Tax Credits for R&D Loss-Making Companies: What You Need to Know

The Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 introduces new rules that will allow companies engaging in intensive research and development activities to cash out their tax losses for research and development expenditure. The new rules underpin the Governments Business Growth Agenda around encouraging business innovation and recognises that research and development is a key element in this process.

Broadly speaking, for income years beginning on or after 1 April 2015, taxpayers can receive cash from the Tax Department for research and development tax losses if the company:

• Is a tax resident of New Zealand (not treated as a resident of any other country under a Double Tax Agreement)
• is in a tax loss position; and
• Has expenditure on research and development salary and wages which is 20% or more of the company’s total salary and wages. The definition of research and development expenditure is based on accounting rules and apply widely to all business sectors, not just business in the IT space.

Certain entities are excluded, including companies wholly owned by the Crown.

A key point to note is that the cash received is in effect an interest free loan from the Government, and one that will be repaid in the future when you pay tax on taxable income or if there is a repayment event such as the sale of assets or if you cease to be a company resident in New Zealand – the repayment events are directly linked to when you will have cash.

How the rules work

The loss making company can “cash out” all tax losses from research and development spending. This means you will have early access to all or part of your tax losses in the form of a cash receipt, rather than carrying those losses forward and potentially losing the loss upon a change in shareholding. Taxpayers are able to cash out the lesser of:

• 1.5 times the company’s research and development expenditure on salaries and wages;
• Total losses; or
• Total qualifying research and development expenditure;

The cap on eligible losses for the relevant year will initially be 28% of $500,000 of losses, rising over time to 28% of $2 million of losses.

So, what do you need to do to claim?

These rules are similar to the previous research and development tax credit regime. Along with expenditure records you will have to prepare a statement of research and development activity. This includes documented explanation, description and records that show activity and expenditure meets the IRD’s definition of research and development.