Home > Updates > Tax implications of your R&D strategy
The Government’s target for R&D performed in New Zealand is to reach 2% of GDP by 2028. This represents a significant increase in R&D activity. The current perception is that there is an under-investment in this area; and this is attributed to the following key risk factors:
The Government and Inland Revenue have become particularly concerned where a tax outcome may be influencing business decisions (i.e., distorting the economy). As a result of these concerns they have made some progress towards reducing the risk of tax inefficiencies for early R&D investment. They have reworked the R&D incentive scheme to reduce the cost of undertaking R&D via the use of a tax credit. The incentive scheme also mitigates some of the spillover effects in an attempt to stimulate more R&D activity.
Common types of feasibility expenditure include surveys or studies (e.g., environmental studies), conducting market research, or engaging professionals like lawyers and consultants.
Immediate deductions for early feasibility expenditure could be available where the general permission for deductibility is satisfied (there is a nexus between the spend and your business operations) and the expenditure is not capital in nature (usually because it is so preliminary it is not linked to the creation of any identifiable asset).
R&D tax credits were introduced in the 2019/2020 tax year in an attempt to stimulate R&D investment. The Research & Development Tax Incentive (RDTI) provides a tax credit at a rate of 15% of eligible R&D up to $120 million. To qualify you must spend a minimum of $50,000 per annum on eligible R&D.
The key aspects to be eligible for the tax credit are that the expenditure must be related to a core R&D activity occurring in New Zealand and it must be aimed at resolving a technological or scientific uncertainty.
Any eligible tax credits are subtracted from your residual income tax after non-refundable tax credits and imputation credits. Recent changes have meant that companies in a loss position could be able to access a refund of excess R&D tax credits.
To further invest in R&D RDTI “in-year payments” are now available. These are administered by TMNZ and are an interest-free government loan that can provide regular cash payments towards your R&D costs. These allow up to 80% of your expected RDTI tax credit to be claimed; after first deducting any amount you wish to offset against provisional tax. For more details visit the RDTI website.
Before submitting a tax return and R&D supplementary return your organisation must first apply for “general approval” to participate in the incentive. If you have a March balance date and want to claim the tax credit for the 2023 tax year you must apply for “general approval” before 7 May.
Your organisation needs to maintain records in real time which substantiate:
IRD requires “contemporaneous record keeping”, which means they will not allow documentation to be created after balance date to support a claim. The easiest way to do this is to set-up systems that will track and identify R&D costs on an ongoing basis (e.g., timesheets and the use of project collation codes).
There is a lot to consider when deciding how to approach your R&D spend from an accounting and tax perspective. If you would like to discuss what your options are and their potential implications, please contact Jono Boyce or your Nexia advisor.