Important:
- To claim the R&D tax credit, you must submit a detailed statement online.
- In most instances, the last date for submitting a detailed statement was April 30 2010. Find out more
What expenditure is excluded from a claim?
Important
For expenditure and depreciation loss to be eligible for the tax credit, they must both be:
- on the list of eligible types discussed in types of eligible expenditure or depreciation loss
and
- not included on the list of ineligible expenditures and depreciation losses below.
Ineligible expenditure
Expenditure and depreciation losses not eligible for the tax credit are:
- expenditure under a financial arrangement (for example interest)
- loss on sale or write-off of depreciable assets
- transactions with associated persons:
- associate's profits on R&D services and property purchased from the associate
- amounts in excess of market value for leasing property purchased from the associate
- depreciation loss on assets acquired from an associated person who has previously used the asset in R&D activities.
- depreciation loss attributable to the time an asset is not used in eligible R&D
- the sale price or market value of items processed or transformed through eligible R&D activities
- expenditure on acquisition of core technology (technology used as a basis for further R&D)
- expenditure and depreciation loss on R&D performed overseas:
- expenditure and depreciation loss on R&D performed overseas, if not part of a New Zealand-based project
- expenditure and depreciation loss on R&D performed overseas that is part of a New Zealand-based project, to the extent it exceeds 10% of eligible New Zealand expenditure
- expenditure funded from a government grant or from funds required as a condition of a grant
- donations
- professional fees paid to determine eligibility for the tax credit
- expenditure acquiring intangible assets
- expenditure of an industry research co-operative (IRC) funded by an ineligible person.
- internal software development expenditure greater than $3 million in any income year, unless the Minister of Finance agrees to increase this expenditure limit. Find out more about applying to have the cap increased.
- interest relating to borrowing funds for undertaking the R&D activity.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B
- LH 6(1)
- LH 6(2)
Financial arrangement
Expenditure under a financial arrangement is ineligible expenditure.
Interest, or other amounts in the nature of interest, related to financing R&D activities are not eligible for the tax credit.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 1
Loss on sale or write-off of depreciable assets
There is no claw-back of R&D tax credits when depreciable property used in R&D is sold for more than its adjusted tax value.
There is a corresponding restriction in relation to a loss on disposal of depreciable assets and the write-off when depreciable items are no longer used. No tax credit is available in relation to this loss or write-off. The exception to this is discussed in end-result tangible assets written off.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 2
Example - loss on disposal of depreciable assets
Company AB buys an asset for $1 million which is used wholly in eligible R&D, with credits claimed in relation to the depreciation. The asset is sold for $650,000. The book value at the time of sale is $700,000. No tax credit is available for the $50,000 loss.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Transactions with associated persons
Purchases from associates
When eligible R&D is outsourced to an associated person, or property used in R&D is acquired from an associate, the credit cannot be claimed for any profit margin that the associate gains in supplying the services or property.
The credit is payable on the lesser of:
- the amount paid to the associate, or
- the eligible expenditure the associate incurred in third party transactions.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 3
Example - core technology and profit margin
A Co contracts its sister company B Co to perform eligible R&D services.
B Co gets all the services and property used to do the R&D from third parties unassociated with B Co (for example employees and contractors).
Unassociated T Co provides core technology to B Co to enable B Co to perform the services.
B Co spends $30,000 on the core technology and incurs $50,000 eligible expenditure on performing eligible R&D services (salary of employees and depreciation on equipment).
B Co charges A Co $100,000 for the services.
Because expenditure on both core technology and an associate’s profit margin are ineligible, A Co may claim the credit only on $50,000.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Leasing property from an associate
When property is leased directly or indirectly from an associated person at more than market value, the excess paid over market value is not eligible for the R&D tax credit.
New Zealand legislation
Income Tax Act 2007:
- schedule 21, part B, clause 4
Example - amount over market rental
A Co leases plant to be used in eligible R&D activities from an associate, B Co, for $100,000 for the year. The market value of the rental is $75,000. The additional $25,000 is not eligible for the tax credit.
Note: Examples are simplified: You should check the detailed R&D information and/or consult your professional advisor.
Property purchased from an associate
There is no claw-back of R&D tax credits when depreciable property used in R&D is sold for more than its tax book value.
