The recent level if economic growth and progression recently experienced in the regions lends itself to attracting more substantial business opportunities that have previously been monopolised by the Metro’s and their (often) superior infrastructure. As our local business confidence continues to grow, plans to capitalise on these opportunities are being discussed and refined. If your business is seeking a solution to a problem, or a new innovation where there is funding queries, then you may be eligible for a potentially sizeable R&D tax credit.
The Government has set aside $1 billion over four years to fund the credit in an attempt to raise the New Zealand R&D spend to 2% of GDP (currently 1.37%). The Inland Revenue officials are motivated to make this regime succeed and that will only happen if they can give out credits.
The key features of the regime are:
- A 15% tax credit on eligible expenditure (in addition to any tax deduction which is available).
- The tax credit offsets your tax liability. So if your business is a company, your 28% tax rate is offset by a 15% credit.
- The tax credit should be refundable from the 2020-2021 year if you are in a tax loss position.
- Companies will get imputation credits equal to the amount of the tax credit received.
- It applies to the 2019-2020 year (i.e., now).
So what qualifies?
As you would expect where the Government is giving money away, there are some strict eligibility criteria. In order to qualify:
- You must be an “eligible entity”;
- You must undertake an “eligible activity”; and
- The expenditure in question must be “eligible expenditure”
Most businesses operating in New Zealand are eligible regardless of the legal structure that the business operates through.
There are a few exceptions. A couple of notable ones are:
- Contract R&D providers are generally not eligible (although their clients may be).
- Anyone receiving a Callaghan Growth Grant.
You need to have what is referred to as a “core activity”. Having a core activity is critical to qualifying and it is the area that businesses will generally need to focus on.
A core activity must meet the following criteria:
- It must follow a systematic approach to testing for possible solutions to an uncertainty. It does not include work carried out in a random fashion or in a simple trial and error process. Documentation is key here.
- It must seek to create new knowledge or new or improved processes, goods or services and must seek to resolve “scientific or technological uncertainty”.
The requirement that a project seeks to resolve scientific or technological uncertainty is absolutely central to the regime and is the area that may require the most work to demonstrate for some businesses. Scientific or technological uncertainty will exist where:
- The knowledge to resolve the uncertainty is not publically available; and
- The uncertainty cannot be resolved by a competent professional in the field without developing new knowledge or undertaking a systematic process of testing.
As a practical matter, it will be important to document the basis for determining that technological or scientific uncertainty (as defined) exists.
There are a number of activities that are expressly excluded. Many of these are simply to clarify that the activity wouldn’t meet the requirement to resolve scientific or technological uncertainty (e.g., reverse engineering, software testing and cosmetic changes) and some are policy decisions (e.g., prospecting, exploring and drilling for minerals, petroleum and natural gas).
Eligible expenditure is defined broadly to include:
- Cost of goods and services used in performing R&D.
- Costs relating to employees performing R&D.
- Depreciation on items used in performing R&D.
The expenditure must generally be greater than $50,000 and there are a number of categories of expenditure that are expressly excluded.
It’s not often that Inland Revenue wants to give you money and we are more than happy to help you through investigating what it is that is on offer and how it may assist you, your business and what projects you have on the go that may be eligible for this funding. If you have some unresolved uncertainties of a scientific or technological nature, we encourage you to take a look at the regime.
About the author: Heather Hallam is a Director with BDO Central (NI). She has extensive experience assisting both small and medium sized entities with a wide range of specialist tax and advisory services. BDO Central are Chartered Accountants and Business Advisors, with offices in Napier and Palmerston North. The firm is an independent member of BDO New Zealand and part of the global BDO network.