New R&D tax incentives available for New Zealand businesses

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Driven by a desire to raise New Zealand’s investment in research and development (R&D) to 2% of GDP by 2027, the New Zealand Government recently introduced a new incentive scheme that will provide New Zealand businesses with a 15% tax credit on eligible R&D expenditure.

The Taxation (Research and Development Tax Credits) Act 2019 passed into law in May 2019 and will be applicable for eligible R&D spend by businesses in the 2019/2020 tax year. This scheme replaces the Callaghan Innovation Growth Grant.

What’s on offer

Over NZ$1 billion has been set aside to enable a wider range of businesses to access the R&D incentives.

In simple terms, New Zealand businesses that meet the minimum threshold of NZ$50,000 in R&D spend per year will be eligible for a 15% tax loss credit. A NZ$120 million cap on eligible R&D expenditure will apply.

Eligibility criteria

The incentive scheme will have broad reach – applying to start-ups and early stage businesses, as well as more established businesses with high intensity R&D projects.

To be eligible, a business can have any legal structure, but it must be registered as a New Zealand tax resident, incur a net loss in the tax year, and undertaking the R&D activity in New Zealand. At least 20% of total personnel costs must be on R&D activities, and the business must own the intellectual property (IP) generated as a result of the activity.

Qualifying projects and expenditure

In general terms, a qualifying R&D project needs to have at least one core R&D activity, such as pursuit of new knowledge, new or improved services, goods, or processes, or resolution of scientific or technological uncertainty.

The activity must take place within New Zealand, and other activities that are undertaken in support of the main purpose, or integral to it, may also quality.

Eligible R&D expenses include salary and wages, contractors, certain overheads, depreciation and consumables. Investment of up to NZ$25 million per year in software development may be eligible, providing it relates to the core R&D purpose.

Intellectual property

Expenditure on obtaining intellectual property (IP) rights, including patent, trade mark and design rights, and activities relating to licensing IP rights, is ineligible for tax credits.

However, the costs of conducting patent searching to ascertain whether or not existing knowledge is useful in the research project is a credit-eligible expense.

Why a business should consider claiming

By definition, the incentive is financial. A taxpaying business can claim a 15% credit on qualifying expenses, which effectively reduces its tax liability for the tax year. If application of the credit reduces the business’s tax liability to zero, any credit balance can be carried forward and used in the following financial year.

A non-taxpaying business may be eligible to receive a portion of its R&D incentive refunded in cash.

Benefits to business and New Zealand

Despite several incentive schemes and grants being made available to businesses over the years, New Zealand still lags behind the world in R&D spending – and yet higher investment in R&D is regarded as essential to fuel innovation and lift overall economic performance, both domestically and abroad.

New Zealand’s gross expenditure on R&D, including government spending, is currently 1.28% of GDP. This compares with an OECD average of 2.38%.

By incentivising New Zealand businesses to increase their R&D activity and spend, the Government intends to narrow this gap, and drive more innovation, value and economic diversity for a stronger New Zealand Inc.

Access to the tax credit – which has been increased from the previously proposed 12.5% to 15% – will provide New Zealand businesses across all stages and sectors, with additional financial support to develop innovative products and services.

Notably, a change in how R&D is defined is seen as a positive development with this regime. Instead of focusing purely on scientific research, the scheme is broadened to include “systematic approaches to solving scientific and technical certainty.”

This is good news for companies that are investing in software R&D. Coupled with an increase in the rate to 15%, the change brings the NZ tech sector more in line with leading tech nations such as Israel and the Netherlands.

Overall, around 2,000 or more New Zealand businesses stand to potentially benefit from the new scheme.

More information

For further information visit Ministry of Business, Innovation and Employment (MBIE). KPMG New Zealand have also provided a comprehensive update on what the tax credit means for New Zealand businesses.

For advice on how this may or may not impact your intellectual property strategy, contact your James & Wells partner or attorney.