R&D tax credit proposals
Innovation, creativity and boundary-pushing are at the heart of New Zealand’s fashion industry.
Today fashion producers and consumers are more focused than ever before on development and innovation, searching for more sustainable, efficient, and ethical ways to clothe and accessorise the world’s expanding population.
A focus on development and innovation means the introduction of new materials, new manufacturing processes, and new ideas. It also means that research and development (R&D) costs are going to be incurred.
Recognising that New Zealand industries need new tools to adapt to a changing world, and in an effort to encourage businesses to undertake more R&D, the Government plans to introduce a new research and development tax credit (the R&D credit) to incentivise R&D activities that will take the country’s businesses and economy into the future. If enacted, the proposals are likely to be effective from 1 April 2019.
Under the new R&D credit proposals:
- A 12.5% R&D credit will be available for eligible expenditure, generally in the year that expenditure is recognised as tax-deductible.
- Only certain activities will be “R&D” for the purposes of the R&D credit (and what counts as “R&D” for these purposes may differ from what counts as “R&D” for financial accounting purposes). R&D activities for which the R&D credit may be available include:
- Core activities – activities that are conducted using scientific methods, performed for the purposes of acquiring new knowledge, or creating new or improved materials, products, devices, processes, or services, that are intended to advance science or technology through the resolution of scientific or technological uncertainty; and
- Support activities – activities that are wholly or mainly for the purpose of, required for, and integral to, performing the core activities. Support activities will exclude activities such as market research, quality control or testing, the making of stylistic changes, and studies into management or efficiency surveys.
- Other types of expenditure (such as interest expenditure) will be deemed ineligible for the R&D credit. Trade mark application and registration costs are also unlikely to be eligible for the R&D credit (in addition to being generally non-deductible for tax purposes, other than in limited circumstances).
Other features of the proposals are that:
- Businesses will be eligible to claim the R&D credit if they are located and undertaking R&D in New Zealand (subject to exceptions), provided that they have control over the R&D activities, bear the risk of those activities, and own the results of the R&D process.
- Businesses can claim the R&D credit even if the R&D activities are not successful.
- All expenditure in respect of which the R&D credit is claimed must be directly linked to R&D activities, and the credit will only apply to expenditure that is deductible or amortisable for income tax purposes.
- A business must undertake a minimum of $100,000 of eligible R&D expenditure a year to claim the R&D credit.
- The maximum credit available will be $15 million a year, meaning that the claimant would have to incur $120 million of eligible R&D expenditure to receive the maximum credit (although the Government is considering whether, and if so how, the maximum cap should be extended in certain circumstances).
Although the proposals are subject to change, fashion producers and innovators could be able to claim the future R&D tax credit for expenditure that relates to:
- the development of new materials and manufacturing processes;
- software developed for use in business that meets a currently unmet need;
- the development of mechanisms or technologies to make the production and consumption of fashion products more sustainable; and
- the development of new technologies that enable more efficient distribution.
The exact impact of the proposed R&D credit will depend on the rules enacted by Parliament following consultation. Stakeholders will be given opportunities to comment on the proposals and what they mean for New Zealand during the legislative process.
Unlike most other OECD countries, New Zealand does not currently have a R&D tax credit regime and our expenditure on R&D is significantly lower, as a per cent of GDP, than that of other OECD nations. To meet the needs of a changing world and to address growing environmental concerns, the Government aims to increase R&D expenditure from 1.28 per cent to 2 per cent of GDP over 10 years. It considers that fostering R&D will not only benefit businesses, but also encourage innovation, build a better future for New Zealand by increasing employment, productivity and industry diversity, and foster international engagement, profitability and overall sustainability.
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