New Zealand's Inland Revenue Department has released updated information to help businesses claim the R&D Tax Incentive.
Presently, legislation is being considered by lawmakers that would enhance the incentive, the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill. It is expected that this bill will be made law (enacted) in March 2020, in time for the 2020/21 tax year.
The Research and Development Tax Incentive
New Zealand's R&D Tax Incentive is available from the 2019/20 tax year and features a credit rate of 15%.
To be eligible for a tax credit, a person must spend at least NZD50,000 (USD31,200) on research and development in a given year. The maximum amount of expenditure that is eligible for a tax credit is NZD120m, unless a person has obtained the Commissioner's approval to exceed the cap.
The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill, introduced to Parliament in late June, would mean more businesses claiming the Tax Incentive will be eligible for refunds of their research and development tax credits from the 2020/2021 tax year onwards.
Under the changes, a pre-profit start-up investing NZD2m in eligible research and development would be entitled to get back NZD300,000 of its investment in cash, provided it meets the broader conditions. A cap would be introduced based on the payroll taxes paid by a firm in each year.
Announcing the changes on July 12, 2019, Minister of Research, Science, and Innovation, Megan Woods, said: "Right now, many businesses are investing in research and development but because they're yet to turn a profit – which is typical for the first few years of a new business – their access to tax credits under the Government's NZD1bn R&D scheme is limited."
"The proposed changes aim to simplify this to ensure a pre-profit firm is able to get the financial support it needs to innovate and succeed," Woods said.
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Guidance For Businesses
New Zealand has issued guidance on the tax break, legislated for in the Taxation (Research and Development Tax Credits) Act 2019, and launched an online tool to assist businesses to determine whether they are eligible for the tax break.
The country initially released guidance on the legislation in Tax Information Bulletin (Vol 31 No 9) and has subsequently published "Research and Development Tax Incentive: Guidance" (IR1240), available on the forms and guides page of the New Zealand Inland Revenue Department's website. A PDF of screenshots from the R&D supplementary return is also available on this page.
Among other things, the guidance highlights that only eligible spending can be taken into account when calculating the credit. A critical part of the definition of an R&D activity is the requirement that it must seek to resolve scientific or technological uncertainty. For instance, investigating a market for a product or service is specifically excluded.
In November 2019, the section relating to claiming the tax credit was updated to reflect progress with operational design.
Claiming The Credit
To claim the research and development (R&D) tax credit, a taxpayer must enrol for the tax credit through myIR and file both:
- their income tax return; and
- an R&D supplementary return.
The R&D supplementary return includes a description of the taxpayer's R&D activities and their expenditure on those activities. This return must be filed online.
From the 2020-2021 income year, taxpayers will be required to have their R&D activities approved by the Commissioner before they are eligible to submit a claim for an R&D tax credit.
Taxpayers should apply for and obtain general approval before they file their income tax return and R&D supplementary return.
If they have or expect to have more than NZD2m of eligible R&D expenditure in a tax year, they must do at least one of the following:
- obtain general approval; or
- provide Inland Revenue with an estimate of their R&D expenditure and provide an R&D certificate with their supplementary return, confirming that their R&D expenditure was reviewed by an R&D certifier and calculated in accordance with the R&D tax credit rules. This alternative is known as the "significant performer regime".
If a taxpayer has not applied for general approval or opted into the significant performer regime by the relevant deadline, which is May 7 for businesses with a standard balance date, they will not be able to claim R&D tax credits for that year.
It is therefore important that businesses plan ahead to ensure they will be able to claim the R&D tax incentive. Inland Revenue will aim to process most applications within eight weeks of receipt.