2nd February, 2021
Are you running a business that is developing innovative products or processes? You may be eligible for substantial tax breaks through the RDTI. Here’s what you need to know.
To encourage and reward the creation of novel products, processes or services, the New Zealand Government offers local businesses lucrative tax incentives to help reduce the financial risk and burden of undertaking innovative activities.
Similar to the way R&D incentives work in Australia and the UK, New Zealand’s R&D Tax Incentive (RDTI) allows businesses who have conducted eligible activities to retrospectively claim tax credits on the costs incurred throughout the R&D process.
Administered by the Inland Revenue Department (IRD), this incentive is as complex as it is intricate, with no shortage of compliance hoops to jump through when applying.
And navigating the eligibility criteria is just the beginning. Thorough knowledge of the NZ taxation system and the implications submitting an application has on broader tax affairs is imperative if a company is to take part in this program.
But, with the tax credits being valued at 15 percent (and in some instances paid out in cash), this incentive can be a saving grace for businesses investing heavily in R&D – so despite its complexities, submitting an application can make a tremendous difference to the feasibility of a Kiwi tech business.
Here are four key issues to consider when determining whether your business ticks the RDTI eligibility boxes, as follows.
A company needs to be set up under the correct type of corporate structure in order to benefit from the RDTI.
To be eligible, the R&D activities must be conducted by the company (or through a contractor) on shore, and the business needs to be operating as a fixed establishment (meaning, a set place of business) in New Zealand.
Generally speaking, any results derived from the R&D activities need to be owned by the business (or joint venture) conducting those activities.
Crown Research Institutes, district health board or tertiary education organisations are all excluded from claiming the incentive.
The IRD’s definition of the term ‘R&D’ is different to the colloquial definition, so before going through the application process, it’s important to be aware of the types of activities that fit the bill for the purpose of this incentive.
For an activity to be considered, it needs to fall under one of the following two categories:
Examples of activities which are excluded from being considered ‘core’ are testing for commercial viability, various mineral and petroleum prospecting activities, routine software development, internal software system improvements, management studies, and a series of other ‘soft science’ activities.
There are three key heads of expenditure that can be claimed under the RDTI. These include:
Across all expenditure categories, if only a portion of the total expense related to the R&D activities (for example, an employee’s time was split between R&D and non-R&D work), such costs would need to be appropriately apportioned to reflect their R&D intensity.
Any expenses incurred off-shore are considered ineligible unless they represent 10 percent or less of the company’s total R&D expenditure.
The minimum threshold for eligible expenditure is $50,000 throughout any given financial year.
Submitting an RDTI application is a five-step process.
Firstly, the applicant business needs to register with the IRD through its myIR portal. Then, it needs to make sure to begin maintaining records of its R&D activities and expenses.
Assuming the company has adequate records and has assessed its own eligibility for the incentive, it needs to submit a ‘general approval’ application, outlining all of the details pertaining to its R&D activities.
The submission deadline for general approval applications is normally on the seventh day of the second month following a company’s end of financial year. For most Kiwi businesses, that works out to be 7 May. But, in light of COVID-19, applications for the 2021 income year can be submitted on the seventh day of the fifth month following the company’s EOFY, an extension that lapses on 30 September 2021. This extension does not apply to filing a tax return.
Once approved, the next step is to complete the ‘R&D supplementary return’, where the business is asked a series of additional questions about its R&D expenditure.
After completing that form, the business can then file its tax return incorporating the total R&D expenditure.
As with any tax-related process, it’s important to seek guidance from an RDTI expert when applying.
There are several complex tax implications that arise for a business when applying for the incentive, and a tax agent can help you navigate your way through those complexities.
Additionally, for businesses running at a tax loss, you may be able to access the Research & Development loss tax credit – an up to 28 percent rebate on R&D related tax losses.
Retaining expert tax advice for this loss credit is especially important, as these credits may need to be repaid in certain circumstances and may have an impact a business’s ability to claim imputation tax credits (which in certain circumstances are paid out together with shareholder dividends).
There is a wealth of information out there for businesses to look through before and during the RDTI application process.
For those looking for additional resources, the Ministry of Business, Innovation and Employment website is another great place to learn more about how this lucrative incentive works.
Looking for more tips on getting your business taxes sorted this EOFY? Check out our NZ EOFY Hub for more.