INSIGHT: New Zealand’s New R&D Tax Incentive

Government support in the research and development (R&D) space is changing with the end of Callaghan Innovation Growth Grants and the introduction of the R&D Tax Incentive. The R&D Tax Incentive received royal assent on May 7, 2019 and is effective from the 2019–2020 tax year.

Main Provisions

The main provisions of the regime are:

• 15% tax credit applied against income tax liability;
• minimum spend of NZ$50,000 ($33,000), capped at NZ$120 million (including associates) per year;
• exception to minimum spend when you use an approved research provider;
• 10% of your overall eligible R&D expenditure can be conducted overseas;
• specific definition of R&D in relation to regime with exclusions for specific activities and costs;
• eligible internal software expenditure capped at NZ$25 million;
• limited form of refunds for the first year of the scheme that will mirror the R&D tax-loss cash-out scheme. A more comprehensive policy will be in place for the second year of the scheme;
• current Callaghan Innovation Growth Grant recipients and associated entities are ineligible to claim the R&D tax credit in the same income year.

What are the Criteria for Eligibility?

There are four broad tests you will need to satisfy to meet the requirements of the R&D Tax Incentive.

Is the Business Eligible?

If you carry on business in New Zealand through a fixed establishment it is likely that you will be eligible. You will also need to ensure that the business (or someone within your corporate group) has full control over the “core R&D activity.” A key requirement of the regime is that you must own the results or be able to use the results of the R&D at no extra cost.

Is the Activity Eligible?

To be eligible the core R&D activity must take place in New Zealand. A “core R&D activity” is defined as an activity that:

• is conducted using a systematic approach; and
• has a material purpose of creating new knowledge, or new or improved processes, services, or goods; and
• has a material purpose of resolving scientific or technological uncertainty.

It excludes any activity where the knowledge required to resolve the uncertainty is publicly available or can be deduced by a competent professional in the relevant scientific or technology field.

Is the Expenditure Eligible?

You must have incurred at least NZ$50,000 of eligible R&D expenditure in New Zealand: the exception to this is if you incur your expenditure with an approved research provider which is not subject to any minimum spend. Approved research providers will be published on the Inland Revenue website.

Expenditure must have been incurred in the relevant income year.

It must meet the eligible expenditure described in Schedule 21B Part A of the Income Tax Act 2007.

The good news for multinational entities is that the R&D being undertaken does not have to relate to the New Zealand business: instead the core R&D activity must take place in New Zealand with a maximum of 10% R&D conducted overseas in relation to the core R&D activity.

Businesses need to be aware that payment of salary, wages or a service payment to a nonresident for R&D services is included in the overseas spend, even if the R&D they undertake occurs in New Zealand.

Have Deadlines for Filing Been Met?

For year one of the regime you must file your income tax return within one year of the latest filing due date for the return and file the R&D supplementary return within 30 days of your income tax return due date. Any returns received after this time frame will be rejected.

Year two requirements are in the process of being finalized. For any taxpayer there will be an in-year approval process for the R&D activities that they intend to include in their tax credit claim, managed via Inland Revenue. This approval is mandatory for any taxpayer seeking to make an R&D tax credit claim with R&D expenditure below NZ$2 million. Businesses which expect to spend more than NZ$2 million on R&D will not be required to obtain in-year approvals but instead will be required to provide an R&D certificate from an accepted R&D certifier with the supplementary return.

Planning Points

Record-keeping must be contemporaneous—you won’t be able to create the supporting R&D documentation at the end of the year. Think about whether your existing systems and processes will enable you to demonstrate eligibility across the four tests outlined above.

There are strict time frames to lodge your supplementary return in year one and to obtain approval of the proposed R&D projects from year two.

Test of “new” knowledge, goods or services applies worldwide—not “new” to your business or to New Zealand. You must be able to demonstrate the “competent professional” test at the time you commenced your investigation—this is especially important in areas where technological or scientific advancements move fast. Publicly available doesn’t mean “free.”

The NZ$120 million cap includes all amounts claimed by you and any associates. You will need to be able to demonstrate that you and your associates have not exceeded this cap or are not claiming for the same expenditure.

Similarly, the restriction on claiming the R&D tax credit and a Callaghan Growth Grant applies to you and any associates.

The R&D activity does not have to be successful to be eligible expenditure.

You will need to explicitly (not just implicitly) be able to demonstrate you have control over the core R&D activity (when undertaken by an associate or a contracted or approved provider) as well as ownership of the intellectual property (IP) or right to use at no extra cost, on a group basis. Ownership of the IP by a group company, including an offshore group company, is permitted.

The R&D Tax Incentive has been created to help increase New Zealand’s business R&D expenditure to 2% by 2027. To ensure you are one of the businesses able to fully utilize this opportunity, you will need to ensure that you are creating appropriate documentation and processes to support any claim you make. If you are unsure what this means for your business you may want to consider taking professional advice.

Anand Reddy and Jill Somerfield are Partners and Nadine Williams is a Director with PwC New Zealand.

The authors may be contacted at: anand.reddy@pwc.com; jill.somerfield@pwc.com; nadine.williams@pwc.com