Research & Development Tax Incentive

Research & Development Tax Incentive

Budget 2022 saw funding dedicated to the Research and Development Tax Incentive (RDTI). With Callaghan Innovation Limited and the Inland Revenue Department working together to evaluate entitlement upon review, the RDTI operates as a tax credit to incentivise businesses and individuals who perform R&D activities that are carried on in New Zealand.

The most common inquiry concerning the RDTI involves interpreting what satisfies the necessary scope of an eligible core R&D activity. It is also important to note that any application can include more than one core R&D activity. The RDTI provides relief for those businesses or individuals who seek to resolve scientific and technological uncertainty while employing methodologies that follow a systematic approach.

For instance, when seeking to resolve scientific and technological uncertainty, there is this expectation that the competent industry professional operating within the same field of research believes there exists uncertainty of finding a resolution to any specific hypothesis.

There is also a need to explain why a business or the individual undertaking this eligible core R&D activity exists. The intent must be to create new knowledge and new and improved processes, services or goods. In extension to eligible core R&D activities, some activities that may not meet the necessary criteria of a core activity could satisfy the threshold for what constitutes a supporting activity. Supporting activities include those activities proven to support and deemed integral to the core R&D activity.

In relation to eligibility and beyond the scope of the uncertainty and systematic approach criteria, the applicant must incur a minimum cost of $50,000 during the calendar year. The applicant can claim back 15% to offset any pending tax obligation or to ‘cash out’ these tax credits if operating in a taxable loss position.

Interested parties often inquire about the excess use of tax credits when already applied to offset a current tax obligation and what is required for the business or individual to ‘cash out’ these RDTI tax credits.

The RDTI tax credits similarly operate to excess tax losses carried forward from one financial year to the next. If excess tax credits exist, these are carried forward and used to offset any future tax obligation.

When referring to the ‘cashing out’ of losses, this option only applies to businesses or individuals operating with a taxable loss for the year of the claim and who satisfy the broader refundability rules for example start-ups. Regarding the broader refundability rules, a limit exists to the extent of the RDTI tax credits refundable to the amount paid in employment related taxes.

In so far as compliance and lodgment of a RDTI claim, there is a requirement to submit a general approval, following the first income year to which the application relates. Moreover, a supplementary return is also required, along with lodging the business (or individual) tax return.

At Bellingham Wallace, we have assisted our clients successfully navigate what can often be a complex and niche area of practice. Given our experience, we understand what makes for a successful claim. Our team, led by Serjit Singh, are always ready to have a chat to establish if this incentive is right for your business activity.

Serjit can be reached on serjits@bellinghamwallace.co.nz