New Zealand provides limited incentives, including:

Special deductions allowed for certain expenses incurred for forestry, farming, aquaculture and mining that would not normally be allowed; and
Income tax exemption on gains from the sale of shares of qualifying unlisted New Zealand companies owned by non-resident investors when those shares are held for at least 12 months, and the investor is resident in a country with which New Zealand has a tax treaty.

“Cash Out” of Research and Development Tax Losses

For income years beginning on or after 1 April 2015, the government introduced rules for allowing start-up companies engaging in intensive research and development activities to “cash out” their tax losses for research and development expenditure. Research and development start-up companies can receive a payment of up to 28% (the standard corporate tax rate) of their tax losses from research and development expenditure in any given year.

In order to qualify, the following conditions must be met:

The company must be a New Zealand resident and not treated as a resident of another country under any tax treaty;
The company must not be part of a group that includes a foreign company;
The company must have a net loss for the corresponding year, or if part of a group, the group must have a net loss for the corresponding income year;
The company must incur R&D expenditure in the income year;
The company's R&D labor expenditure must be at least 20% of their total labor expenditure, or if part of a group, the aggregate expenditure of the group must meet the 20% requirement; and
The intellectual property and know-how that results from the R&D must vest in the company, solely or jointly.

The R&D tax-loss credit amount is limited to the lower of the following multiplied by the basic tax rate for the year (current corporate tax rate is 28%):

A yearly net loss cap of NZD 500,000 for the income year 2015-16, which is increased by NZD 300,000 per year over the next 5 years up to NZD 2 million (for the income year 2020-21);
The company’s net loss for the year;
The company’s total research and development expenditure for the year; or
1.5 times the company’s R&D labor expenditure for the year.

R&D tax-loss credit applications must be filed on or before the due date of filing a tax return.

When the company makes a return on their R&D, it is required to repay some or all of the credit amounts cashed out. Triggers for repayment include the sale of R&D assets, failure to meet the eligibility conditions, liquidation or migration of the company, and the sale of the company.

COVID-19 Emergency Measures

In response to the COVID-19 pandemic, the New Zealand tax authorities have extended the due date for filing the R&D tax-loss credit applications up to 31 August 2022 for the tax year 2021, if the companies were unable to file the application due to the pandemic or if the late filing was based on the postponement of the due date for filing of tax returns.

Tax Credits for Research and Development (R&D)

Effective 1 April 2019, New Zealand introduced a 15% tax credit for eligible expenses incurred towards R&D activities.

Eligible Persons

A person is eligible for the R&D tax credit if the following requirements are met:

A person or a joint venture of which the person is a member undertakes core R&D activity in New Zealand including a contractor undertaking core R&D activity on their behalf;
The business is carried out through a fixed establishment in New Zealand by the person or a joint venture of which the person is a member;
The person or a joint venture of which the person is a member may use results of the relevant core R&D activity and any related supporting R&D activities for no consideration; or
The results of the relevant core R&D activity and any related supporting R&D activity are:

owned by the person;
if the person is a company owned by another company that is resident in New Zealand or in a country with which New Zealand has a tax treaty and such other company is a part of the same group of companies as the said person; or
owned by a joint venture of which the person is a member.

Further, the above eligibility criteria apply only if the total of the person’s R&D expenditure and the eligible R&D expenditure for any joint venture amounts to at least NZD 50,000 for the year.

Core R&D

Core R&D refers to an activity that:

Is conducted in a systematic approach;
Has a material purpose of creating new knowledge, or new or improved processes, services, or goods; and
Has a material purpose of resolving scientific or technological uncertainty.

An activity that supports the core R&D activity may also be considered if it is integral to the core activity.

Core R&D activities do not include:

An activity being publicly available where the knowledge is required to resolve uncertainty and is deductible by a competent professional in the relevant scientific or technological field;
An activity to the extent it is performed outside New Zealand; or
An activity excluded in Schedule 21, part A of the Act.

