Getting to grips with government’s new R&D tax credit

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The Labour-led government has resurrected its old R&D tax credit and given it a new set of clothes.

The government’s goal is to increase New Zealand business R&D spend from its current 1.28 percent of GDP to two percentover the next 10 years (the current OECD average is 2.38 percent).

Labour’s former R&D tax credit only applied for one year before National abolished it when it took power in 2008.

The National Government favoured R&D related grants and the current rules that allow loss-making companies to cash-out losses.

The National Government was sceptical that a R&D credit would encourage R&D to the extent touted, instead believing that businesses would merely recharacterise existing business-as-usual expenditure to get the credit.

The government has presented the new legislation to Parliament.

It is expected to be passed into law mid-2019 and will take effect from 1 April, 2019 in respect of taxpayers’ 2019/20 income year.

As part of the introduction of the credit, the Callaghan Innovation Growth Grants will be phased out.  Currently under the grant businesses can claim up to 20 percent of their R&D expenditure up to a $5 million cap.

Details of the new scheme

The credit rate

Taxpayers who qualify will be entitled to a 15 percent tax credit on eligible R&D expenditure. To qualify, businesses will need to spend a minimum of $50,000 per annum on eligible R&D expenditure, or outsource their R&D to Approved Research Providers.

Eligible outsourced expenditure will qualify for the tax credit even if a taxpayer’s total R&D spend is below the $50,000 threshold.

Cap on R&D expenditure

A business will be able to claim a tax credit for up to a maximum of $120 million of R&D expenditure each year (equating to an $18 million tax credit). Businesses may be able to apply for an extension to this cap if they can demonstrate a substantial benefit to the
country.

Eligibility

All businesses will be eligible to claim the credit, as will industry research cooperatives, State Owned Enterprises and Mixed Ownership Model companies (CRIs, DHBs tertiary education organisations won’t be eligible).

Businesses that have received Callaghan Innovation Growth Grants in the same year will not be eligible for the credit.

R&D carried out overseas

Up to 10 percent of an eligible R&D expenditure can be overseas R&D.

Businesses making a loss

The government has not fully considered how it will support businesses that are making a loss, but is committed to its own comprehensive scheme applying from 1 April, 2020.

As a stop-gap measure it has indicated that businesses will be eligible for a refund of their tax credits for R&D expenditure up to $1.7 million (i.e. a maximum cash refund of $255,000).

Definition of R&D

The government’s originally suggested proposal that only activities conducted using scientific methods would be eligible has been has been replaced with a requirement to use a “systematic approach” to R&D.

The R&D activities must be performed for the purpose of acquiring new knowledge or creating new or improved processes, services or goods.

There is a further requirement that the R&D must seek to resolve scientific or technological uncertainly.

How is eligible R&D expenditure calculated?

The government proposes to base eligible expenditure on a broad range of actual R&D costs, including:

  Salary/wages of employees doing R&D research.

  Depreciation on assets used in the R&D.

  Overheads and consumables used in the R&D process.

Accounting standards/rules around how expenditure is treated will not determine eligibility.

The government intends to allow the salary/wages of staff working on the R&D, plus additional costs incurred as a result of conducting the research, to qualify.

Conclusion

The new credit will not stand in isolation and will support the existing innovation framework.

Encouragingly, the government has signalled its intention to grow this broader innovation package, including providing more targeted support for start-ups and innovative businesses.

The new credit is a welcome addition and at a minimum should relieve the cash cost of business conducting R&D. Only time will tell whether it will lead to increased R&D investment. However, its chances will be bolstered by continued government support and investment.

A key challenge for the government will be the need to balance the integrity of the system to prevent it being rorted, with ease of compliance.

An administratively burdensome regime will discourage businesses from applying for the credit.

The comments in this article are of a general nature and should not be relied on for specific cases, where readers should seek professional advice.

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Grant Neagle

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