About the R&D Loss Tax Credit

Research and development (R&D) can be described as a documented project, planned and managed with a specific and identifiable goal. The aim of the R&D loss tax credit is to allow start-up companies with an R&D focus to cash out their tax losses caused by qualifying R&D expenditure. Usually tax losses are carried forward to the next income year, however the R&D loss tax credit allows business losses from eligible R&D expenditure to be cashed out instead of being carried forward. Losses that are cashed out are no longer available to apply against income in future years.

The cash out is administered through the tax system and delivered in the form of a tax credit, therefore referred to as the ‘R&D loss tax credit’. Only the net loss for the year can be cashed out and any losses that cannot be cashed out will be carried forward. Once the company makes a return on their R&D and derives taxable income, the repayments of the R&D loss tax credit will begin to occur.

For income years beginning on or after 1 April 2015, the company may be refunded up to 28% of any tax losses associated with eligible R&D activity if the company is a New Zealand tax resident.

Company Eligibility

  • Be a tax resident in New Zealand
  • Have a net loss in the corresponding tax year
  • Have eligible R&D expenditure for the income year
  • Have sufficient R&D wage intensity
  • Meet the corporate eligibility criteria
  • Own (solely or jointly) the intellectual property and know-how that results from the R&D activity.

If you are part of a group of companies you may still be eligible as long as the company meets the criteria above and the group as a whole:

  • Is in a tax loss position, and
  • the R&D wage intensity calculation is based on the entire group’s total R&D labour expenditure, divided by the total labour expenditure for the entire group.

A company will not be eligible if it is:

  • Treated as a resident of a foreign country or territory under a double tax agreement
  • A look through company
  • Listed on a recognised exchange (e.g.: stock exchange)
  • 50% or more of the company’s shares are owned by any one, or a combination of
    • public authority
    • local authority
    • crown research institute
    • state enterprise
  • Established by or subject to:
    • the Education Act 1989
    • the New Zealand Public Health and Disability Act 2000
    • the crown Entities Act 2004.

Introduction Of The 2019 R&D Tax Incentive

A new research and development tax incentive program is proposed to take effect in New Zealand from 1 April 2019. This proposed R&D tax incentive program is to be a 12.5% credit for eligible expenditure by qualifying firms that engage in R&D activities in the country. This credit will be capped by the government at $15 million per year.

In order to qualify for the tax credit, a company must engage in R&D expenditure that exceeds $100,000 in a specific taxation year. Additionally, firms must be carrying out business and claiming research and development expenditure that relates to the firm. They must also control, bear the financial risk and own the R&D results.

Activities that qualify as R&D activities include those that have been conducted using scientific methods with the aim of generating new knowledge. This includes developing or improving products, services, technology or processes. Expenditure should be deductible under the Income Tax Act.

The government has been able to devise two methods for determining the eligibility of firms. The first is through direct R&D labour costs only, while the second involves a list of items of expenditure with exclusions. The first method is straightforward to implement. However, it limits those eligible for the tax incentive and favours labour intensive R&D. On the other hand, the latter will lead to threshold issues and applicants could inflate their R&D claims through reclassifying the normal expenditure.

The existing R&D Loss Tax Credit will be reviewed and in the meantime, will be separately administered.