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R&D Tax Incentive frequently asked questions

Find out answers to the most frequently asked questions about the R&D Tax Incentive.

Administration

Where can I find out more about the Research and Development (R&D) Tax Incentive?

Go to, and download, the Research and Development Tax Incentive: Guidance or consult your tax advisor for detailed information.

What should I do first if I want to apply for the Tax Incentive for the 2019/20 income year?

  1. Familiarise yourself with the eligibility rules. The Research and Development (R&D) Tax Incentive eligibility tool is a good place to start.
  2. Read the Research and Development Tax Incentive: Guidance or consult your tax advisor to learn more about the incentive and the eligibility rules.
  3. If you think you're eligible, enrol for the R&D Tax Incentive under the business tab in your myIR account, select the I want to ... tab and RDTI enrolment. You do not have to submit an R&D Tax Incentive supplementary return if you change your mind.
  4. Keep records of the eligible R&D activity you're undertaking and the expenditure on those activities.

How do I claim the R&D Tax Incentive in the 2019/20 year?

  • You must enrol for the R&D Tax Incentive in your myIR account
  • You need to complete an R&D supplementary return which will ask questions about your R&D activities and expenditure.
  • Your R&D supplementary return must be filed within 30 days of the due date for your income tax return.
  • You will include the amount of the tax credit you're claiming in your income tax return and this return must also be filed.
  • The absolutely latest possible date for filing your income tax return is 1 year after your due date for filing your income tax return - but note that if you file after the due date penalties will apply.
  • This process applies in the 2019/20 income year.

Where will I find the R&D supplementary return?

It will be available to customers, who have enrolled for the R&D Tax Incentive, in their myIR account from November 2019.

What will be different in the 2020/21 year?

  • In the 2020/21 income year, if you expect to have less than $2 million of eligible expenditure, you must obtain general approval for your R&D activities. General approval provides certainty that your R&D activities are eligible before you file your tax return.
  • The general approval application will require you to set out the R&D activities you are seeking approval for. If the eligible R&D is expected to take longer than a year, you can apply for approval for up to 3 years.
  • The application for general approval can be made at any time during the year and must be filed by the 7th day of the 2nd month following the end of your income year. Businesses with a standard 31 March balance date must file the application for general approval by 7 May.

What will be different for large R&D performers in 2020/21?

Businesses that expect to have more than $2 million of eligible R&D expenditure can apply to be recognised as a significant performer which would exempt them from the requirement to obtain general approval.

Businesses recognised as significant performers will need to get an R&D certificate from an R&D certifier. They are able to apply for criteria and methodology approval. Find out more on Changes in year 2 (2020/21 income year) - General approval and significant performer regime in the Research and Development Tax Incentive: Guidance

How can I minimise compliance costs?

Compliance costs will be minimised if you already have good record keeping systems and document approach to initiating and monitoring R&D projects, you should be able to integrate additional record keeping requirements into your existing system.

Businesses which have to create record keeping systems from scratch will face higher costs.

We are concerned about protecting our IP. How much detail about our R&D do we need to provide?

You will need to provide details of your R&D activity when you complete the R&D supplementary return, and from 2020/21 when you apply for general approval.

The Research and development (R&D) supplementary return section in the Research and Development Tax Incentive: Guidance explains what information will be required. From November 2019 the supplementary return questions will be visible in myIR to businesses that are enrolled for the R&D Tax Incentive.

The supplementary return focuses on the questions you are trying to answer and the activities you are undertaking, rather than the IP you have generated.

We recognise the privacy and security of R&D information is of the utmost importance. Access to the information you provide about your R&D activity will be restricted to the Inland Revenue and Callaghan Innovation core team directly working on the R&D Tax Incentive.

Are other changes expected?

A Bill before Parliament proposes changes that, if passed, will apply from the beginning of the 2020/21 income year. The main changes would make:

  • refundable R&D tax credits available to more firms
  • tax exempt entities such as charities ineligible for the R&D Tax Incentive. (Levy body researchers would remain eligible.)

