 40-50 percent of the value of Callaghan Growth grants in the last three years. Officials are considering if there needs to be a variation to the standard definition of R&D to ensure it adequately captures R&D software activity. Special treatment for some activities, such as testing and internal software development, is also being considered.
The proposed R&D tax credit is a non-refundable credit so will not provide value to businesses in tax losses. The discussion document notes that many R&D intensive businesses may be in tax losses in the early years. Currently these businesses can benefit from the Callaghan Growth grants. Further work will be undertaken with the intention that a modified version of the rules will be available for such businesses from 1 April 2020. In the meantime, Callaghan Growth grants will continue to be available, along with the existing R&D loss cash out scheme, which will remain in place for at least the 2019-2020 income year.
The discussion paper poses a range of questions for businesses to consider. Submissions received will help ensure the final design of the rules is creating the right incentives and will help towards the goal of increasing New Zealand’s R&D expenditure to 2% of GDP. Consultation on the proposals is open until 1 June 2018.
Please speak to your usual Deloitte tax advisor for further information about these proposals.
May 2018 Tax Alert contents
- New Zealand GST on low value imported goods announced
- Buyer beware: ring fencing may be here
- Australia’s GST on low value goods - what you need to know
- Research & development tax incentive
- Employee Share Schemes – It’s time to act
- Are you ready to file your final FBT return?
- Post-BEPS transfer pricing legislation refresh requires taxpayer action
- How non-residents can get an IRD number without a bank account
- Have your say on taxing short-term accommodation
- Recent Developments