Following completion of the consultation process, the Government has announced the details of the new Research & Development (R&D) tax incentive package. The final proposal includes several changes from that proposed in the discussion document.
The R&D tax incentive package will give eligible taxpayers a tax credit to offset against their tax liability for the income year, thereby reducing the amount of tax they must pay. The amount of the tax credit will be 15% of the eligible R&D expenditure the taxpayer incurs in the income year. The original proposal was for a 12.5% tax credit. However, this was considered too low, as the figure of 15% was what was available under an earlier R&D tax credit scheme. A business must satisfy a minimum spending threshold of $50,000 per year on R&D to qualify for the tax credit; this is reduced from the originally proposed minimum R&D spend of $100,000 per annum.
To qualify as R&D, the business must perform the activity for the purposes of acquiring new knowledge or creating new or improved processes, services, or goods and must seek to resolve scientific or technological uncertainty. If a competent professional in a field is unable to tell a business whether it is possible to achieve a desired outcome without a series of tests or analysis or building a prototype, to resolve the uncertainty then it is likely the activity will involve R&D. After the first year of the scheme businesses will need to obtain approval of the R&D activity. This approval will bind IRD and will give certainty as the whether the business is undertaking eligible R&D.
For the 2019/20 income year a limited tax refund will be available for certain businesses in a tax loss position that are undertaking eligible R&D. For eligible businesses, up to $225,000 of the tax credit can be paid out as a tax refund. The existing R&D tax loss cash out scheme will continue to apply for the 2019/20 income year and businesses will be allowed to make claims under both schemes due to the different definitions of R&D that apply. However, for the 2020/21 income year and onward, the Government intends to have a new system in place for businesses in a tax loss position that are undertaking R&D.
Callaghan Innovation Growth Grants * will cease once the new scheme starts. However, a transitional period will apply which could result in Growth Grants being automatically extended for up to two years.
The Government intends to introduce a Bill to Parliament later this month or early November with a view to legislation being enacted for the start of the 2019/20 income tax year.
If you would like further information, please speak to your tax adviser.
Technical Director – Tax Advisory
* Callaghan Innovation is an agency which partners with business to provide a range of innovation and research and development (R&D) services to suit each stage of a business’ growth. The Callaghan Growth Grants are designed to add scale to a business’ R&D investment and to continue to grow investment in R&D.