Engaged in R&D? The R&D loss tax credit regime is a go!
On 24 February 2016, the Taxation (Annual Rates for 2015-16, Research and Development and Remedial Matters) Bill ( “the R&D Bill” finally received royal assent. The R&D Bill was originally introduced into Parliament over a year ago.
As the title suggests, a major feature of this bill are the new rules providing a tax credit for research and development (R&D) tax losses. Start-up companies engaged in R&D face high upfront costs and as a result are likely to have losses in the early years. Recognising that lack of cash flow is a real problem, New Zealand resident start-up companies engaged in intensive R&D will be able to “cash-out” losses by claiming 28% as a refundable tax credit starting from the 2015-16 income year. The amount a company can claim as a tax credit will be the lesser of the company's:
· net tax loss for the year x 28%, or
· total R&D expenditure for the tax year x 28%, or
· total R&D labour expenditure for the year x 1.5 x 28%
The amount of credit is capped. For the 2016 income year the amount is $140,000 (representing an R&D spend of $500,000). This will rise progressively to $560,000 by the year 2020-2021 (representing an R&D spend of $2,000,000). Cashed out R&D losses are forfeited meaning that the benefit of the losses is available immediately rather than only becoming usable once the start-ups achieve trading profits.
The R&D loss tax credits are repayable (as a clawback) in certain circumstances to the extent that the company has yet to pay tax in excess of the R&D credits received. Clawback events include where less than 10% of the shareholders remain from when the credit was received, the company disposes of or transfers the intangible property down the track, or the company is put into liquidation. Losses are reinstated in such instances.
To qualify for the regime, companies must meet corporate eligibility and “wage intensity” criteria, have a net loss for the corresponding tax year and incur R&D expenditure. Further, the intellectual property and know-how that results from the R&D must vest in the company, solely or jointly.
Now that the rules are a reality and in force, eligible companies should be turning their attention to the practicalities. This includes ensuring there is appropriate project documentation, keeping suitable records to demonstrate they have carried out eligible R&D activities and have eligible expenditure in relation to those activities. It would be advisable for companies to set processes up correctly at the start of the income year to ensure this. Although given the rules have only just come into force now and the 2016 income year is almost complete, it may be a more difficult exercise to pull this information together for this first year.
Inland Revenue will be using the Ministry of Business, Innovation and Employment (MBIE) Investment Management System (IMS) client portal for the R&D loss tax credit application process. To apply for the R&D loss tax credit, taxpayers will first need to check they meet the eligibility criteria and then register for IMS access to complete the application. If the taxpayer’s registration satisfies the regime’s requirements, they will receive an email with access to their IMS account.
Once registered, taxpayers claiming the tax credit are required (in addition to their normal income tax return) to file two other forms: a R&D activity statement and a R&D supplementary form. Both forms will be completed electronically within the MBIE’s IMS.
If you would like to discuss how this new regime could benefit your business please don’t hesitate to contact Aaron Thorn or your usual Deloitte advisor.