Taxation of Research and Development in New Zealand

1. Introduction

Research and Development (R&D) tax rules in New Zealand are designed to encourage innovation by providing tax support to businesses that invest in developing new or improved products, processes, or services. This article provides an overview of the key features of the current R&D tax settings, aimed at helping business owners and finance teams understand the opportunities and compliance requirements.

2. Overview of New Zealand’s R&D Tax Settings

New Zealand currently offers two main forms of tax support for R&D activity undertaken in New Zealand:

• A 15% Research and Development Tax Incentive (RDTI), delivered as a tax credit.

• A cash-out of R&D tax losses (often referred to as the R&D loss tax credit), allowing qualifying companies to receive an early cash benefit for tax losses generated from eligible R&D expenditure.

These rules sit within the Income Tax Act 2007 (primarily in subpart LH for the RDTI and in the loss cash-out provisions for R&D losses) and are supported by detailed Inland Revenue and MBIE guidance that defines eligible activities, eligible expenditure and the process for applying and claiming.

3. The Research and Development Tax Incentive (RDTI)

The RDTI is a 15% tax credit that applies to eligible R&D expenditure incurred in an income year, subject to minimum and (in some cases) maximum thresholds. It is generally available to businesses that:

• Carry on a business through a company or other qualifying entity.

• Undertake eligible core and supporting R&D activities in New Zealand.

• Incur eligible R&D expenditure (for example, employee costs, consumables and certain contractor costs) that is not otherwise excluded (such as expenditure related to commercial production).

RDTI claims are made through the tax return process and are subject to a formal approval framework. Businesses must usually apply for general approval of their R&D activities and, in some cases, specific approval of their R&D expenditure. Robust documentation of hypotheses, experiments, test results and costs is critical to support eligibility.

4. R&D Loss Tax Credits (Cash-Out of R&D Losses)

The R&D loss tax credit regime allows qualifying companies to “cash out” part of their tax losses that arise from eligible R&D expenditure, instead of carrying the losses forward in the usual way. In broad terms:

• The regime applies to companies with sufficient R&D “wage intensity” (that is, R&D labour costs as a proportion of total labour costs) and within specified caps and thresholds.

• The cash-out is based on the portion of tax loss attributable to eligible R&D and is generally calculated at the company tax rate.

• Amounts cashed out reduce the company’s available tax losses and may be repayable if certain events occur in future (for example, loss of continuity, migration or change of ownership).

This regime can be particularly valuable for early-stage and growth companies that invest heavily in R&D but are not yet profitable, as it provides earlier cash to help fund ongoing innovation.

5. Practical Eligibility and Compliance Considerations

Correctly determining whether an activity and its associated expenditure qualify as R&D is often the most challenging part of these regimes. Key practical points include:

• Activity eligibility: R&D activities generally involve a systematic investigation or experiment to resolve scientific or technological uncertainty and create new or improved knowledge, products or processes. Routine or cosmetic changes, or activities carried out after commercial production has begun, are typically excluded.

• Expenditure eligibility: Not all costs associated with an R&D project will qualify. Businesses need to carefully separate eligible costs (for example, relevant salaries, materials, certain overheads) from ineligible or restricted costs (for example, marketing, commercial production costs and some capital items).

• Documentation: Contemporaneous documentation of project objectives, hypotheses, testing, failures and expenditure allocations is essential, both for the approval process and for supporting any future review by Inland Revenue.

• Interaction of regimes: Where a business is eligible for both the RDTI and the R&D loss tax credit, care is required to ensure that claims are correctly coordinated and that the same expenditure is not effectively “double-dipped”.

Well-designed internal processes, clear project codes, and early tax input can materially reduce risk and improve claim quality.

6. Common Questions and Answers

Below are illustrative questions and answers that highlight common issues businesses encounter in practice. These are general in nature and are not a substitute for specific advice.

1. Is all product development automatically eligible R&D?

No. To qualify, the work must seek to resolve scientific or technological uncertainty using a systematic process. Routine upgrades, aesthetic changes or work that does not go beyond existing knowledge may not qualify.

2. Can R&D performed overseas be claimed?

As a general rule, R&D activity must be performed in New Zealand to qualify. Limited exceptions may apply in specific circumstances, but these are tightly constrained and require careful analysis.

3. How does the 15% RDTI actually benefit my tax position?

The RDTI provides a tax credit equal to 15% of eligible R&D expenditure. The credit can reduce income tax payable and, subject to the rules, may be refunded or carried forward if it exceeds tax for the year.

4. What is meant by R&D “core” and “supporting” activities?

Core activities directly seek to resolve scientific or technological uncertainty. Supporting activities are those that are integral to and necessary for conducting the core activities but may not themselves involve uncertainty, such as certain testing or data collection activities.

5. What is the wage intensity requirement under the R&D loss tax credit?

The wage intensity test compares R&D labour costs to total labour costs. A minimum percentage is required for a company to access the R&D loss cash-out, so accurate classification of R&D labour is important.

6. Can start-ups with tax losses but little tax payable still benefit from R&D rules?

Yes. While the RDTI is a tax credit, the R&D loss tax credit regime is specifically designed to help companies that have losses rather than taxable income by providing a cash-out of qualifying R&D losses.

7. Are capital items and equipment eligible for R&D support?

Many capital items are not directly eligible under the RDTI; however, some associated costs may qualify, and separate depreciation rules can apply. The treatment of capital expenditure must be considered project by project.

8. How important is documentation for R&D claims?

Critical. Clear records of hypotheses, experiments, results, and cost allocations greatly reduce the risk of challenge, support approval processes and provide evidence if Inland Revenue reviews a claim.

9. What happens if my ownership structure changes after I have cashed out R&D losses?

Certain events, such as major ownership or residence changes, can trigger repayment or adjustment obligations. These rules are complex and should be considered before significant restructures or exits.

10. Can I claim RDTI and also receive other government grants for the same R&D?

In some cases, yes, but there are rules that limit or adjust the claim where other government funding is received. It is important to identify all sources of assistance so that claims are correctly calculated.

Conclusion

New Zealand’s R&D tax settings offer valuable support to innovative businesses by reducing the after-tax cost of qualifying R&D and, in some cases, providing an early cash benefit for R&D-driven tax losses. However, the regimes are technical and rely heavily on accurate identification of eligible activities, careful allocation of expenditure and strong documentation. Businesses that invest in innovation should consider reviewing their R&D projects and internal processes to ensure they are capturing available benefits while managing compliance risks. If you are unsure whether your projects qualify, obtaining professional advice can help you navigate the rules and maximise the value of your R&D investment.

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