New Zealand: Research & Development Tax Changes
14 July 2014
Posted by: Author: Iain Craig
Author: Iain Craig
Two tax changes designed to encourage business investment in research and development (R&D) activities have been announced.
The first change allows an R&D-intensive startup company to "cash-out” its tax losses which are attributable to the R&D expenditure.
The new measures are expected to come into effect from 2015/16, but with some transitional relief for expenditure incurred from 7 November 2013.
R&D Credit – Start Up
An innovative start-up company will have the option to "cash-out” its tax losses arising from qualifying research and development (R&D) expenditure from the start of the 2015 income year.
The proposed measures mean that companies can receive an up-front cash payment equal to the tax value of the losses rather than having to carry forward the tax loss to apply against future assessable income.
To qualify the company must have an R&D intensity which is measured as a ratio of R&D expenditure on wages and salaries to total wages and salaries. This ratio should exceed 20%. An overall cap will apply on the amount that can be cashed up.
An eligible business will be able to cash out up to 1.5 times the R&D expenditure on salary and wages, provided this amount does not exceed its total tax losses or total qualifying R&D expenditure. The initial cap is set at NZD 500,000, rising to NZD 2 million per business.
Innovative start-up companies will be able to cash-out up to NZD 500,000 of eligible tax losses in the first year, with the cap rising by NZD 300,000 each year to an eventual maximum of NZD 2 million (a cash-out of NZD 560,000 per year at a company tax rate of 28%).
There are claw-back provisions proposed where the company makes a tax-free capital gain by
selling intellectual property, selling 90% or more of its shares, or is liquidated or becomes non-resident for tax purposes.
An eligible business will need to assess the benefit of cashing out the losses compared to carrying them forward. This will involve an assessment of the eligible expenditure defined according to the relevant accounting standards, the prospect of future taxable income or income from other sources, and the risk of tax losses being forfeited through the introduction of new investors or changes in shareholder percentages which could result in the company not satisfying the minimum shareholder
continuity test of 49%.
Black Hole Expenditure
Black hole expenditure refers to business expenditure which is not immediately deductible for tax purposes and does not form part of the cost of a tax depreciable asset.
Capitalised development expenditure (incurred on or after 7 November 2013) that relates to a patent, patent application, or plant variety rights will be allowed as part of the costs of these depreciable assets. Currently only legal and administrative costs of registering the asset are treated as depreciable.
A one-off tax deduction will be allowed for capitalised development expenditure incurred on or after 7 November 2013 on intangible assets that did not create a depreciable intangible asset and which are written off for accounting purposes. This will be irrespective of whether the assets were used in the business or the R&D was unsuccessful.
There will be a claw back provision if the R&D asset subsequently becomes useful to the business in producing taxable income. The claw-back will, however, become depreciable over the life of the asset. A similar provision will apply if the intangible asset is sold, with the previous write-off being deemed to be income to the extent of the consideration received.
The objective is to ensure businesses are not discouraged from investing in R&D because of the potential adverse tax treatment.
New categories of depreciable intangible property
The schedule of depreciable intangible property is to be extended so that
- Registered designs and applications for registered designs will become depreciable with a fixed life over 15 years; and
- Copyright in an artistic work which ha been used industrially will be depreciable over 16 years for product designs or casting moulds, and 25 years in the case of works of craftsmanship.
Although the effective date for the change is to be from the start of the 2015/16 income year, the treatment will apply to certain expenditure incurred from the date of the release of the original Discussion Document, i.e. 7 November 2013.
This article first appeared bdointernational.com