The Bill also proposes to broaden the definition of internal software development expenditure subject to the $25 million cap. It would then include all software development expenditure that is not external software development or software development undertaken for the purposes of internal administration.

If this amendment is passed it will apply retrospectively to the 2020/21 income year.

Eligibility

Who can apply for the R&D Tax Incentive?

Privately owned New Zealand-based businesses and state owned enterprises doing eligible R&D in New Zealand are generally eligible to apply.

Businesses in the following situations are not eligible. FInd more details about eligible entities in the Research and Development Tax Incentive: Guidance

  • If you have eligible expenditure of less than $50,000 in your income year, you are not eligible for the R&D Tax Incentive unless your expenditure is with an approved research provider.
  • If you, or an associated business, received a Callaghan Innovation Growth Grant in the same income year, you are not eligible. (There is a limited exception for businesses with a late balance date in the 2020/21 income year.)
  • If you are majority owned by, controlled by or associated with a Crown Research Institute, district health board or tertiary education organisation, you are not eligible.
  • If you are doing the R&D on contract for a New Zealand-based business and you fit the definition of an R&D contractor, you are not eligible.
  • If you do not own the results of the R&D you are generally not eligible unless the results are owned by either:
    • a company in your corporate group, in New Zealand or in a country with which New Zealand has a double tax agreement
    • an overseas business and you can use the results for no extra cost.

Can international companies apply for the R&D Tax Incentive?

To claim the R&D Tax Incentive, an organisation must carry on business through a fixed establishment in New Zealand. A foreign-owned company which meets this requirement may be eligible to claim the R&D Tax Incentive.

R&D activity

What R&D is eligible?

For the purposes of the R&D Tax Incentive, eligible R&D activities require a core R&D activity and can include supporting R&D activities. To be a core R&D activity all of the following needs to apply - a core R&D activity must:

  • seek to create new knowledge or new or improved processes, services or goods
  • use a systematic approach in an effort to resolve scientific or technological uncertainty
  • not be on the schedule of excluded R&D activities.

What is the test for scientific and technological uncertainty?

Scientific or technological uncertainty exists if the required knowledge is not publicly available and a competent professional in that field cannot deduce (work out) the answer without undertaking a systematic approach designed to evaluate possible solutions.

Put simply you must have a hard problem that experts in the field are not sure can be done or how to do it. Refer to the Resolution of scientific or technological uncertainty information in the Research and Development Tax Incentive: Guidance

What is the test for new knowledge, process, service or good?

The test of new is on a worldwide basis, it is not enough that it is new to your business or new to New Zealand.

If what you are doing has already been done somewhere else, but it involves resolving scientific and technological uncertainty and there is no publicly available information about how to resolve the undertainty, your activity may still be eligible for the R&D Tax Incentive.

What activities are excluded from being core R&D activities?

The full list of Activities excluded from being research and development (R&D) activity is in the Research and Development Tax Incentive: Guidance

Activities excluded from being core R&D include, but are not limited to:

  • research in social sciences, arts, humanities, organisational design and management studies
  • prospecting, or drilling, for minerals, petroleum, natural gas, or geothermal energy
  • market research, market testing, market development or sales promotion including consumer surveys
  • ineligible internal software development
  • making cosmetic or stylistic changes to processes, services or goods
  • supporting or making minor improvements to existing computer software using known methods.

What are supporting activities?

If you have a core R&D activity there may be related activities which are directly related to a core R&D activity and are required to conduct the R&D, but do not meet the definition of a core R&D activity. These activities may qualify for the tax incentive if:

  • supporting the core R&D activity is their only or main purpose
  • they are required for and integral to the core R&D activity.

Put simply, to qualify there must be a very close connection between something claimed as a supporting R&D activity and the core R&D activity it supports. For example, it is unlikely that an activity which is already undertaken for non-R&D purposes will have a main purpose of supporting R&D.

