R&D tax incentive: What’s eligible and how to claim — business.govt.nz

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R&D tax incentive: What’s eligible and how to claim

Money your business spends on research and development (R&D) from the 2019/20 income year may be eligible for a 15 per cent tax credit. Find out if your R&D activities qualify.

What is the R&D tax incentive?

What: The R&D tax incentive provides a tax credit at a rate of 15 per cent of eligible R&D spend up to $120 million. To be eligible, you must spend at least $50,000 per year on eligible R&D. Spend under $50,000 per year may still be eligible if you use an approved research provider to do R&D on your behalf.

Approved research provider list (external link) — Inland Revenue

When: The R&D tax incentive is available from your business’s 2019/20 income year. The R&D tax incentive is already in effect for most taxpayers.

Who: Businesses investing in eligible R&D activity.

Why: To grow New Zealand’s investment in R&D.

Check your eligibility

If you’re currently doing R&D, find out if your present activities meet the tax incentive criteria. If you’re considering how you might do future R&D, understanding the eligibility criteria might help you make the right decisions.

Eligible R&D activities must:

  • be performed to acquire new knowledge, or create a new or improved process, service or good,
  • seek to resolve a scientific or technological uncertainty, and
  • use a systematic approach.

For your R&D to be eligible you must seek to resolve a scientific or technological uncertainty. In other words, it’s not enough to be applying existing knowledge in a new situation. You must be trying to solve a hard problem or do something that professionals in that field don’t know how to do without going through an investigative process to try to find an answer.

Eligible R&D activities must be done in New Zealand, but up to 10 per cent of total eligible spend can relate to R&D done overseas.

Inland Revenue has a tool to help you better understand if you are eligible for the R&D tax incentive.

R&D tax incentive eligibility tool (external link) — Inland Revenue

Case studies

R&D eligibility

Example of possibly eligible R&D activity based on scientific or technological uncertainty.

Greg owns a construction business and is interested in developing wool composite panels for use as a construction material. He does a review of existing knowledge and finds some academic articles on the qualities of wool-reinforced composites. However, Greg doesn’t find any information on the design or suitability of panels made from biodegradable polymers reinforced with wool fibre as a construction material.

Greg is knowledgeable and experienced in the relevant field of materials science with a good understanding of the information that is publicly available on the topic. Yet, even with this knowledge, Greg still doesn’t know if wool-reinforced panels would be effective as a construction material. Therefore, work to investigate and analyse the properties of wool composite construction panels using a systematic (ie planned and structured) approach could be eligible R&D activity.

Example ineligible R&D based on existing knowledge

Mike and Fulia design and build houses. In response to market demand, they are improving their designs to achieve passive house energy efficient standards. Their designs are new and require them to do a considerable amount of background research. Mike and Fulia are unsure if they will be commercially successful or not.

Mike and Fulia use a systematic approach and check each stage of their first house design to ensure it complies with the passive house standards.

The principles for passive house design are well understood by competent professionals in that specialist field and there is no scientific or technological uncertainty in what Mike and Fulia are doing. Because of the absence of scientific or technological uncertainty, this type of adaption or development does not qualify as an eligible R&D activity.

 

Consider your spend breakdown

If you spend $50,000 or more a year on eligible R&D activity you may qualify for the tax incentive, although you should note there are some rules around what types of expenditure are eligible.

If you spend less than $50,000 a year, then your claim can only include eligible expenditure on approved research providers doing R&D on your behalf.

Case study

R&D spend breakdown

Karen’s R&D spend is $35,000 with an approved research provider. Her approved research provider ensures that none of the R&D spend relates to ineligible activities or expenditure. Karen also spends $20,000 on eligible R&D performed in-house. Her total eligible R&D spend equals $55,000, which meets the minimum threshold of $50,000. Karen’s total R&D spend of $55,000 may be eligible for the tax incentive.

Karen’s R&D spend breakdown:

$35,000 approved research provider
+$20,000 in-house
$55,000 total – meets $50,000 threshold, so all spend may be eligible ($55,000)

Tom’s R&D spend is $35,000 with an approved research provider. His approved research provider ensures that none of the R&D spend relates to ineligible activities or expenditure. Tom also spends $10,000 on eligible R&D performed in-house. His total eligible R&D spend is $45,000, which doesn’t meet the $50,000 threshold. Tom’s $10,000 spent on in-house R&D is not eligible, but the $35,000 he spent on an approved research provider may be eligible for the tax incentive.

Tom’s R&D spend breakdown:

$35,000 approved research provider
+$10,000 in-house
$45,000 total – doesn’t meet $50,000 threshold, so only spend with an approved research provider may be eligible ($35,000)

Record your R&D spend

The tax incentive is already in effect from the beginning of the 2019/20 income year. Start recording your R&D spend now and over the course of the year so that your records are ready to file at the end of the tax year.

You’ll need to keep records that:

  • show your business is eligible,
  • show your R&D activity meets the eligibility criteria, and
  • show that your expenditure was incurred on eligible R&D activity and was of an eligible expenditure type.

Whether you do your R&D activity in-house or with a contractor, including an approved research provider, you are ultimately responsible for making sure you can access the records required to support your claim. It is also your responsibility to make sure your claim only includes eligible expenditure, even if you use an approved research provider.

Inland Revenue has guidance about how to keep records and more information about the R&D tax incentive.

Research and development tax credit guidance (external link) — Inland Revenue

Do you have more questions about the R&D tax incentive?

Do you have more questions about the R&D tax incentive?

Contact Inland Revenue by email at R&DTIteam@ird.govt.nz.

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