Getting down to business: R & D Tax Incentive
In April, the New Zealand Government released a discussion paper entitled, Fuelling innovation to transform our economy – a discussion paper on a Research and Development Tax Incentive for New Zealand. The joint release between Ministry of Business, Innovation and Employment, Inland Revenue and Callaghan Innovation seeks public feedback on proposals for implementing a research and development tax incentive to encourage businesses to invest more into R&D.
What was proposed?
The key proposals are as follows:
- A 12.5% non-refundable tax credit on eligible expenditure (up to a maximum of $120 million of R&D expenditure each year / $15 million tax benefit) will be available to businesses doing R&D in New Zealand, if they spend a minimum of $100,000 on eligible expenditure within one year. We set out further details of what may be eligible at the end of this article.
- This credit will be available for eligible expenditure incurred from 1 April 2019.
We note that the benefit for many start-up businesses may be minimal as this is a non-refundable tax credit. Where businesses are in a tax loss position, there is no tax liability for the tax credit to offset against. We understand the Government is looking to address this issue, but understand it is unlikely to be solved prior to the commencement date of 1 April 2019.
Areas being worked on
There are several points that officials are working to understand and refine prior to the scheme being introduced as legislation, including two most significant points:
- Software R&D has become increasingly important – accounting for approximately 40-50 percent of the value of Callaghan Growth Grants in the last three years. Officials are considering if there needs to be a variation to the standard definition of R&D to ensure it adequately captures R&D software activity. Special treatment for some activities, such as testing and internal software development, is also being considered.
- The proposed R&D tax credit is a non-refundable credit so will not provide value to businesses in tax losses. Currently these businesses can benefit from the Callaghan Innovation Growth Grants. Further work will be undertaken with the intention that a modified version of the rules will be available for such businesses from 1 April 2020.
What if my business has a Callaghan Innovation Growth Grant?
In response to the introduction of the R&D tax incentive, there will be a transition away from existing growth grants administered by Callaghan Innovation.
It’s proposed that businesses with an active growth grant contract on 31 March 2019 can continue to receive their growth grant until 31 March 2020. Applications for growth grants and extensions to growth grants can continue to be made until 31 March 2019.
Our view is that the 20% growth grant funding would generally be more advantageous for businesses, so it’s definitely an option you should consider if your business is not already in the scheme.
What if I had a tax loss for the year?
As you may be aware, there’s also a separate tax credit scheme available for R&D tax losses which has been in place since the 2016 income year. In particular, start-up companies engaged in R&D face high upfront costs and as a result are likely to have losses in the early years. Recognising that lack of cash flow is a real problem, New Zealand resident start-up companies engaged in intensive R&D will be able to “cash-out” losses by claiming 28% as a refundable tax credit starting for the income year. The amount a company can claim is the lesser of the company’s:
- Net tax loss for the year x 28%
- Total R&D expenditure for the year x 28%
- 1.5 x total R&D labour expenditure for the year x 28%
- Or the max cap of $1,100,000 x 28%.
We’ve helped many clients through this process and would welcome a chat if you think your business could benefit from these tax incentives.
31 May, 2018 by Jason Yang,
Jason Yang is a manager in Deloitte Private with a particular interest in helping clients with R&D incentives.