Is your business eligible for an early tax refund under the R&D Tax Incentive scheme?

23 April 2020

On 25 March 2020, the Government enacted legislation to assist with the economic impacts of the COVID-19 outbreak. One of the measures brings forward the application date for broader refundability rules for R&D tax credits under the R&D Tax Incentive scheme that applies to the 2020 and subsequent tax years. This means you may be eligible for a tax refund under the R&D Tax Incentive scheme a year earlier than expected.

The R&D Tax Incentive scheme provides businesses carrying out eligible R&D activities with a 15 percent tax credit. Where that tax credit is more than the business’ income tax payable for a year, the excess credit may be refundable.

Previously, the amount of the refund was limited in the first year of the scheme to $255,000 (equating to $1.7 million of eligible R&D expenditure) if the business was:

  • In a tax loss position, or
  • In a tax paying position but had surplus tax credits, and
  • Met the corporate eligibility and wage intensity criteria (under the R&D tax loss cash-out rules), and
  • Did not derive exempt income or was associated with anyone who derived exempt income.

The amount of the refund was broader in the second year of the scheme (the 2021 tax year). It carried forward the criteria outlined above but dropped the R&D wage intensity requirement and replaced the $255,000 cap with one based on labour-related costs. That cap was made up of:

  • Any labour-related taxes (PAYE, ESCT and FBT) paid by the business, and
  • Paid by companies the business is controlled by or which are within the same wholly-owned group, where those companies have allocated amounts to the business for the purposes of the cap.

Under the recent response to COVID-19, this broader refund has been brought forward to apply from the 2020 tax year, a year earlier than expected. This will apply by default, unless a business chooses to apply the original first year limited refundability rules. As a result, the Government intends for more businesses to have greater access to R&D tax credit refunds.

Any remaining R&D tax credit that can’t be refunded may be carried forward subject to the shareholder continuity rules. The Government is investigating how new shareholder continuity rules might apply under a same business test approach. The outcome of this may provide greater flexibility for tax benefits on R&D expenditure to be carried forward through periods of change in shareholding that would previously have been lost due to a breach in shareholder continuity.

For the 2020 tax year, it’s possible that an eligible R&D business may be able to claim both the R&D tax credit and the earlier R&D tax loss credit (loss cash-out scheme). The earlier 2016 R&D tax loss credit scheme is still in place, although it is currently under review by the Government.

One unexpected outcome of the recent change is tax exempt entities that meet the R&D Tax Incentive’s general eligibility criteria may be eligible for a one-off tax refund on an R&D tax credit for the 2020 tax year. From the 2021 tax year, such entities will be ineligible for the R&D tax credit.

These measures form a code of rules for the tax treatment of R&D expenditure in New Zealand that includes:

  • Deductions for eligible R&D expenditure;
  • Ability to cash out R&D tax losses;
  • The carry forward of excess R&D losses unable to be cashed out; or
  • The deferral of R&D expenditure to future tax years to preserve tax benefits through changes in shareholding.

Findex can provide guidance on how the R&D rules apply and help you to maximise the tax benefit associated with your business’ R&D activity. Please contact your Findex adviser today.

Findex has developed a Government Stimulus Health Check and free Business Wellbeing Toolkit to help businesses manage potential risks and take full advantage of eligible stimulus assistance. Book your Health Check here.

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