When depreciable property is purchased from an associated person who has previously used the property for R&D activities, for a price in excess of the vendor's tax book value, the excess does not attract the credit in the hands of the purchaser.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 6
Example - price in excess of tax book value
A Co owns an asset used in R&D that cost $2,000 and has a tax book value of $1,000. A Co sells the asset to associate B Co for its market value of $1,300. B Co depreciates the asset from a cost base of $1,300.
B Co cannot claim the tax credit on the $300 depreciation deduction.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Depreciation claimed in excess of R&D use
Where property is used partly for eligible R&D and partly for another use, depreciation for the income year can only be claimed in proportion to the use of the property for eligible R&D. Any depreciation in excess of this cannot be claimed.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 5
Example - depreciation in excess of proportion used for eligible R&D
Company A has equipment used 40% of the time on eligible R&D, 40% on other activities and is idle 20% of the time. Amounts in excess of 50% of the annual depreciation cannot be claimed for the tax credit. The idle time is ignored.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Items processed or transformed
Where items are manufactured or acquired and then processed or transformed in an eligible R&D process, only the net expenditure on the items is eligible. The net eligible expenditure is the cost of the items that have been processed or transformed, less:
- the sale price (if the items are sold to a non-associate), or
- the market value (if the items are not sold or are sold to an associate).
The balance of the expenditure is excluded. The sale price or market value does not attract the tax credit.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 7
Example - sale proceeds in relation to expenditure
A paper manufacturer is working to modify a machine to increase the rate of production. This work is eligible R&D.
A series of test production runs are required to resolve technical problems involved with the modifications. The technical specifications for the work state that the process must not diminish the quality of the paper, including its suitability for high-quality printing.
The trial is made up of several different runs. Paper quality improves as modifications are made and although the output is sold as off-grade, the sale price is $7 per bundle. The wastage problem has been overcome and the average cost of production is now $6.55 per bundle (materials transformed $2, employee remuneration $4 and overheads $0.55).
The eligible expenditure is calculated as follows:
- Employee remuneration of $4 and overheads of $0.55 are not subject to this rule, and are eligible in full.
- A credit is only available on the materials that have been transformed, to the extent that their cost exceeds the market value of the output. Here, the output is sold for $7 and the cost of the materials transformed is $2, so no credit is available on the materials cost of $2.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Acquisition of core technology
What is core technology?
Core technology is technical knowledge, or the results of the application of this knowledge, which can be used as a basis for further eligible R&D. It may be intellectual property or a tangible asset such as a prototype. It is ineligible for the R&D tax credit.
Core technology may be:
- knowledge, or a product, of which the claimant's eligible R&D activities are an extension, continuation, development or completion
- the basis for obtaining new knowledge based on that technology
- the basis for new or improved materials, products, devices, services or processes to be created as a purpose of the eligible R&D activities.
Facilitative assets that are not the object of the R&D, but are used in the R&D process, are not core technology, for example a testing device.
Example - core technology
E Co runs a fish farm and is developing an automated aquaculture system which uses tidal power to automate functions such as feeding. Some of the aquaculture system development activities meet the criteria as eligible R&D.
E Co has sourced a small tidal generator to power the system. The generator is almost entirely suitable but the control module requires additional ports for the sensor input. E Co arranges to buy the generator and the control module separately.
Expenditure on the generator, minus the control module, is expenditure seeking to create a depreciable asset that will be used elsewhere in the business. Depreciation on this item is claimable while the system is being experimented upon. Expenditure on the control module, which has to be modified for the R&D, is ineligible as it is core technology.
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
- Schedule 21, part B, clause 8
Example - expenditure on prototype as core technology
D Co buys a prototype intending to use it to continue development; the expenditure on the prototype is expenditure on core technology, and as such is not eligible for the tax credit.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor
Internal software development exceeding $3 million
Expenditure or depreciation loss incurred on internal software development that exceeds the eligible amount (limit on eligible expenditure) claimable is ineligible.
Find out more about limits on internal software development expenditure.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 9
- LH 9 - LH 13
Overseas R&D
Expenditure conducted outside New Zealand is generally ineligible. There is a limited exception where eligible R&D is carried out as part of an R&D project based in New Zealand.
