The R&D tax credit has been repealed, effective from the 2009-10 income year.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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Grouping with other developers under the same control
Businesses undertaking internal software development are required to form a group with other developers under the same control. This prevents a taxpayer generating multiple limits on expenditure through the use of subsidiaries, as the entire group's expenditure counts towards a single limit.
If your business is not under common control with any other business claiming the credit, the grouping rules are unlikely to apply.
What are developers and controllers?
Each person undertaking internal software development ("developer") has an internal software development controller (a "controller"). The controller is the person, or group of people, who have ultimate control over the developer. In simple cases, the developer and the controller might be the same person.
Another common case would involve the controlling shareholder of a company being the controller and the company being the developer.
Test for control
An entity is controlled by a person if the person has the power to govern the financial and operating policies of the entity to obtain benefit from its activities.
The test is based on the definition of "control" in New Zealand International Accounting Standard 27 (NZIAS 27) (consolidated and separate financial statements). If two people would be required to consolidate for financial reporting, it is highly likely they would be under common control.
Important:
Entities not required to use NZIAS 27 in their financial accounts will still need to use this test for control.
Internal software development groups
When a developer has the same controller as other developers, those people are members of an internal software development group. A person is a member for as long as their controller does not change, provided there is at least one other person with the same controller at the same time.
A person can:
- belong to one group for all or part of the year
- be part of more than one group over the course of a year, or
- not belong to a group.
Example - one member ceasing internal software development
Company A, Company B and Company C have the same internal software development controller (implying they undertake internal software development) and so are members of an internal software development group.
Company A stops doing internal software development, so ceases to be in the group.
The group continues to exist, however, with Company B and Company C as members.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - all but one member ceasing internal software development
Company D, Company E and Company F have the same internal software development controller and are the members of an internal software development group.
Company D and Company E stop doing internal software development. Company D and Company E cease to be members of the group.
Company F no longer has any other person with the same internal software development controller, so the group ceases to exist. Company F is still subject to a limit on expenditure as it is an individual company.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - forming a group
Company G and Company H both have the same single shareholder, Carol. Company G undertakes internal software development and Carol is Company G’s internal software development controller. Company H does not undertake internal software development.
Company H begins internal software development. Company G and Company H are now the members of an internal software development group.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - changing group membership
Company J and Company K are the members of an internal software development group, X, controlled by Mrs X.
Company L and Company M are the members of another internal software development group, Y, controlled by Mr Y.
Mr Y sells Company L and Company M to Mrs X. Group Y ceases to exist and Company L and Company M become members of group X.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - grouping change within the year
At the beginning of the year, N Co, O Co and P Co have the same internal software development controller and are the members of an internal software development group, Z.
O Co is sold to a non-associate in the middle of the year.
P Co buys Q Co in the last quarter of the year.
N Co, O Co, P Co and Q Co are all members of Z at some time over the course of the year.
- N Co and P Co are members for the entire year
- O Co is a member for the first half of the year
- Q Co is a member for the last quarter of the year.
Note: Examples are simplified and you should check 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
- Calculating the limit if you are not part of a group
- Allocating the limit across members of a group
- Applying to have the limit on internal software development expenditure increased
Date published: 30 Sep 2008
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