The R&D tax credit has been repealed, effective from the 2009-10 income year.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 >
Tax agents: To file a detailed statement on behalf of a client, you must upgrade your online services user ID to access your client's detailed statement. For help, ask the online services support person or administrator in your office, or contact the R&D tax credit team.
What is research that is systematic, investigative and experimental (SIE)?
What are eligible R&D activities?
To qualify for the tax credit, there must be activities that are systematic, investigative and experimental. SIE activities must:
- be intended to advance science or technology by resolving scientific or technological uncertainty, or
- involve an appreciable element of novelty.
The uncertainty and novelty tests are discussed in the next sections.
R&D may also include support activities. Find out more about support activities.
Find out more about keeping records to support your claim.
Important
R&D activities do not have to be successful to be eligible. Activities remain eligible even if they do not resolve the uncertainty or succeed in introducing appreciable novelty.
What are SIE activities?
- are planned activities
- follow a logical progression involving hypothesis, experimentation, observation and evaluation.
The SIE activities relating to the R&D's scientific or technical objectives will form the basis of your claim for the tax credit.
Purposes and objectives
There are likely to be three layers of objectives in many projects that will be looking at the R&D tax credit. These include the:
- commercial objectives of the project
- objectives of your R&D
- objectives of the eligible portion of the R&D.
The commercial objectives may be to develop an improved range of products to achieve higher revenue targets.
Your objectives for your R&D might be to develop a new process for manufacture of products. In the example - identifying technological uncertainty and SIE activities the business's objectives for the R&D is to create a new fabric with more stretch, because this is considered a key way to improve the product range.
However, only a portion of the R&D might be eligible for the R&D tax credit.
The business would need to determine whether the R&D, or a portion of it, is eligible R&D. To do this, it would need to explicitly identify the technical objectives that require the resolution of scientific or technological uncertainty, or appreciable novelty.
In the cited example, the relevant technical objectives of the eligible R&D are to find a way to introduce uniform two-dimensional stretch of 25% into polyamide blend sportswear fabric without compromising appearance or other critical characteristics.
It is important, when discussing objectives and purpose, that you are clear about which layer of objectives and purpose you are referring to.
Systematic activities
Eligible R&D activities must be systematic. The "systematic" test in scientific and research contexts is whether the methodology is sufficiently structured and documented so that it can be reproduced by another "competent professional".
This requirement will exclude investigations carried out in an ad hoc and random manner, regardless of whether anything useful is discovered.
Investigative activities
To be considered investigative, R&D activities must have sound problem definition and research methodology.
Investigative activities systematically test a hypothesis, and involve experimental activities.
Experimental activities
The need for an experiment is key to the definition of eligible R&D activities. An experiment is a structured intervention designed to test a hypothesis. The hypothesis must seek to advance science or technology, or involve appreciable novelty.
Purpose
Experiments must systematically test your hypothesis to discover something previously unknown or appreciably novel.
This distinguishes an experiment from a demonstration. For example, after the eligible R&D activities finish the team may demonstrate their results to potential investors. This is not an experimental activity for the purpose of the tax credit.
Hypothesis
SIE activities must test a hypothesis. In the context of the tax credit, a hypothesis means:
- a proposed solution to a scientific or technological uncertainty, or
- a proposal to develop new and improved processes, products etc that involve an appreciable degree of novelty.
A simple statement along the lines of "trying to improve the material" is insufficient. An effective hypothesis must have sufficiently detailed the technical objectives for a competent professional to judge whether a programme of SIE activities is required.
Nature of experiment
You must carry out and document experiments. For example, a series of tests conducted on the shop floor would be experimental if they systematically tested your hypothesis.
While experiments do not have to be performed in a laboratory, they must seek to advance science or technology, or test a proposal which involves appreciable novelty.
Example - insufficiently structured experimental activities
Farmer A is concerned over the level of lameness occurring in his milking herd. He has his herd split in two for grazing and milking. He elects to establish two races of the same length and gradient using different race materials, one to be used by each herd, to determine whether the lameness is a result of materials used or caused by some other unknown factor. Farmer A uses his farm staff to observe cows on the races on the way to and from milking and measure the incidence and severity of lameness of the two herds.
Because of the number of factors that could be influencing lameness, the design of this intervention is not sufficiently structured to advance science and technology so it is not eligible for the tax credit.
Note: Examples are simplified. You should check the detailed R&D information and/or consult a professional advisor.
Example - sufficiently structured experimental activities
Farmer B, who has the same concerns about lameness, forms a consortium with other farmers including Farmer C who has a background in agricultural research methods. The consortium, lead by Farmer C, designs a program of R&D activities that is capable of advancing understanding of the effect of race materials on lameness in a milking herd. Farmer C oversees the program as it is implemented over two milking seasons, analyses the data, and reports back to the consortium.