Schedule 21 refers to excluded activities and may be amended by Orders in Council with the intent to maintain the R&D tax credit regime in accordance with its stated purpose, i.e.:

To provide an R&D tax credit as an incentive to a person for performing, or contracting for the performance of, activities to create new knowledge, or new or improved processes, services, or goods; and
To ensure that activities, expenditures and losses do not inappropriately qualify for R&D tax credits.

Eligible R&D Expenditure

Eligible R&D expenditure includes expenditure or loss incurred on an R&D activity for an income year. This includes:

Depreciation loss for an item of depreciable property to the extent the depreciable property is used in performing an R&D activity;
Expenditure or loss incurred in acquiring goods and services that are non-depreciable, to the extent:

the goods and services relate to performing an R&D activity; and
the expenditure or loss is not a certain unexpired amount relating to end of year adjustments; and

Payments to employees, to the extent to which their employment relates to performing an R&D activity.

As with core and supporting activities, certain expenditure or loss is specifically excluded as described in Schedule 21B of the Act. Further, expenditure or loss is excluded where it would have been incurred in the absence of the R&D, if:

The R&D activity is performed in the course of commercial production; and
The expenditure/loss is not related to an employee’s contribution to the R&D activity.

Tax Credit Amount, Refund, and Carry Forward

Total expenditure on R&D is capped at NZD 120 million. The expenditure threshold may be increased with the approval of the Commissioner. The tax credit is calculated as 0.15 x total eligible R&D expenditure.

Where the tax credits for eligible persons exceed the tax liability for the year, the credit is allowed to be refunded up to a maximum of NZD 255,000, subject to certain conditions, or is allowed to be carried forward. The refund of tax credit applies from the income year 2020-21 i.e., 1 April 2020.

The carry forward of R&D tax credit for companies is subject to continuity rules, which include maintaining a 49% interest in the company from the first day of the income year in which the R&D tax credit arises until the last day of the income year.

R&D Tax Credit Return and Notice

Effective income year 2019-20, a supplementary R&D tax return must be filed in electronic format within 30 days after the due date of filing of the tax return, to claim the R&D tax credit incentive. From the income year 2020-21 onwards, the taxpayer is first required to file a notice with the commissioner and obtain a general approval or a pre-approval of their criteria and methodologies (CAM), failing which the supplementary R&D tax return cannot be filed. Taxpayers may opt for the CAM approval as significant performers if the eligible R&D expenditure is expected to be more than NZD 2 million for the relevant income year.

The application for the general approval is required to be filed by the 7th day of the second month following the end of the first income year to which the application relates (7 May for taxpayers with a standard year ending of 31 March), and the application for CAM approval is required to be filed by the sixth month before the end of the first income year to which the application relates (30 September for taxpayers with a standard income year ending of 31 March). The general or CAM application filed can be used to claim R&D tax credit for up to 3 years. Companies incurring eligible R&D expenditure of more than NZD 2 million can alternatively acquire a certification that their R&D activities and expenditure meets the requirements of the R&D tax incentive, from an approved R&D certifier.

COVID-19 Emergency Measures

In response to the COVID-19 pandemic, the New Zealand tax authorities brought forward the planned refundability measures by one year to the income year 2019-20, to relieve cash flow problems, encourage businesses to retain R&D staff and support the firms to continue their R&D in the current environment.

Further, the following extensions in deadlines are provided for the benefit of the taxpayers:

The due date for filing the supplementary tax return for the income year 2020-21 is extended up to 31 May 2022;
The due date to apply for the general approvals for the income year 2021-22 are as follows:

for the income year ending between 31 December 2021 and 31 March 2022, both inclusive, the due date is extended up to 31 May 2022 or a date that represents a two-month extension to their standard filing date, whichever is earlier; and
for the income year ending in June 2022 the due date is extended up to 30 September 2022; and

The due date to apply for the CAM approvals for income years 2021-22 and 2022-23 are as follows:

for the income year ending between February 2022 up to June 2022, both inclusive, the due date is extended up to 31 March 2022 or 3 months before the end of the income year, whichever is earlier;
for the income year ending on 31 August 2022 and 30 September 2022, the due date is extended up to 30 April 2022 and 31 May 2022 respectively; and
for the income year ending on 31 October 2022, the due date is extended up to 31 May 2022.

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