"On behalf of" criteria

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About the criteria

The R&D must be carried out "on your behalf". This means you must:

• control the research and development activities, and
• bear the financial risk of the R&D activities, and
• effectively own the results of the research and development activity, if any.

Specific rules apply for:

• joint ventures
• partnerships, and
• company groups.

"On behalf of" and "in business" criteria in company groups

The "on behalf of" tests can be met by a group of companies, provided that:

• the group is at least 66% commonly owned, and
• the following are in New Zealand:
  • the entity in business
  • the entity controlling the R&D
  • the entity bearing the financial risk.

In these circumstances the "on behalf of" tests can be met across a number of entities within the group, and the entity that owns the results does not have to be in New Zealand.

The entity that owns the results does not necessarily have to be in New Zealand but can be controlled by a New Zealand-resident member of the group.

Control

You must have control over the R&D activities. This means you have the ability to:

• determine the R&D activities to be undertaken
• decide on major changes of direction
• stop an unproductive line of research
• follow up on an unexpected result
• terminate the activities or project.

Contracting out R&D

R&D activity can be contracted out to a research provider who is responsible for the day-to-day management of the work. You will be eligible for the credit as long as the arrangement meets the control requirements above.

This may mean you exercise that control at the beginning of an arrangement and are bound by it for the duration of the work.

For example, a research provider may only undertake a programme of work if you agree to bind yourself to finance the whole programme. In these situations you have not given away control, but made choices in the contract in advance. Even then, you should be entitled to check that the programme was being carried out and require the researcher to act according to the arrangement.

Subcontracting R&D

If a business contracts another entity to carry out the R&D activity on their behalf, and that entity subcontracts that work to a third party, the R&D activity is still done on behalf of the original commissioning business, not on behalf of the intermediary contractor.

Joint decisions

It is possible for control decisions to be taken jointly with a research provider, or to exercise control decisions before a project begins. For example, parties could agree what R&D will be undertaken before the work begins and what criteria should be used to determine whether a line of research is unproductive and should be terminated.

Researcher determining programme of work

Where a major researcher determines a programme of research and actively seeks industry participants to fund the work, the control requirements may be met for R&D for the industry participants.

While the researcher may have independently formulated the R&D programme and control day-to-day management, it is subject to the agreement between the funders and the researcher. Essentially, the funders exercise joint control when they choose to participate and enter into the arrangement to fund the work programme.

Proprietary rights

Although a business's owners have the ultimate ability to control the activity by exercising their proprietary rights, activity is still considered to be under the control of the business.

Financial risk

You must bear the financial risks of the R&D activity.

When outsourcing some or all of the R&D activity, if you are required to pay for the activity to be carried out regardless of the outcome, you will usually be considered to bear the financial risk.

"At risk" contracting

"At risk" contracting is where the contractor controls the work on the basis that their fee is not payable unless they succeed. In this situation, the party contracting out the work would not be eligible for the tax credit.

The contractor may be eligible for the tax credit if they meet the eligibility requirements in their own right.

Sharing financial risk

Businesses may want to reduce the financial risk of undertaking the R&D by finding another party to contribute to financing the work. If you enter into an agreement to fund eligible R&D activity with another person, you may be eligible for the tax credit for your share of the expenditure.

Effective ownership of results

You must effectively own the results of the R&D activity.

While ownership can be shared, you must retain sufficient rights to have reasonable commercial use of the results, commensurate with your contribution to the work.

Effectively owning the results does not require you to own the intellectual property. The relevant formal methods of intellectual property (copyright, patent, or registered design) may not be available to protect the results.

You may have all the advantages of ownership without actually owning the intellectual property. This may include the right to use a patent, to require the patent to be licensed, to restrict or direct further development based on the patent, all without further fee or payment, and not be the formal holder of the patent.

Giving rights of ownership

Some rights of ownership may be given to others without reassigning or losing your effective ownership of the results.

A business having R&D carried out on its behalf might completely control commercial use of the results of that R&D (including further development of those results for commercial purposes), but allow the researcher exclusive scientific publication rights.

Actual use of particular results may only be possible in limited ways or for limited purposes, which means limited rights can amount to full effective ownership. For example, exclusive rights of commercial use and development for only a few years might amount to full ownership in a particularly fast-changing area.

Sharing ownership

A share in ownership of overall results may also be considered acceptable ownership for the purposes of the R&D tax credit.

For example, if a business does R&D that builds on existing research results belonging to another person, they may take a share of the overall results. The interest must match its contribution to the overall research.

Selling ownership

Subsequent sale of the results does not change the effective ownership of the results at the time the eligible R&D was conducted.

However, R&D carried out under an agreement that required the disposal of results or commercial rights for inadequate return may suggest less than effective ownership of the results.

Unsuccessful R&D

It is possible that the R&D activity is unsuccessful and there are no exploitable results from it. This does not negate the effective ownership test.

"On behalf of" criteria in joint ventures

Incorporated JVs

Incorporated JVs claiming the credit must meet the "on behalf of" criteria in their own right.

Parties may establish a company in which they are shareholders to carry out R&D activities. The company will need to show that it is in business and that the R&D activities have been carried out on its own behalf, not on behalf of its shareholders.

The fact that the shareholders may expect an indirect benefit through dividends does not mean the company is carrying out R&D activities on their behalf.

Unincorporated JVs

If you are carrying out eligible R&D in an unincorporated JV, you can apply the "on behalf of" tests at the level of collaboration, or at the level of the parties involved.

If the parties to the venture jointly control, bear the financial risk and effectively own the results, the parties to the venture will be taken to have met this requirement and each party can claim the tax credit for their eligible expenditure.

JV with ineligible entity

If one party to an unincorporated JV is an ineligible entity, the other party may still be eligible for the credit, provided it can be established that either:

• the collaborating parties together meet the "on behalf of" tests, or
• the second party meets these tests in its own right.

In this case,the second party will be able to claim the tax credit for its eligible expenditure

"On behalf of" criteria in partnerships

Partnerships of eligible persons

If the R&D is carried out by a partnership of eligible persons, the "on behalf of" criteria can be applied at the level of the partnership or at the level of individual parties concerned / involved.

If the "on behalf of" criteria are met at the level of the partnership the partners will be taken to have met the requirement.

Partner ineligible

If one or more of the partners is an ineligible entity, the "on behalf of" criteria cannot be applied at the partnership level.

Eligible partners may be able to claim the tax credit for their eligible expenditure if they meet the "on behalf of" tests in their own right.

Partners receive tax credit

The partners claim the tax credit on the basis of the eligible expenditure contributed to the R&D. The partners receive the tax credit not the partnership.

Minimum expenditure

The minimum eligible expenditure threshold of $20,000 applies at the partnership level, regardless of whether there is an ineligible partner.

Trusts

Where a trust carries out eligible R&D activities, the trustees must control the R&D activities, bear the financial risk and own the results.

Find out more

• Find out if your business is eligible
• Excluded organisations

 

Date published: 02 Nov 2009

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