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Tax credit eligibility criteria for research and development (R&D) loss

The aim of the R&D loss tax credit is to allow start-up companies (with an R&D focus) to refund tax losses caused by qualifying R&D expenditure.

To "cash out" any tax losses from R&D expenditure you must meet the eligibility criteria.

To be eligible the company must:

  • be a tax resident in New Zealand
  • have a net loss in the corresponding tax year
  • have eligible R&D expenditure for the income year
  • have sufficient R&D wage intensity
  • meet the corporate eligibility criteria, and
  • own (solely or jointly) the intellectual property and know-how that results from the R&D activity.

If you're part of a group of companies you may still be eligible. As long as your company meets the criteria above and the group as a whole:

  • is in a tax loss position, and
  • the R&D wage intensity calculation is based on the entire group's total R&D labour expenditure, divided by the total labour expenditure for the entire group.

Go to the meaning of group of companies on the New Zealand Legislation website - Income Tax Act 2007 section IC 3(1)

Our Research and development (R&D) loss tax credit eligibility tool can help you work out if your company meets the eligibility criteria.

Corporate eligibility

Only certain companies are eligible to apply for the R&D loss tax credit.

Your company won't be eligible if it is:

  • treated as a resident of a foreign country or territory under a double tax agreement, or
  • a look through company, or
  • listed on a recognised exchange, eg, a stock exchange , or
  • 50% or more of the shares in the company are owned by any one, or a combination of, a:
    • public authority, or
    • local authority, or
    • crown research institute, or
    • state enterprise, or
  • established by or subject to:
    • the Education Act 1989, or
    • the New Zealand Public Health and Disability Act 2000, or
    • the Crown Entities Act 2004.

R&D wage intensity

In order to be eligible you must spend 20% or more of your total labour expenditure on R&D.

The formula to calculate your percentage of R&D labour expenditure is:

  • total R&D labour expenditure ÷ total labour expenditure x 100

Total R&D labour expenditure is defined as the total of:

  • salary or wages paid to employees for carrying out R&D
  • amounts paid to shareholder-employees as income for carrying out R&D, and
  • the costs of R&D carried out by a contractor excluding GST x 0.66 (the multiplier is intended to exclude profit and non-wage cost components of the contract price).

R&D labour expenditure doesn't include labour on activities excluded from eligibility.

Total labour expenditure is the total of:

  • salary or wages paid to employees
  • amounts paid to shareholder-employees as income, and
  • the costs of research and development carried out by a contractor excluding GST x 0.66.
Example

For the 2015-2016 tax year, Company A calculated their total labour expenditure and R&D labour expenditure as:

Total labour expenditure (including R&D labour expenditure):

contractor R&D excluding GST x 0.66: $49,500
salary or wages paid: $645,000
amounts paid to shareholder-employees: $120,000
Total labour expenditure $814,500

R&D labour expenditure:

contractor R&D excluding GST x 0.66: $49,500
salary or wages paid for carrying out R&D: $240,000
amounts paid to shareholder-employees for carrying out R&D: $50,000
Total R&D labour expenditure: $339,500

R&D wage criteria calculation

$339,500 $814,500 = 0.4168 x 100 = 41.68%

For the 2015-2016 tax year, Company A meets the wage intensity criteria as their R&D expenditure is greater than 20% of their total labour expenditure.

The total R&D labour expenditure and total labour expenditure can also include:

  • attributed fringe benefits
  • fringe benefit tax on attributed fringe benefits
  • employer superannuation cash contributions, and
  • employer superannuation contribution tax (ESCT).

You need to include all of the above in your equation for both total labour expenditure and R&D labour expenditure or none at all.

In cases where an employee divides their time between business-as-usual duties for the company, and the R&D project, the total expenditure on the above listed items for each employee should be the same proportion as their total R&D labour expenditure.

Example

Tony receives an annual salary of $49,400 and contributes to KiwiSaver for which the employer pays an employer superannuation cash contribution of 3%. His total labour expenditure for the year will include:

salary: $49,400
net employer superannuation cash contributions: $1,227.20
ESCT: $256.80
Tony's total labour expenditure for the year: $50,884

Tony spends 60% of his time carrying out R&D. The rest of his time is spent carrying out normal duties for the company. In this case, 60% of his salary, net employer superannuation cash contribution and ESCT would be included as the company's R&D labour expenditure as:

$49,400 x 60% = $29,640
$1,227.20 x 60% = $736.32
$256.80 x 60% = $154.08
Tony's total R&D labour expenditure for the year: $30,530.40