Is unsuccessful R&D eligible?

Yes, unsuccessful R&D that meets the eligibility criteria can qualify for the R&D Tax Incentive.

Expenditure eligibility

What expenditure is eligible?

To be eligible, expenditure must be on eligible R&D activities and it must be on 1 or more of the following:

  • depreciation for items used in R&D activities
  • employees performing R&D activities
  • on goods and services used in the R&D (this includes contracts for other to perform the R&D for you).

In addition, the expenditure cannot be on an ineligible expenditure type.

What types of expenditure are ineligible?

The full list of Ineligible expenditure is in the Research and Development Tax Incentive: Guidance

Excluded expenditure includes, but is not limited to:

  • expenditure under the $50,000 minimum threshold unless it is with an approved research provider
  • the portion of expenditure for which a GST input credit is claimed
  • expenditure to acquire depreciable property (depreciation may be claimed while it is used in eligible R&D)
  • expenditure contributing to the cost of depreciable tangible property unless that property is only to be used in R&D
  • expenditure on land
  • expenditure on interest and other financing costs and on professional fees to determine eligibility or calculate the value of a claim
  • expenditure to acquire technology on which your R&D activity will be based
  • the portion of expenditure that exceeds market value
  • expenditure funded by or related to a government or local authority grant and any required co-funding.

What other expenditure rules apply?

There are specific rules which limit eligible expenditure when the R&D:

  • processes or transforms things which are sold or which have a market value (the feedstock rule)
  • is carried out in the course of commercial production.

If R&D is carried out overseas, eligible overseas expenditure can be no more than 10% of your total expenditure in that year.

More detail is provided in the Research and Development Tax Incentive: Guidance

Can I claim for overheads such as rent, power and other facilities costs even if they are not exclusively used to support R&D activities?

Overheads are eligible to the extent they are incurred on core or supporting R&D activities. Sometimes it will not be practical or possible to examine each expenditure item to determine if it was used in eligible R&D.

In these cases, you can use apportionment to allocate the costs to the R&D but the method of apportionment must be:

  • on a reasonable basis
  • supported by an audit trail of source documents
  • capable of being substantiated.

Note, if your R&D is being carried out in the course of commercial production (at the same time and same place as commercial production) you can only claim overheads if you can demonstrate that the costs are additional to the costs that would normally be incurred and arise because of eligible R&D activity.

Does the $50,000 minimum expenditure all have to be spent on 1 project?

No, the threshold relates to the business's total eligible expenditure in that year and can be on more than 1 R&D project.

Can tax credits be refunded?

If the businesses are in loss or have more R&D tax credits than they have tax to pay, they may be able to have the tax credits paid out (refunded).

In the 2019/20 income year the maximum refund is limited to $255,000 and the requirements include that the business is structured as a company and that at least 20% of its employee costs are on eligible R&D activity. Find out more about Refunding R&D tax credits in the Research and Development Tax Incentive: Guidance

The Government intends to have a broader refundability policy in place for the 2020/21 year and legislation is currently in the house which, if passed, will make refundability available to more businesses.

Can tax credits be carried forward?

Yes, tax credits can generally be carried forward to the next income year. For companies, the tax credits can be carried forward provided the standard shareholder continuity requirements are met.

Approved research providers

What kind of organisations can become approved research providers?

To become an approved research provider, an organisation must:

  • be capable or performing R&D activities for other people
  • be available to undertake such R&D
  • charge market rates for their R&D
  • have facilities to perform the R&D in New Zealand.

Why would I use an approved research provider?

You might use an R&D contractor when you do not have the skills or capacity to conduct your R&D in-house.

The advantage of using a contractor who is also an approved research provider is that the minimum expenditure threshold does not apply.

If your total R&D expenditure in a year is less than $50,000, this expenditure is eligible for the R&D Tax Incentive if it is done with an approved research provider and meets the other eligibility requirements.