The R&D tax credit has been repealed, effective from the 2009-10 income year.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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Allocating the limit across members of a group
What am I eligible for as a group member?
While a person is a member of an internal software development group, they are not entitled to any credits as an individual for eligible expenditure relating to internal software development. They might be entitled to a share of credits for the combined eligible amounts of group members. Eligible expenditure not related to internal software development is not affected.
Entitlement to a share of tax credits
The entitlement of group members to tax credits for a share of the combined eligible tax credit amounts depends on the nature of the group, but a group cannot allocate more than $3 million across all its members for a full year. The group is free to decide the exact allocation, subject to the following restrictions.
No member may be allocated an eligible amount greater than the eligible amount they would have received during the period of membership in the absence of sections LH 9-13.
Note: The group goes out of existence when the last person leaves or there is only one member. In this case, the person leaving and/or the person remaining in the group will have their entitlement to credits determined on the basis of part-year membership.
New Zealand legislation
Income Tax Act 2007:
- LH 9 - 13
Identical income years
If all the members of the group have the same income year (same length of year and same balance date), a member can have an eligible amount allocated and claim an R&D tax credit.
The eligible amount that can be allocated across all group members is $3 million for a full year.
This amount must be pro rata (on a daily basis) when the member is in the group for less than a full year.
Example - allocation of tax credits in a group with same income year and full year membership
Company A and Company B are members of an internal software development group. A Co and B Co have the same (standard) income years and belong to the group for the entire year.
Company A would have eligible expenditure on internal software development of $1.4 million for the year, in the absence of sections LH 9-13.
Company B would have an eligible amount of $1.7 million.
Company A and Company B may share credits for an eligible amount of $3 million. They may make the allocation as agreed by the parties, as long as Company A receives no more than $1.4 million and Company B receives no more than $1.7 million.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - allocation of tax credits where members for part year
Company C and Company D, who have standard income years, do not belong to any internal software group, but are under common control.
Company C and Company D begin internal software development on 1 July 2008. They are the members of an internal software development group from 1 July.
The group exists for 274 days of the income year (1 July 2008 to 31 March 2009) and Company C and Company D are members for this entire period.
Company C would have eligible expenditure on internal software development of $4 million in the absence of sections LH 9-13.
Company D would have an eligible amount of $5 million.
Company C and Company D can share tax credits for an eligible amount of $3 million x 274/365 = $2,252,054 (see subsections LH 11(2)-LH 11(6)) any way they choose.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - allocation of tax credit when one member less than full year
Company E and Company F belong to an internal software development group. Company E and Company F have the same (standard) income years, and are members of the group for the entire year.
Company E would have eligible expenditure on internal software development of $1.4 million for the year, in the absence of sections LH 9-13.
Company F would have an eligible amount of $1.7 million.
Company G, an internal software developer with a standard income year, is bought by Company F on 1 July 2008, so is a member of the group for 274 days of the year. Company G has eligible expenditure on internal software development of $1 million for the first 91 days of the year, and in the absence of sections LH 9-13 would have an eligible amount over the other 274 days of another $3 million, making a total expenditure of $4 million for the year.
Company G calculates the group can allocate it up to $3 million x 274/365 = $2,252,054 for the period it is a member (under subsections LH 11(2) to LH 11(6)).
Company E and Company F calculate the group can allocate up to $3 million to either of them for the full-year period they are members, provided they do not receive more than $1.4 million and $1.7 million respectively (also under LH 11(2) to LH 11(6)).
Company G is allocated the full $2,252,054 available for the period it was a member. Of the $3 million available to the group over the (full-year) period of Company E and Company F's membership, $747,946 is left for distribution to Company E and Company F. This distribution may be made as agreed by the parties.
Company G is also entitled to a tax credit for $3 million x 91/365 = $747,946 for the eligible amount relating to its time outside the group.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Non-identical income years
If any member, X, of the group has an income year that differs from the income year of another member, X will only be able to receive an amount of R&D tax credit if they have been a member of the group for X's entire income year.
It has not been possible to get a simple and fair formula for when members have different income years and they are only a member for part of the year.
The eligible amount available to be allocated across all group members is $3 million for a full year.
