Tax Updates: 24 July 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 Loss Tax Credit

If you’ve got corporate clients, perhaps in the early stages of their business life cycle, that are undertaking Research and Development (R&D) and in a tax loss position at year-end, remember that they may be able to take advantage of the R&D loss tax credit.

The R&D loss tax credit regime is different to the more commonly known R&D tax incentive (RDTI) regime, with different criteria to be satisfied. However, ultimately, your client could be entitled to receive credits from both regimes at the same time.

There has been a bit of cloudiness surrounding some of the components of the loss tax credit rules. Inland Revenue (IR) has recently issued a draft interpretation statement to clear the skies.

PUB00435 is titled “Research and development loss tax credits” and is a 42-page document that is split into two parts.

Part one considers when a company will be eligible to claim an R&D loss tax credit (the eligibility criteria). This includes considering the type of company that is eligible, the expenses that are relevant for particular calculations, and the qualifying types of R&D activity.

Part two then considers a company’s obligations once it is eligible to receive the R&D loss tax credit.

So a few key takeaways from the IS:

• The regime only applies to New Zealand resident companies which have a tax loss for the year, and those which qualify can essentially receive a cash pay-out equivalent to 28% of the calculated amount (although a set sum of $560k if this is the lowest of the four thresholds).
  
• It is an annual calculation, but losses carried forward from a previous income year cannot be included in a current year claim, so make sure you don’t overlook your entitlements for a particular year, as there is no going back due to strict timing criteria.
  
• The credit is, in essence, an interest-free loan, basically repaid by the company paying income tax sooner than it otherwise would have due to the carry forward of tax losses. There are, however, triggers that could require a repayment of the credit (early repayment events).
  
• The company must satisfy the wage intensity criteria (>20% R&D labour costs to total labour costs), incur R&D expenditure in the income year and actually own the IP/know-how resulting from the R&D (although ownership could be jointly). Note a distinction from the RDTI regime, where a claim entitlement can still exist if another group member owns the R&D outcomes.
  
• In order to qualify as R&D expenditure, the expenditure must be tax deductible in the year it is incurred. Consequently, expenditure of a capital nature, or where the deduction is deferred to a subsequent income year, will not qualify. Equally, where expenditure is funded by a government grant to which sections CX 47 and DF 1 apply, then only the amount of expenditure not covered by the grant will qualify.
  
• An R&D statement to claim the R&D loss tax credit must be filed no later than 30 days after the last day for filing the company’s income tax return for the relevant income year. Miss the filing date, then you lose the ability to claim a credit for that income year. So if your client, for some reason, has lost their extension of time, they must file no later than 6^th August.
  
• Once a loss tax credit has been claimed, the company must continue to file an R&D statement every subsequent income year until the R&D loss tax credit is repaid.

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.