The Government has announced publication of its discussion document on a research and development tax incentive which it proposes to introduce in 2019.
New Zealand's gross expenditure on research and development is currently 1.28% of GDP compared with an OECD average of 2.38%.
Business expenditure on R&D has been rising, but it is still much lower than the OECD average.
The Government states that it is committed to increasing R&D expenditure to 2.0% of GDP over 10 years. Expenditure on R&D is recognised as a key indicator of innovation.
The proposal is that a 12.5% tax credit on eligible expenditure will be available to businesses doing R&D in New Zealand.
The credit will be available for eligible expenditure incurred from April 1, 2019.
This reflects international practice among other OECD countries where tax credits are commonly available for R&D expenditure.
All businesses regardless of legal structure will be eligible to claim the tax incentive. You do need to be located in New Zealand and carrying out R&D in New Zealand. You need to have control over the R&D activities, bear the financial risk for them and to own the results of the R&D.
This means that good planning around ownership of intellectual property rights will be important to qualify for the tax incentive.
A business will need to spend a minimum of $100,000 on eligible expenditure within one year to qualify for the tax incentive. The rationale for this threshold is to filter out claims that are not likely to be genuine R&D.
The threshold does not apply where R&D provision is outsourced to an approved research provider. A person would have to apply to Inland Revenue to be qualified as an approved research provider.
The Governments rationale for setting the threshold at $100,000 of eligible expenditure is to filter out claims that are not likely to be genuine R&D. The $100,000 expenditure is roughly the cost of one full-time employee's salary and related overhead costs.
A business will be able to claim a tax credit for up to $120million of R&D expenditure each year.
This equates to a tax credit of $15million each year based on a 12.5% rate.
Part of the Governments strategy is to grow or attract large R&D performing firms as they claim that large firms bring resources to the economy that small firms struggle to provide.
However, New Zealand is a nation of smaller businesses and tax credits are only of benefit to businesses which are actually making a profit and therefore paying tax.
One of the biggest challenges facing SMEs is the ability to survive the first two years and to turn a profit, and it is very difficult for those firms to access any external funding to assist with growth.
There are existing R&D growth grants available to businesses which meet the criteria, but some of those may well be replaced by the Governments new R&D tax incentive.
Any business which would benefit from greater investment in R&D should look at the discussion document published by MBIE entitled ``R&D Tax Incentive Fuelling Innovation To Transform Our Economy'' and consider making a submission.
The document asks some specific questions and is seeking input from all businesses which might benefit from some form of funding for R&D.
- Sally Peart is a commercial and intellectual property lawyer with Marks & Worth Lawyers and regularly advises businesses with a desire to innovate.
