On 25 October 2018, the Minister of Research, Science and Innovation introduced the Taxation (Research and Development Tax Credits) Bill (108-1) to Parliament. The Bill includes the proposed legislation for the Government’s Research and Development Tax Credit (R&D tax credit) tax incentive package previously announced on 3 October 2018.
The Bill proposes to introduce an R&D tax credit to incentivise businesses to perform research and development (R&D). It does so by amending the Income Tax Act 2007 and the Tax Administration Act 1994.
The Government’s goal is to increase the amount of business R&D undertaken in New Zealand. It has set a target of raising the amount of R&D undertaken in New Zealand to 2% of gross domestic product (GDP) by 2028. The Government considers the wider benefits to New Zealand when businesses invest in R&D warrant the provision of a subsidy. A tax credit has been selected as the instrument for providing the subsidy because of the wide reach of the tax system. The tax system also provides certainty because firms are able to access support on predefined rules.
The credit will apply from the 2019–20 income year. The in-year approval requirements of the Bill apply from the 2020–21 income year.
Summary of key features
There are various tests that must be satisfied before a person can receive an R&D tax credit. The tests cover:
• the person who is claiming the credit
• the type of activity that qualifies as eligible R&D, and
• the type of expenditure that qualifies as eligible R&D expenditure.
Defining an eligible person
The Bill proposes requirements for who is eligible for an R&D tax credit. The key requirements are that a person:
• performs a core research and development activity (“core activity”) in New Zealand, or a contractor performs a core activity on their behalf
• carries on a business through a fixed establishment in New Zealand, and
• has R&D controlling rights over their research and development activities (“R&D activities”).
It is also proposed that the person must satisfy one of the following to be eligible:
• the person owns the results of their R&D activities
• the person is able to use the results of their R&D activities for no further consideration, or
• a company in the person’s corporate group owns the results of the person’s R&D activities, and the company is resident in a jurisdiction with which New Zealand has a double tax agreement.
Defining R&D activity
There must be a core activity for an R&D activity to be eligible. A core activity is an activity that:
• is conducted using a systematic approach
• has the purpose of creating something new, and
• has the purpose of resolving scientific or technological uncertainty.
An activity that is not a core activity will only be eligible if it is in support of a core activity. Some activities are explicitly excluded from being core or supporting activities.
Calculating the tax credit
The tax credit is proposed to operate with a threshold and a cap. In general, to be eligible for a tax credit, the Bill stipulates that a person must spend at least $50,000 on research and development in a given year. The maximum amount of expenditure that is eligible for a tax credit is $120m unless a person has obtained the Commissioner’s approval to exceed the cap.
The tax credit that a person receives is equal to 15% of their eligible expenditure. Eligible expenditure is expenditure incurred on an R&D activity, and includes things like employee salaries, consumables used in the R&D process and depreciation of assets used in the R&D.
Where expenditure is incurred on an R&D activity performed in the course of commercial production, the amount that may be claimed is limited to the additional expenditure incurred because of that R&D activity.
Primarily, the tax credit is only available for expenditure on research and development that occurs in New Zealand. Nevertheless, up to 10% on an R&D claim can be for expenditure incurred on an R&D activity that occurs outside New Zealand.
Orders in Council
The Bill adds two schedules to the Income Tax Act 2007. The first is a schedule of activities that are ineligible for the R&D tax credit regime. The second is a schedule of categories of eligible and ineligible expenditure. The Bill allows the Governor-General, by Order in Council made on the joint recommendation of the Minister of Revenue and the Minister of Research, Science and Innovation, to amend the schedules.
The Bill requires the Minister of Research, Science and Innovation to commission a review of the R&D tax credit regime every five years to evaluate the regime in terms of the delivery of the policy intent, the compliance costs and the administration of the regime.
Communication by Inland Revenue to other government departments and agencies
The Bill allows for Inland Revenue to communicate information to relevant people within specific state sector agencies so that they can evaluate, administer, report on and develop policy for the R&D tax credit regime.
Starting from the 2020–21 income year, persons wanting to receive a tax credit will be required to seek approval that their R&D activities meet certain criteria in the year they are undertaking or contracting for the R&D activities. If granted, this approval will be binding on the Commissioner.
A person who expects to spend more than $2m on R&D activities, or is part of a group of companies that expects to spend more than $2m on R&D activities in a given year, can opt out of the general approval process. A person who opts out of the general approval process must notify the Commissioner of their intention to opt out, and is required to submit an R&D certificate alongside their R&D supplementary return.
Refunding R&D tax credits
When a person has more R&D tax credits than their income tax liability, their R&D tax credits are refunded up to a maximum of $255,000, provided the person meets certain criteria. R&D tax credits that are not refunded are carried forward, subject to the same continuity rules as apply to losses in the Income Tax Act 2007.