Because it has sound problem definition and systematically tests the farmers' hypothesis, the design and implementation of this programme of SIE activities can advance science and technology. As such, it is likely to be eligible R&D activity for the R&D tax credit.
Note: Examples are simplified. You should check the detailed R&D information and/or consult a professional advisor.
Evolution of hypothesis and objectives
As investigative and experimental activities are carried out, the established hypothesis, technological objectives and planned SIE activities may evolve as the results become known.
Your activities can continue to be eligible R&D, as long as the revised hypothesis and technological objectives still seek to advance science or technology by resolving scientific or technological uncertainty, or involve an appreciable amount of novelty.
Fine-tuning and calibration
Tests to commission new equipment, calibrate, fine-tune, or optimise processes or production systems are not eligible as SIE activities unless there is scientific or technological uncertainty to resolve, or appreciable novelty.
Many production systems and processes, such as the commissioning of new equipment, require or benefit from fine-tuning or calibration to optimise performance.
These processes may involve running tests and recording and evaluating the results. These are part of standard processes used in those fields and are directed towards confirming a result within an expected range. The tests themselves are not evidence of an experimental process to advance science or technology or create something appreciably novel.
Exception
If, however, these processes throw up unexpected problems requiring the resolution of scientific or technological uncertainty or involving appreciable novelty, eligible R&D activity may begin.
New Zealand legislation
Income Tax Act 2007
- LH 7 (1)
- LH 7 (2)
Eligible R&D activities v development based on existing practice
There is a key distinction between eligible R&D, and development based on existing practice in your field.
Knowledge, tools or models may already exist in your trade or profession, or be available through consultancy services, which allow you to manage uncertainty or novelty. If the application of these tools or knowledge in the manner they are intended to be applied allows you to develop a new product or adapt a technology to a new environment with reasonable certainty that the approach will work, the activities are ineligible for the R&D tax credit.
Only competent professionals in a given field can judge what is existing practice.
The use of existing tools or models to develop something appreciably novel, where there is uncertainty that the approach will work, may give rise to eligible R&D.
Example - use of existing practice
A farmer wants to improve his lambing percentage and, at the same time, limit the degree of inbreeding in his flock. He accesses a novel tool developed by a research and consultancy company to analyse the current genetics of the flock and the likely influence of the use of particular rams. The tool informs his choice of rams over several breeding seasons.
Using this tool is not SIE activity. There is still some uncertainty about the final lambing percentages in each year, but the systematic use of the tool in the manner it was intended does not affect the underlying science of either the tool or the farming practices applied to.
Expenditure with a research company (or CRI etc) does not necessarily mean that the activity is eligible R&D activity. For instance, the expenditure may be purchasing a consultant's skills or products rather than SIE activities that meet the uncertainty or novelty tests.
Note: Examples are simplified. You should check the detailed R&D information and/or consult a professional advisor.
Uncertainty within a range
Many production systems or techniques are generally well understood. A competent professional could deduce the results from making minor changes without necessarily being able to predict the point in a specific environment where productivity or performance would be optimised. Such uncertainty could only be resolved by a series of tests.
As outlined in fine-tuning and calibration, resolving uncertainty within an understood range will not be seen as giving rise to eligible R&D.
Genuine scientific or technological uncertainty may however exist in activities such as scaling up from the research environment to production. Find out more about R&D activities aimed at resolving scientific or technological uncertainty.
Example - uncertainty within an understood range
A baking company buys a new continuous baking machine that will increase production capacity for several lines of product. Some initial runs are required to systematically check, adjust and confirm the speed of throughput for optimum quality output of each product.
There is some uncertainty that can only be resolved with tests, but the uncertainties lie within an expected range and any adjustments required are deducible by a competent engineer.
As such, these activities are not eligible for the R&D tax credit.
Note: Examples are simplified. You should check the detailed R&D information and/or consult a professional advisor.
Example - uncertainty outside a range
A farmer has been following the established practice of managing the supply of high quality feed at appropriate times to highly productive ewe flocks and is achieving conception rates above 170%. However, he observes that increasing feed supply in late pregnancy to lift survival and growth rates further unexpectedly results in increased ewe deaths, and lower lamb survival and subsequent growth rates. The farmer checks with experts and confirms that there is no previous research that would explain this pattern of production.
In consultation with appropriate researchers, he designs and implements an experiment to test the hypothesis that increased food supply to highly productive ewes in late pregnancy increases rates of ewe deaths and reduces lamb survival and growth rates.
In this instance, the farmer has observed a variation from standard practice that is outside the expected range and designed a program of eligible R&D activities to investigate this deviation from expected results. The SIE and supporting activities are likely to be eligible activities for the tax credit.
Note: Examples are simplified. You should check the detailed R&D information and/or consult a professional advisor.
Find out more
- R&D activities aimed at resolving scientific or technological uncertainty
- 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: 30 Sep 2008
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