Example - allocation when one member has different income year and member less than full year
Company H and Company I are members of an internal software development group. Company H and Company I have the same (standard) income years and belong to the group for the entire year. Company H would have eligible expenditure on internal software development of $1.4 million for the year, in the absence of sections LH 9-13. Company I would have an eligible amount of $1.7 million.
Company J, an internal software developer with an income year ending 31 December 2008, is bought by Company I on 1 July 2008, so is also a member of the group for 184 days of its income year.
Company J has eligible expenditure on internal software development of $2 million for the first 181 days of the year and, in the absence of sections LH 9-13, would have an eligible amount over the other 184 days of $3 million.
Company H and Company I share credits for an eligible amount of $3 million (under the formula in subsection LH 12(4). The allocation may be made as the parties see fit, as long as Company H receives no more than $1.4 million and Company I receives no more than $1.7 million.
Company J receives no credit for the internal software expenditure incurred while it was a member of the group, because it is a member for less than its full income year (see subsection LH 12(2)). Company J is, though, entitled to a credit for $3 million x 181/365 = $1,487,671 for the eligible amount relating to its time outside the group (subsection LH 10(1)and (2)).
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:
- LH9-13
- LH 10(1) and (2)
- LH 12 (2)
- LH12 (4)
Example - members with different income years, and members for less than full year
Company K and Company L belong to an internal software development group. Company K has an income year ending 31 March and Company L has an income year ending 30 April.
Company K would have eligible expenditure on internal software development of $1.4 million for the year, in the absence of section LH 12.
Company L would have an eligible amount of $1.7 million.
Company K is liquidated on 30 November 2008, and the group ceases to exist on this date.
Company K and Company L are members of the group for only part of their 2008-09 income years and have different income years. So they do not receive any tax credit relating to internal software development expenditure incurred while they are in the group.
Company L is entitled to credits for such expenditure incurred after the group dissolves, under the formula in LH 10(1) and (2).
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 10(1) and (2)
- LH 12
Example - allocation of credits in a group
Company A and Company B, who have standard balance dates, belong to an internal software development group from 1 October 2008 to 31 March 2009.
R&D expenditure
| Internal software development expenditure | Other R&D | Total R&D | ||
|---|---|---|---|---|
| Company | Period 1 | Period 2 | ||
| Company A | $1 million | $2 million | $6 million | $9 million |
| Company B | $0.5 million | $1.5 million | $4 million | $6 million |
Period 1 = 1 April 2008 to 30 September 2008
Period 2 = 1 October 2008 to 31 March 2009
Company A files its tax return on 1 May 2009, claiming a tax credit for $8,495,890 of R&D expenditure, comprising:
- $1 million of internal software development expenditure before it was part of the group
- $1,495,890 of internal software development expenditure as a group member (being 182/365 x $3 million, which is the total amount the group may claim a tax credit for)
- $6 million for other R&D expenditure.
This gives a total tax credit of $1,274,383.
Company B files its tax return on 1 July 2009, claiming a tax credit for $4.5 million of R&D, comprising:
- $0.5 million of internal software development expenditure before it was part of the group
- $4 million of other R&D expenditure.
This gives a total tax credit of $675,000.
Company B also wants to claim for internal software development expenditure it incurred while in the group, but knows that the group's limit for expenditure has been reached.
Company B negotiates with Company A, which files a notice of proposed adjustment and reduces its claims for tax credits by $90,000 (relating to $600,000 of eligible expenditure). Company B files a notice of proposed adjustment and increases its claim for tax credits by $90,000. Inland Revenue makes both adjustments.
Because $90,000 is less than the tax credits Company A received for internal software development expenditure incurred while in the group and because Company B is entitled to more than $90,000 of tax credits for internal software development expenditure incurred while in the group, Company A has no tax shortfall.
Note: Examples are simplified. You should check the details in the detailed R&D information and/or consult your professional advisor.
Find out more
- Work out if you are affected by the limit on software development expenditure
- About the limits on internal software development expenditure
- Requirement for developers to group themselves with other developers under the same control
- Calculating the limit on expenditure if you are not part of a group
- Applying to have the limit on internal software development expenditure increased
Date published: 30 Sep 2008
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