R&D expenditure is tax deductible expenditure that is spent on eligible R&D activities. Eligible R&D expenditure must be:
- tax deductible
- spent on eligible R&D activities
- incurred on goods and services to the extent that they relate to R&D.
Any intellectual property or know-how resulting from the R&D must be owned (either solely or jointly) by the company incurring the expenditure.
Eligible R&D expenditure includes:
- salaries and other remuneration of employees doing R&D, including, salaries or wages, shareholder-employee salaries, bonuses, holiday pay and fringe benefit tax
- depreciation of tangible (physical) assets used in R&D
- costs of staff training, recruitment, relocation, travel incurred as a direct result of R&D
- the costs of materials used in prototypes
- directly related overheads for administration, personnel, cleaning and security, repairs and maintenance, utilities, rates, insurance and leasing of buildings, plant and equipment
- the costs of consumable items used in R&D activities
- payments to an entity or person conducting R&D on behalf of their claimant.
Apportionment of expenditure
Typically a company will carry out an R&D project alongside their regular business activities. You must separate R&D expenditure from a company's business-as-usual costs.
Some situations may arise where it is not possible to directly allocate all of an expense to a project. This includes overhead costs which are incurred by the company in running its day-to-day business activities
An apportionment method must be used to estimate costs incurred on the R&D project. This method should follow the same rules as those required for the apportionment of deductible income tax expenditure.
The company must be able to show that an approved method has been applied to arrive at an accurate apportionment.
In some cases you may need to engage an external contractor. The full cost (excluding GST) associated with a contractor can be included as R&D expenditure. Contracted R&D includes:
- R&D outsourced to a research provider, for example, Plant and Food Research
- contracted staff, for example, temporary staff member to assist with the project
- contracted or outsourced specialists, for example, a consultant subject-matter expert
- a specialist workshop to produce prototype machinery parts.
The intellectual property and know-how resulting from any outsourced R&D must remain in the company contracting the services, not the external contractor.
Certain expenditure and activities are excluded and cannot be included in the company's eligible R&D expenditure during the income year.
Expenditure is ineligible if it is:
- spent on goods and services which relate to an excluded activity
- spent on goods and services used to provide a service of R&D to another person, or used to further another person's R&D activities
- does not give rise to a deduction for the income year
- is for or under a financial arrangement
- is for the acquisition or transfer of:
- intangible property
- core technology
- intellectual property
Expenditure on some activities is ineligible for the R&D loss tax credit. These activities are:
- those performed outside of New Zealand
- acquiring or disposing of land, and related activities, except if the land is used exclusively for housing research or development facilities
- acquiring, disposing of, or transferring intangible property, core technology, intellectual property, or know-how and related activities, for example, drafting sale and purchase agreements for patents
- prospecting for, exploring for, or drilling for, minerals, petroleum, natural gas, or geothermal energy
- research in social sciences, arts, or humanities
- market research, market testing, market development, or sales promotion, including consumer surveys
- quality control or routine testing of materials, products, devices, processes, or services
- making cosmetic or stylistic changes to materials, products, devices, processes, or services
- routine collection of information
- commercial, legal, and administrative aspects of patenting, licensing, or other activities
- activities involved in complying with statutory requirements or standards
- management studies or efficiency surveys
- reproduction of a commercial product or process by a physical examination of an existing system or from plans, blueprints, detailed specifications, or publicly available information
- re-production activities, such as a demonstration of commercial viability, tooling-up, and trial runs.