What is an R&D project?
An R&D project is a planned and coordinated set of eligible R&D activities with start and finish dates, cost and time constraints. The project must be directed towards a specified objective where:
- the claimant meets the "on behalf of" tests, and
- more than half the eligible expenditure or depreciation loss on the project is incurred in New Zealand.
Eligible overseas R&D
If R&D activities within an R&D project as defined above are carried out in the 2008-09 income year in both New Zealand and overseas, you can claim eligible overseas expenditure of up to 10% of the eligible New Zealand expenditure. Any excess over this is not eligible for the tax credit.
New Zealand legislation
Income Tax Act 2007
- LH 6
Example - overseas expenditure over 10% of New Zealand eligible expenditure
A New Zealand company, AB, incurs eligible expenditure of $1 million on an R&D project conducted in New Zealand in the 2008-09 year. It also incurs $400,000 of eligible expenditure in relation to R&D conducted overseas on the project in the same income year.
AB can only claim the R&D tax credit for the overseas expenditure equal to 10% of the New Zealand eligible amount - that equals $100,000. The other $300,000 is excluded.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor
Stand-alone overseas R&D
If you carry out R&D activities outside New Zealand which are not part of an R&D project as defined above, the expenditure incurred or depreciation loss on these activities are not eligible for the tax credit.
New Zealand legislation
Income Tax Act 2007
- LH 6(1)
- LH 6(2)
- LH 6(4)
- LH 6(5)
Example - R&D performed overseas
A New Zealand company, X Co, contracts a New Zealand company to carry out eligible R&D on its behalf. The contractor uses expertise in its Australian branch, where all the work is carried out. The expenditure is not eligible.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
New Zealand-based R&D under 50%
If you have R&D activities carried out in New Zealand and overseas, and the New Zealand eligible expenditure is 50% or less of the total eligible expenditure, overseas expenditure cannot be claimed for the R&D tax credit, as insufficient eligible R&D has been performed in New Zealand to make the overseas component eligible.
New Zealand legislation
Income Tax Act 2007
- LH 6(4)(e)
Example - New Zealand expenditure under 50%
G Co is undertaking eligible R&D activities. The eligible expenditure and depreciation loss totals $350,000 in the 2008-09 income year.
$100,000 is incurred in New Zealand and $250,000 in Australia. This does not meet the definition of an R&D project.
G Co can claim the R&D tax credit for the eligible New Zealand expenditure and depreciation loss, but not for any portion of the overseas expenditure or depreciation loss.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Location of expenditure
The location of the expenditure is determined by where the related activity takes place. This will be the place that the good purchased is consumed or where the service purchased is performed.
Examples - New Zealand expenditure
A research team based in Auckland imports chemicals from the United States that are to be consumed in experiments conducted in their facility in Auckland; the expenditure on the chemicals including transportation is New Zealand expenditure.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Examples - overseas expenditure
An airfare bought for a researcher to travel to a foreign location where field trials are being undertaken by the researcher's collaborator is overseas expenditure, despite the fact that it was purchased from a retailer in New Zealand.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Government grant funding
Larger version of image | Long description of flowchart
If government or a local authority provides a grant which is used by the recipient for eligible expenditure or depreciation loss, that portion of expenditure or depreciation loss cannot be claimed for the R&D tax credit.
Expenditure or depreciation loss is also ineligible when it is from funds required as a condition of a grant (known as required co-funding).
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 10
- Schedule 21, part B, clause 11
Funds required as a condition of grant
In many cases, government grants also require the recipient to apply a stipulated amount of funding to the research project.
Expenditure or depreciation loss is ineligible when it is from funds required as a condition of the grant.
Expenditure that is covered using required co-funding is ineligible for the R&D tax credit, even if the expenditure would otherwise be eligible.
Example - funding from grants and co-funding
A Co receives an R&D grant of $500,000 from government agency X to contribute to R&D salary costs. As a condition of the grant, A Co is required to contribute $500,000 of its own funds towards the project.
The $1,000,000 is used to fund eligible activities and pays for R&D salaries and for the construction of prototypes used solely for R&D. While these categories of expenditure would normally be eligible, they are ineligible expenditure because of the exclusion of grants and of required co-funding.
