It's not supposed to be a secret, but we often speak with New Zealand companies who are surprised to learn that they can cash out R&D losses when investing in research and development. Many early-stage companies are leaving this cash incentive untouched. Are you getting yours?
What is the R&D Loss Tax Credit?
First introduced in 2016, the R&D Loss Tax Credit allows loss-making NZ companies to convert yearly business losses caused by R&D investment to cash. This provides a valuable boost to your cash flow in the early and loss-making stages of product development. The refund available is up to 28% of your losses.
This IRD-run program is entirely separate from the more well-known R&D Tax Incentive (RDTI) program run by Callaghan Innovation, which gives up to 15% of your R&D expenses. This means loss-making companies may be able to access both and get cash refunds up to 43% of their yearly R&D expenditure.
Who Can Get the R&D Loss Tax Credit?
The R&D Loss Tax Credit are only available to privately held and unlisted companies resident in New Zealand, who are not treated as a foreign resident under any double tax agreement. Sole traders, partnerships and look-through companies are not eligible.
For each tax year you want to claim, you must:
- have a net tax loss, and
- have spent more than 20% of your payroll on R&D by NZ employees.
If you’re close to the 20% line, you may still qualify since you can count 2/3 of NZ contractor costs as employees for this test.
How Can Tax Credits Help a Loss-making Business?
Don’t let the name fool you – the R&D Loss Tax Credit isn’t so much about getting you tax credits – which may or may not be useful in the future to offset against eventual income tax. You’re going to get those anyway, when you report a loss. Instead think of this as a mechanism to ‘cash out’ those credits as a refund, paid into your bank account annually. Your business may not be paying income tax yet, but this program is still a great benefit to your real cash position.
The point of this program is to give innovative loss-making companies something comparable to the benefit a profit-making company gets from lowering their income tax, when they deduct their R&D expenses.
Is the R&D Loss Tax Credit Actually a Loan?
Because you get the benefits now (as cash) instead of later (as a credit), the IRD says you can think of this as working like an interest-free loan that is ‘paid back’ when you do eventually make profits and pay income tax. However, this description has created some confusion, since there is no loan agreement, no interest, and no term. Another way of thinking about it is the cashflow benefits are shifted earlier in time – for no fee.
The IRD does keep a record of how many credits you’ve cashed out, and can ask for early repayment in some circumstances, such as if you’re selling the company or the IP you’ve generated for a profit that is otherwise untaxed.
How Much Could I Get?
Here’s a simplified example of the maximum refund, and how it combines with the RDTI:
Expenses | RDTI 15% | R&D Loss Tax Credit 28% | Total | |
RDTI projects | $100 k | $15 k | $28 k | $43 k |
Other R&D | $100 k | - | $28 k | $28 k |
Total | $200 k | $15 k | $56 k | $71 k |
The maximum yearly expenditure you can cash out is $2m (to receive $560,000 refund). The actual refund will be capped at 28% of your net loss for the income year, or 28% of your R&D expenditure, whichever is lower. Companies with low payroll or contractor expenditure may also face a further cap ( contact us to discuss ).
How Do I Apply For the R&D Loss Tax Credit?
A company must apply at the end of each tax year, in a separate application process just after the annual tax return. In the application you will describe your R&D activities, then provide exact calculations of the qualifying expenditure on R&D. It’s important to take great care, since the definitions of R&D are different for the R&D Loss Tax Credit, for the RDTI, and for the standard accounting classifications. There are also important exclusions for which types of expenditure are eligible.
The R&D Loss Tax Credit application is due 30 days after your tax return, and both have to be filed to process a refund. For companies with standard tax years ending 31 March, your deadline will be 6 August. The standard extension-of-time if you have a tax agent means your deadline may be the following 30 April.
What are the Next Steps to Securing R&D Funding?
BlueRock can save you the hassle of navigating the rulebook, and fully prepare your R&D Loss Tax Credit, R&D Tax Incentive, or any other NZ Government or business grant applications. Get in touch with our R&D tax consultants for a free consultation to discuss your business, and how much grant funding you may be able to qualify for.
Disclaimer: This article is intended to be an overview only, and is necessarily of a general nature and not comprehensive. There are additional exclusions, limits and conditions to be considered when preparing your application and claim.
