The Government has now released draft legislation prescribing how its R&D tax credit will operate. The key incentive is the introduction of a 15% R&D tax credit (increased from 12.5% in the draft proposals) applying to maximum expenditure of $120m, equating to a potential tax credit of $18m. Businesses can apply to exceed this expenditure cap if they can demonstrate NZ will derive a substantial net benefit from the R&D. The minimum R&D expenditure threshold has also been decreased to $50,000 per annum, from the original amount of $100,000, which will help smaller businesses access the regime.
As originally proposed, the new tax credit was to be non-refundable. During the consultation period requests were made for the new scheme to include a refund mechanism for early stage R&D intensive companies that commonly experience tax losses during their early years. The resultant cash flow problems can threaten their existence. The Government recognised that such firms are vital to innovation and the development of a diversified economy. Hence, for the first year of the new regime (1 April 2019 – 31 March 2020) the Government will allow tax credits to be refunded based on the limits prescribed within the existing tax-loss cash-out scheme, i.e. businesses can receive refunds providing at least 20% of their labour cost is R&D related, to a maximum eligible spend of $1.7m. At the new tax credit rate of 15%, this will provide a maximum refund of $255,000. For context, approximately only 350 businesses currently benefit under the current scheme. The Government recognise this is only an interim solution so they will continue to review the new regime, with revised rules for refunds expected from 1 April 2020.
A further welcome change is a widening of the definition of ‘eligible R&D expenditure’. The initial Discussion Paper contained a narrow definition requiring the use of ‘scientific methods’. There was concern that this would preclude tech sector businesses from accessing the regime, as the development of computer software or phone apps is not commonly based on ‘scientific methods’. This has been addressed, with the revised definition based on the use of a ‘systematic approach’.
The tax credit claims will be submitted alongside income tax returns. However, from the 2020/21 year, businesses will be required to attain pre-approval of their eligible R&D expenditure, which will be binding on IRD, providing businesses the ability to confidently forecast their future tax positions.
The changes to the regime reflect the Government’s commitment to raise NZ’s R&D expenditure to 2% of GDP over the next ten years, whilst making the regime accessible to a wider range of businesses.