A Co also invests an additional $300,000 in this project, on other eligible R&D activities. This expenditure is not a requirement of the grant. Provided the expenditure is otherwise eligible, A Co can claim the tax credit on this amount.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - student fellowships
In conjunction with a university, a business identifies a suitable Masters student to research a production problem. The business receives a Foundation for Research, Science and Technology (FRST) Technology for Industry Fellowship. The business supplies 50% of the stipend, and will have access to the results of the research.
The business contribution to the fellowship is a condition of the government funding, so this expenditure is not eligible for the tax credit.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Third party co-funding
In some cases, grants are made to organisations on the condition that the grant is matched or augmented by contributions to the R&D from other businesses.
If your expenditure or depreciation loss was required co-funding to another party under the terms of their grant, the expenditure or depreciation loss is not eligible for the R&D tax credit. Neither you, nor the party you funded, may claim the R&D tax credit on this funding.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 12
Example - required third party co-funding
Companies B and C contribute $1 million each to an R&D project run by CRI A. CRI A has already received a $2 million grant for this project from a government agency, on the contractual condition that it arranges matching funding from businesses.
Companies B and C cannot claim the tax credit for their expenditure because of the contract between CRI A and the agency which gave the grant.
In this example it is not the fact that the grant contract is to a CRI (an ineligible entity) that disqualifies Company B and Company C, it is the fact that their funding is required co-funding, under the terms of a contract between third parties.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Can I choose how to apply funding?
If the contract doesn't specify which expenses within the project the grant or required co-funding is to be applied to, the grant recipient can choose to apply the grant and the required co-funding to ineligible activity.
Example - applying funding
B Co receives an R&D grant of $300,000 from a government agency. As a condition of the grant, B Co is required to contribute $300,000 of its own funds towards the project.
The contract does not specify which aspects of the R&D project the grant and required co-funding shall be used on.
In the income year the grant was received, expenditure on project X totals $1,500,000 and includes:
- $500,000 payment for core technology
- $10,000 interest payments, and
- $125,000 expenditure on exploring a potential market.
None of this $635,000 of expenditure is eligible for the R&D tax credit but the balance of $865,000, which is applied to eligible R&D activities, is eligible for the tax credit.
B Co chooses to use the grant and the required co-funding to fund the core technology, which is ineligible expenditure, and the market exploration trip, which is an ineligible activity.
This decision leaves B Co with $865,000 of expenditure eligible for the tax credit.
Note: Examples are necessarily simplified. You should check the detailed R&D information and/or consult your professional advisor.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clauses 10 and 11
Donations and professional fees
Donations
Making donations to anyone else’s R&D is not eligible expenditure.
Example - donations
B Co provides a $200,000 annual donation to establish and fund a research chair at a university in the expectation that eligible research will be carried out. This funding is classified as a donation and is not eligible.
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
- Schedule 21, part B, clause 13
Professional fees
Fees paid to professionals (eg accountants, lawyers or other specialist advisors) to determine whether claimants, activities and expenditure are eligible, or for calculating the amount of the claim, are not eligible for the R&D tax credit.
Important
The costs of professional research to determine the state of knowledge at the start of the project may be eligible expenditure.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 14
Acquisition of intangible assets
The R&D tax credit is not available for expenditure on purchasing, leasing or obtaining the right to use an intangible asset. This includes royalty payments and lump sum capital costs.
Costs associated with creating intangible assets from R&D may be eligible.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 15
Example - software licenses and depreciation
A Co acquires a licence to use software in its R&D process. The R&D relates to eligible activities. Depreciation on, or licence fees for, the software is not eligible expenditure.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Industry research co-operatives (IRCs)
An IRC's expenditure funded by a person who is not eligible for the R&D tax credit, is not eligible expenditure for the co-operative.
Find out more about industry research co-operatives (IRCs) and their expenditure.
New Zealand legislation
Income Tax Act 2007
- Schedule 21, part B, clause 16
Find out more
- Types of eligible expenditure or depreciation loss
- Deductibility of expenditure
- Using listed research providers
- Industry research co-operatives (IRCs) and their expenditure
Date published: 24 Mar 2009
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