The R&D tax credit has been repealed, effective from the 2009-10 income year. It is still available for qualifying expenditure on R&D activities carried out in the 2008-09 income year. Find out more about the R&D tax credit repeal >
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R&D activities aimed at resolving scientific or technological uncertainty
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What is an advance in science or technology?
- An advance in science or technology is the discovery of new scientific or technological knowledge.
An advance in science and technology does not occur simply because a material, product, device, process or service uses science or technology in its creation.
What is scientific or technological uncertainty?
Scientific or technological uncertainty is when knowledge of whether something is scientifically or technologically possible, or of how to achieve it in practice, is not publicly available or deducible by a competent professional working in the field.
Solution publicly available or deducible
If the solution to your uncertainty is publicly available or deducible by a competent professional working in the field, it is not a "scientific or technological uncertainty".
It is not enough that the knowledge needed to resolve the uncertainty is new to your business, your industry or to New Zealand.
To qualify for the credit, the uncertainty is defined in terms of the knowledge available to, or deducible by, a competent professional.
What is publicly available?
Publicly available does not mean free. It means available to the claimant from anywhere in the world on commercial terms.
Situations may arise where uncertainty or the potential for appreciable novelty exists because, although a third party has resolved that uncertainty or made the novel development, they have kept the results a trade secret. A business could claim the tax credit despite the advance already having been made by a competitor.
How do you demonstrate scientific or technological uncertainty?
To demonstrate scientific or technological uncertainty, you should be able to identify the following:
- What you are uncertain about. What is the scientific or technological question or proposed solution that requires resolution by a SIE process? This may be your hypothesis or it may be a technical statement of the problem that precedes the hypothesis. In both cases, it must be sufficiently detailed for a competent professional to make a judgement whether or not a programme of SIE activities is required.
- The state of the knowledge or technology when the judgement was made that an SIE process was required.
- Who decided you were dealing with a scientific or technological uncertainty requiring SIE activities, and why they were competent to reach this conclusion. Evidence should establish the involvement of a competent professional working in the field.
Your records should demonstrate these points. Find out more about keeping records to support your claim.
What is a competent professional?
A competent professional in their field of expertise should be:
- knowledgeable about the relevant scientific and technological principles involved
- aware of the current state of knowledge, and
- recognised as having a successful track record in their professional field.
Note
A successful track record might be demonstrated by success in a role that required familiarity with the underlying principles and current state of knowledge in a given field, for example employment in a relevant research role.
Working in a field or profession, or having an intelligent interest in it, does not make a person a competent professional for the purposes of the test, which focuses on the level of scientific and technological understanding.
A food manufacturer, a farmer and a software engineer may all be respected professionals in their own fields. They would, however, each need to make sure someone with relevant expertise in the area of potential uncertainty had been involved, before concluding they were seeking to do something scientifically or technologically uncertain or novel.
For example, a farmer wanting to develop an added-value food product from a crop would need a knowledgeable food technologist to confirm if the necessary science was already available.
A competent professional may be an employee of the business.
Cost constraints
A technological uncertainty may arise from economic constraints. A competent professional may be fairly confident that the uncertainties can be resolved, but unsure as to whether this resolution meets the cost requirements for the product or process.
Example - identifying technological uncertainty and SIE activities
Purpose of research and development
Company A wants to produce an improved sportswear fabric with uniform two-dimensional stretch.
Existing knowledge
The company reviewed the state of existing knowledge with their consultant fabric technologist. Available processes using existing yarns result in a fabric with plenty of stretch in the warp (length) but insufficient in the weft (width). Changing the amount of spandex in the yarn could improve the stretch in the weft, but this would compromise the stretch in the warp and could result in appearance faults.
A higher level of spandex would impact on the knitting process, dye colour absorption, reaction to finish treatments and the reaction of the finished textile when exposed to chemicals such as chlorine and algaecide.
Technological uncertainty
The technological uncertainty was how to produce a polyamide blend fabric with uniform two-dimensional stretch of 25% without affecting appearance and other characteristics.
The solution to this was not already known to, or deducible by, a competent fabric technologist. A programme of systematic investigation and experimentation was required.
Hypothesis
The company hypothesised that a new yarn with higher spandex content and new knitting and finishing processes could produce a fabric with sufficient stretch (25%) in both the weft and warp, without compromising other characteristics.
SIE activities
Over six months the company ran a series of trials on the production line, testing yarns and the knitting and finishing processes. Adjustments were made until an overall process was developed which produced a new fabric with the required characteristics.
This example follows the critical steps for making a successful claim:
- The company began a research process directed at an eligible business purpose - creating a new material.
- The research started with a survey of existing knowledge and concluded there was a genuine technological uncertainty.
- A hypothesis was developed.
- The hypothesis required SIE activities and the results were evaluated and reported.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Product evaluation
Evaluating a product, device or service to ensure that it is fit for the purposes for which it was developed, is product evaluation rather than R&D.
