The tax rules are becoming more favourable as the Government to increase national spending on Research & Development (R&D). The new rules come into effect today which mean companies can now “cash out” some of their spending on R&D.
More info about the scheme here
Why would you want to “cash out” tax losses?
Before these rules came into effect, companies building a product or service would spend money developing a product and make losses until revenue catches up to spending. These losses in the initial years would be carried forward to be offset when the company makes a profit. The new regime means you can receive a benefit from the IRD a lot sooner than carrying forward losses.
It’s important to identify that the benefit is a loan and not a credit, it may need to be repaid under certain circumstances*.
Who is the new regime for?
In order to qualify you must:
- Be a NZ tax resident
- Be making tax losses
- Be spending on R&D activities
- Spend 20% of the total wages/salaries bill on R&D
If you’re receiving a grant for R&D this expenditure may be excluded.
The IRD have developed an eligibility tool to work out whether you are entitled to cash out R&D losses.
What is R&D?
Each business processes will look different, but it’s useful to remember that Research and Development are two separate activities:
Research is defined as being original and a planned investigation, carried out with a view to gain new scientific or technical knowledge and understanding.
Development for R&D loss tax credit purposes takes place when a project uses research findings to produce new, innovative or substantially improved materials, devices, products, processes, systems or services.
More info on these terms here
Costs that are claimable must relate to R&D, which might include:
- Salaries, wages & contractors costs
- Office costs relating to R&D
- Depreciation of any assets used solely for R&D purposes
How much can you claim?
The regime allows you to cash out losses for the year to 31 March 2016, and for the tax years going forward. There are limits however, so the rate you may be able to cash out will be the lesser of:
- Total tax loss for the business
- 1.5 times your R&D spend on salaries & wages
- Total R&D spend in the business
- $500k (this increases by $300k every year for five years)
What are next steps?
You can register for the regime with the IRD here. There is no harm in registering even if you might not be eligible. When your accounts are prepared there will supplementary statements to file with MBIE.
This may be an opportune time for your business to really look at how R&D is accounted for and measured, and how costs are allocated. It’s a good time also to ensure your systems are up to date and data is collated efficiently, with accurate details of costs. To talk to us more about how this can be achieved in your business, or anything in this post, please email us.
*Circumstances include sale of the business or intellectual property among other scenarios. It’s best to get professional assistance.
Disclaimer: Information provided to the best of the authors knowledge at time of publication. Laws are subject to change and independent advice should be sought. The above information is general in nature and should not be construed or relied on as a recommendation.