New Zealand Government adds more incentive for R&D
09 November 2022
Enacted in June 2019 with the 2020 income year being the first year in operation, the R&D tax incentive (“RDTI”) scheme was introduced to replace the Callaghan Innovation Growth Grant (now phased out) and attract wider participation of taxpayers into this scheme with the ultimate goal of raising the amount of business R&D performed in New Zealand and will be evaluated in 2024/25, five years after its launch, to determine whether it has been effective in meeting the Government’s objectives.
The RDTI scheme offers a 15% tax credit on eligible R&D expenditure, which includes comprising R&D employee expenditure, R&D contractors and any overheads directly relating to the R&D activity. The tax credit is first offset against the business’s income tax payable. If the tax credit exceeds the income tax payable or the business is in a tax loss position, the R&D tax credit may be refunded in cash (up to a cap based on labour-related taxes) and/or carried forward to the following income year.
Most businesses, including partnerships, joint ventures and look-through companies, should be eligible to participate in the RDTI scheme. There is a $50k minimum R&D spend requirement unless the business contracts with an Approved Contract Provider to help with their R&D.
To access the RDTI, a general approval application is required to be filed by the seventh day of the second month following the end of the business’ income year. For example, if RDTI is sought for the year ending 31 March 2023, the general approval application would be required to be filed by 7 May 2023.
The RDTI scheme is jointly administered by Callaghan Innovation and Inland Revenue. Callaghan Innovation reviews the general approval application to assess whether the core R&D activities submitted by the business meet the definition under New Zealand tax legislation. Once the activities are assessed and the submitted R&D activities meet the definition, the general approval application is approved. This then allows an R&D supplementary return to be submitted online with Inland Revenue. The due date for filing the R&D supplementary return is 30 days after the due date for filing the income tax return. The R&D supplementary return is reviewed by Inland Revenue which may result in requests for working papers to be provided before the R&D tax credit is processed.
As an exciting development, from early 2023 there will be an ability to access in-year payments under the RDTI scheme, rather than wait up to nine months after balance date to obtain the R&D tax incentive credit! This is especially helpful for businesses to receive payments in the year they carry out R&D. The in-year payment is available if the business has a pre-approved R&D activity under the General Approval application. This should not be an issue for businesses with multi-year general approvals (i.e. multi-year approval issued from the 2021 or 2022 income years). If you are new to the RDTI scheme and wish to access in-year payment from the 2024 income year (1 April 2023 onwards), we recommend preparing a General Approval application for submission as early as possible.
In our view, the RDTI scheme had a rocky start for businesses in the software development space especially with articulating the “scientific and technological uncertainty” associated with the R&D activity. The frustration expressed by these businesses led to further guidelines issued on the definition of “scientific and technological uncertainty” in March/April 2021 and an R&D guidance document for the digital technology sector issued in March 2022.
Most General Approval applications submitted to date have been successful but care needs to be taken around addressing the following aspects of the application:
setting out the scientific or technological uncertainty of the R&D activity, and
setting out the systematic approach undertaken, especially when the general approval application is for multiple years (up to three years).
Similarly, we recommend robust contemporaneous documentation is kept as these can be closely scrutinised by Inland Revenue upon submitting the R&D supplementary return. If employees are not fully dedicated to R&D, contemporaneous timesheets should be kept on file supporting the relevant proportions of eligible R&D and non-eligible R&D work. There should also be a reasonable methodology to apportion any overheads directly related to the R&D activity.
In addition to the RDTI scheme, the Government is launching two new grants – Arohia Innovation Trailblazer Grant and the New to R&D grant (the precursor to the RDTI scheme) – aimed at strengthening support for businesses doing research, development and innovation. The New to R&D grant is expected to be available in the fourth quarter of 2022 and the Arohia Innovation Trailblazer Grant in 2023.
For more details and to discuss eligibility, process, and timing please contact our tax specialists here.