There are set events that mean companies will have to repay their research and development (R&D) loss tax credit. These are called 'loss recovery events' and the tax you'll need to pay is the R&D repayment tax.
Loss recovery events (LREs) and the R&D repayment tax
There are set events that mean your company repays its Research and Development (R&D) loss tax credit. These events are loss recovery events (LREs). Sometimes you'll repay it all or only some of it. It depends on what type of event it is.
When your company gets the loss tax credit you must make an annual declaration. It tells us if a LRE has taken place or not. You do this each year until you've repaid the total amount of R&D tax loss credit.
The LREs are:
- disposal of intellectual property
- appointment of a liquidator
- company migration or no longer a company
- sale of shares.
R&D repayment tax
Repayment of your R&D loss tax credit is the R&D repayment tax. R&D repayment tax is due by the terminal tax date for the tax year the LRE occurred in.
R&D repayment tax must be paid in full if a liquidator is appointed or the company migrates or is no longer a company. This happens even if in the same year there is a disposal of intellectual property or sale of shares.
When your R&D tax loss credit is settled
When you receive the R&D loss tax credit the amount of losses cashed out are extinguished. However, the loss value of any R&D repayment tax paid as a result of a LRE will be reinstated in the year in which the payment is made.
If you've already repaid your cashed out tax credit balance by trading into profit, no further payment amount is required.
The four loss recovery events (LREs) and repayment tax amounts
These are the four loss recovery events and how the repayment tax is calculated.
Disposal of intellectual property
When a company disposes of intellectual property it becomes liable to pay R&D repayment tax. This is unless the disposal:
- is part of an amalgamation, or
- was for at least market value and is assessable income of the company.
The amount to pay after the sale will be the lesser of:
- 28% of the sale price
- the current balance of the R&D tax loss credit.
The due date for R&D repayment tax is the terminal tax due date for the tax return period. This is the same period the loss recovery event (LRE) occurred in.
Appointment of a liquidator
Appointment of a liquidator is a loss recovery event (LRE).
The amount of the outstanding R&D loss tax credit will become payable (as R&D repayment tax). You need to pay it by the terminal tax due date for the income year. That is the same year as the liquidator's appointment.
Company migration or no longer a company
A company migration or no longer a company is a loss recovery event (LRE). This type of event is when the company is:
- no longer a company for tax purposes
- no longer a resident in New Zealand
- treated as resident in a foreign country or territory under a double tax agreement (DTA).
You pay outstanding R&D loss tax credit by the terminal tax due date. This is the due date for the year the company was no longer eligible.
Sale of shares
Change of shareholding greater than 90%
It's not a loss recovery event to sell or transfer up to 90% of your company's shares from the first year of the 'cash out'.
Selling or transferring over 90% of your company's shares is a loss recovery event. This means you'll have to repay the 'cashed out' balance remaining. You'll need to repay it in full by the terminal tax due date.
Your company must maintain at all times a 49%:
- continuity of minimum voting interest, or
- market value interest.
You'll need to do this before you're allowed to carry forward net losses. This applies from the beginning of the year, or to net loss you want to carry forward at the end of the year. This is the continuity period.
If your company does not maintain its shareholder continuity, any losses for that income year are forfeited. This will not create an LRE event until you sell 90% of the company.
The amount due to be paid after the sale will be lesser of the:
- market value of shares sold multiplied by tax rate (28%)
- current balance of the R&D loss tax credit.
The due date for R&D repayment tax is the same as the terminal tax due date. This is for the year the sale occurs in.
Example: Disposal of intellectual property
Company A has claimed the R&D loss tax credit in each of the 2015-16 and 2016-17 tax years totalling $40,000. In the 2017-18 tax year they sold an IP for $30,000 which they'll treat as a capital asset and not include it as part of its assessable income.
The amount due to be paid after the sale will the lesser of:
Current balance of the R&D loss tax credit $40,000
Less 28% of the sale price $30,000 x 28% = $8,400
R&D repayment tax = $31,600
Company A is required to pay an amount of $8,400 as it is lesser amount by the due date for terminal tax for the 2017-18 tax year.
To account for this, the company will file a R&D supplementary form showing the LRE and the new tax credit balance of $31,600 owing. The remaining balance reduce as the company starts trading into profit and making future tax payments.
Example: Company migration or no longer a company
Company A has claimed the R&D loss tax credit in each of the 2015-16 and 2016-17 tax years. The amount of loss tax credit refunded to the customer for the two years totals $50,000.
In the 2017-18 tax year, Company A decides to move the company to Australia. Because of this they are required to pay back the outstanding balance of the "cashed out" amounts.
A R&D repayment tax assessment is raised for $50,000 and is due on the 2017-18 terminal tax date.