New Zealand currently has two different tax concessions aimed at encouraging research and development (R&D). Namely, the Research and Development Loss Tax Credit (RDLTC) and the Research and Development Tax Incentive (RDTI).
The RDTI has been in effect for eligible R&D activities from the 2019/2020 income year and was introduced to support the then Labour Government’s target of raising the total amount of R&D performed in New Zealand to 2% of GDP by 2028.
If an entity qualifies for the RDTI regime, it is able to claim a tax credit calculated as 15% of its total eligible R&D expenditure. This tax credit can be refunded when the taxpayer is in a tax loss position.
The RDLTC has been around for longer than the RDTI – it applies to income years that commenced on or after 1 April 2015.
The RDLTC acknowledges that companies engaged in intensive R&D tend to have significant up-front costs, and as a result, tax losses in their early years. Hence, the aim of this regime is to assist with cashflow by allowing an eligible company to ‘cash-out’ (and forfeit) its tax losses in an income year, in exchange for a payment; RDTLC payment = eligible tax loss x corporate tax rate (28%).
The way the regime is intended to work, is that the payment is subsequently repaid as the company derives taxable income – as the company has forfeited its tax losses, it will repay the RDLTC through paying income tax on its taxable income.
Subject to meeting the eligibility criteria of both regimes, a business can claim both the RDTI and RDLTC under the same R&D activity. However, a few notable differences exist between the regimes:
- Only New Zealand Companies can be eligible for the RDLTC, whereas partners, owners of look-through companies and members of joint ventures can also be eligible for the RDTI if certain conditions are met.
- There are differing definitions of R&D - the RDLTC uses the accounting definition NZ IAS38 whereas the RDTI definition of eligible R&D is set out in the legislation.
- The RDLTC expenditure can only be claimed for R&D expenditure incurred in New Zealand, whereas the RDTI can include foreign expenditure, up to 10% of the eligible spend.
- To qualify for the RDTI, a business must have spent at least $50,000 on eligible R&D expenditure, whereas the RDLTC does not have a minimum expenditure requirement.
- The RDTI is not required to be repaid, while certain events will trigger the repayment of the RDLTC (if it hasn’t already been repaid through the mechanism outlined above).
- The RDTI requires that activities are approved before claiming the expenditure with strict deadlines applying. For the RDLTC the activities and expenditure are submitted together at the end of the financial year.
The type of activities that can qualify under the regimes are broad, hence if your business has or is looking at incurring expenditure on creating or improving processes, services or goods, even for internal purposes, it may be worth finding out if the regimes could apply.
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