Tax Updates: 16 November 2023

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

R&D tax loss IS finalised

Inland Revenue (IR) has released its final version of an interpretation statement (IS), which covers the topic of R&D (Research and Development) loss tax credits. Note that this is a different regime from the R&D tax incentive (RDTI), which was introduced in the 2020 tax year, and a company may be entitled to make claims under both regimes.

IS 23/09 is a 43-page document, which is broken into two parts.

Part one examines the eligibility criteria and clarifies that:

• The R&D loss tax credit rules adopt the terms “research” and “development” as used in “NZ IAS 38”, which applies to intangible assets.

• If there is an R&D group of companies, then (i) the wage intensity calculation must be satisfied for the R&D group, and (ii) the R&D group must have a net loss.

• An eligible company must satisfy the wage intensity calculation to claim an R&D loss tax credit. This requires 20% of a company’s total labour expenditure to be on R&D labour.

• R&D expenditure is the company’s expenditure on goods and services to the extent it relates to research or development. The intellectual property and knowhow resulting from the research or development must vest in the company (solely or jointly); and,

• R&D expenditure excludes expenditure that:
  
  
  • Relates to an activity described in Schedule 22 (proscribed activities)
  • Is on goods and services used to provide a service of R&D to another person or that furthers another person’s R&D activities
  • Is not deductible in the income year
  • Is for or under a financial arrangement (such as interest)
  • Is for the acquisition or transfer of intangible property, core technology, intellectual property or know-how.

Part two then considers a company’s obligations once it is eligible to receive the R&D loss tax credit, including discussion surrounding:

• Treatment of losses: Once the available amount of credit is calculated, the company will have some or all of its net loss extinguished, equating to the amount of the R&D loss tax credit / the basic tax rate for a company (28%). Any loss remaining may be carried forward to the next tax year.

• Early repayment events: In certain situations, a company must make an early repayment of a previously claimed R&D loss tax credit. These situations are referred to as “loss recovery events”. If a loss recovery event occurs, the company will have a liability for an amount of R&D repayment tax.

• Imputation credits: Where an ICA company has claimed an R&D loss tax credit and has not had to pay R&D repayment tax, the company will have an imputation debit for the year. The amount of the imputation debit is the lesser of:
  
  
  • the imputation credit that the company has for the year (that is, for amounts of tax paid), and 
  • the company’s total R&D loss tax credits less the imputation debts under section OB 47B for previous income years.

Effectively, this means the company cannot attach imputation credits to dividends until it has repaid the R&D loss tax credit amounts in full (whether through paying income tax or R&D repayment tax).

• Record-keeping requirements: A company’s record-keeping requirements are set out in section 22 of the Tax Administration Act 1994.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.