In keeping with its pre-election promises, the government recently released a discussion paper on a possible Research and Development Tax Incentive for NZ.
There is concern that NZ’s spending in this area is well below OECD averages, and a belief that further investment should be encouraged to benefit the long-term growth of the economy.
The document proposes a 12.5% tax credit on costs incurred by a NZ business in the research and development of new technology. However, like previous tax measures in this area, there are a number of issues in its application. A threshold will apply, meaning only businesses with a minimum of $100,000 in R&D costs, or who outsource to an approved research provider may claim the credit.
The main problem for many taxpayers is defining what expenditure qualifies as research and development. There is a need to show scientific methods, and a defined purpose of advancing science or technology through the resolution of uncertainty. It is expected that all applications will be reviewed by both IRD and Callaghan Innovation. In our experience, there is significant administration involved in making these applications, and the outcomes are not always certain.
The tax credits are not likely to be refundable, but may be carried forward to future return periods, subject to shareholder continuity. This can also create a problem for many start-up businesses that aim to bring in new equity investors after their first periods of R&D. A significant change in shareholding may cause any accumulated credits to be forfeited.
We agree that the goal of promoting greater spending in this area is an important one, however, we are less certain that the proposed regime will create sufficient changes to meet government targets.