Eligible R&D activities may arise from subsequent SIE activities to adapt the technology for a purpose for which it was not designed, or to resolve problems in its application.
Example - product evaluation
Australian researchers have developed an innovative mobile sawmill that reduces the long haulage of large logs. A group of New Zealand forest owners commission an evaluation of the technology for its use in New Zealand conditions.
A programme of investigative activities evaluates the use of the technology for New Zealand wood varieties and in New Zealand terrain. This is an evaluation of an existing technology, and does not meet the test for the R&D tax credit.
However, the evaluation identifies the technical problems and adjustments that are necessary to make the technology useful in the New Zealand context. Those adjustments that can be made by a competent professional would not constitute R&D, but if there are technological problems that can only be resolved through a programme of SIE activities, these activities may be eligible for the R&D tax credit.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Use of trials in R&D
Trials are a research method that may be used for both eligible and ineligible activities. Systematic, investigative and experimental trials are only eligible R&D activities to the extent that they test:
- a hypothesis that seeks to advance science and technology through the resolution of a scientific or technological uncertainty, or
- a proposal which involves appreciable novelty.
Trials are not eligible R&D activities if they are testing the usefulness of an established product or practice for a particular commercial context, or the results of standard business processes, or to confirm expected results.
In the context of the development of a new pharmaceutical or agricultural chemical, trials required to establish that the product meets the technical requirements of initial registration are likely to be eligible activities. Further trials would only be eligible SIE activities if they are testing a new hypothesis that seeks to advance science or technology.
Example - ineligible trial to evaluate a product
An industry research co-operative imports a variety of commercially available cultivars to increase the genetic diversity available to growers in New Zealand. A trial is established to evaluate the productivity and disease resistance of the new cultivars over several growing seasons, by comparing the imported cultivars with varieties already available. The purpose of this trial is to evaluate different cultivar or varieties against one another for commercial use, and does not advance science or technology, nor involve appreciable novelty. It would not constitute eligible R&D activities.
Note: Examples are simplified. You should check the detailed R&D information and/or consult a professional advisor.
Example - eligible trial to test a hypothesis
A corporate farmer wishes to reduce the incidence of resistance of animal parasites to available drenches. It commissions research from a CRI to better understand the effects of farm management practices on reducing the incidence of drench resistance. The CRI develops some hypotheses about the likely critical issues to select for disease resistance, and runs appropriately designed farm trials to test these hypotheses, combining different drenching regimes and different farm practices. This is likely to be an eligible R&D activity.
Note: Examples are simplified. You should check the detailed R&D information and/or consult a professional advisor.
Consultancy v eligible R&D
A business may need to access expertise and knowledge from outside the business, including from professional researchers. Using skills and knowledge of a consultant or researcher is not eligible R&D unless the consultant or researcher needs to undertake SIE activities to address an uncertainty.
Example - consultancy
An architect wishes to integrate solar and wind generation technology within a large development and commissions an expert in the field to locate and analyse the available technologies. While this requires their research and analytical skills, it does not require a programme of SIE activities that will advance science and technology, and is not eligible R&D.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Other sources of uncertainty
Eligible R&D must involve activities that experimentally test a hypothesis. Investigations of uncertainties that are not investigations of scientific or technological uncertainties are not eligible for the tax credit. Uncertainties that are not eligible for the R&D tax credit include:
- uncertainty as to whether R&D staff have the expertise to successfully apply knowledge or techniques used in leading edge businesses
- uncertainty around whether production staff have sufficient technical knowledge and expertise to operate a new technology
- uncertainty about where to find natural resources - mining and prospecting are specifically excluded. Measuring fish stocks or recording species on a land site are also ineligible, unless they are shown to be a supporting activity to otherwise eligible R&D activities
- uncertainty about whether implementation of the project will be successful.
Investigations of a number of other types of uncertainty are specifically excluded - find out what R&D activities are excluded.
Example - other sources of uncertainty
A builder wishes to incorporate new energy efficient technologies in a housing development, and plans to import new-to-New Zealand window technology and incorporate it into a proportion of the houses in the development. These houses will be slightly more expensive than those houses that use traditional technologies.
There is considerable uncertainty as to whether this will be a commercial success, and the builder systematically and experimentally tests the technology to demonstrate its performance.
Regardless of SIE activities this use of innovative technology is not eligible for the tax credit as he is not seeking to resolve a scientific or technological uncertainty.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
New Zealand legislation
Income Tax Act 2007
- LH 7(1)(a)(i)
- LH 7(3)
- LH 7(5)
Find out more
- What is research that is systematic, investigative and experimental?
- R&D activities involving an appreciable element of novelty
- R&D activity need not be successful to be eligible
- Support activities
- Determining when eligible R&D activities start and finish
Date published: 24 Mar 2009
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