Research and Development Tax Incentive

The way research and development (R&D) is supported by the Government is changing.

After considering feedback and submissions on changes proposed in April 2018, a Bill was introduced on 25 October 2018 which includes a new tax incentive package for businesses investing in R&D.

This represents the latest approach to encouraging R&D in New Zealand. Previous Government support has included the one-off R&D tax credit in 2009, Callaghan Innovation Growth Grants, dollar for dollar investment by the NZ Venture Investment Fund in innovative companies with private investors and the more recent R&D tax loss cash out scheme from 2015.

New Zealanders continually bat well above average in finding new and unique solutions to critical global issues, such as climate change, poverty and creating productive and sustainable economies. However, at 1.3% expenditure of gross domestic product (GDP), R&D in New Zealand falls short of other countries such as the United Kingdom, the United States and Australia, which spend closer to 3% of GDP.

The Government hopes that the new tax incentive will help back business to do more R&D, create high value jobs, lift household incomes and grow R&D spend towards the goal of 2% of GDP over the next ten years.

The key features of the scheme are:

  • The rate for the tax incentive will be set at 15%
  • There will be a $120 million cap on eligible expenditure, unless an extension is granted
  • A minimum R&D expenditure threshold of $50,000 per year will be required
  • The definition of R&D will be more easily applied across all sectors, including technology
  • There will be a limited form of refundable tax credits
  • The tax incentive will be administered by Inland Revenue with support from Callaghan Innovation
  • The tax credit will be available from the 2020 income year.

Other changes proposed to the current approach were to phase out R&D grants from Callaghan Innovation and remove the ability to cash out tax losses arising from eligible R&D expenditure. The Bill confirms existing recipients of Growth Grants will have their arrangements extended for up to two years. Recipients won’t otherwise be eligible for the R&D tax credit and will have to choose which scheme they operate under.

The Government has also listened to feedback calling for the new R&D tax credit to be refundable and has committed to undertaking further work and consultation on this for introduction by the second year of the scheme.

In the meantime, the tax credit arising from eligible R&D expenditure of up to $1.7 million will be refundable providing the business meets certain criteria. This equates to a refund of up to $255,000. The existing R&D tax loss cash out regime is also retained (at least for now) and businesses may be eligible for a cash out or refund under either incentive.

While this interim measure will likely work fine for many R&D businesses and we support any incentive that leads to more jobs, limiting or removing the ability to cash out an R&D incentive when in losses significantly erodes any benefit for early stage businesses carrying out R&D and yet to earn a profit. Some R&D businesses have benefitted from both Growth Grants at 20% of eligible expenditure and R&D tax loss cash outs at 28% of eligible expenditure. For some businesses, restricting R&D tax credit refunds to 15% of R&D spend and capping that expenditure would represent a substantial reduction to previous and current Government assistance and may not result in the growth in R&D expenditure the scheme is designed to encourage.

Many innovative solutions take several years to develop. Key personnel must balance the demand of commercialising the product or service with securing funding to keep the R&D going. Refunding R&D tax credits in the development phase will help relieve funding pressure and support key personnel to focus on the core activity.  For these businesses, we would like to see Government consideration given to retaining a form of cash out on eligible R&D spend. We consider tagging repayment of an incentive to a liquidity event, if the business has realised the value in the R&D undertaken is a good way to strike a balance between a non-refundable grant and providing a loan.

In addition, there is a small handful of businesses outside Callaghan Innovation that provide consulting services to assist with the research and development of innovative and commercially successful products and services. There are substantial benefits for innovative businesses in partnering with such providers, such as reducing the cost of development and the demands on key personnel time by using external expertise and knowledge of the systems and qualifications required to navigate complex regulations and get a product or service to market. If Government funding was targeted to support the cost to innovative businesses with engaging such providers this could encourage further growth in R&D expenditure by fostering the innovation process. Sometimes, a fresh outside perspective can make a crucial difference at the right time.

Eligible R&D activity will be determined under a test that includes what a “competent professional” in the relevant scientific or technological field may reasonably be able to deduce from publicly available information or by identifying an approach without needing to carry out a process of testing, analysis or prototyping.

Experienced researchers and innovators that are experts in their chosen fields may be called upon to assist with the administration of this scheme. This could be a rewarding way to share knowledge and expertise for the benefit of New Zealanders innovating and blazing a trail to a better standard of living and strengthen our standing on a global stage as leaders in our chosen fields.

Alex Davidson

Associate Partner – Tax Advisory