Authors: Jessica Olivier and Peter Xi, RSM Australia and Lisa Murphy, RSM New Zealand
Over the past 3 years, there has been significant legislative reform around how Research and Development (R&D) Tax Incentive claims are administered across Australia and New Zealand. The introduction of the R&D Tax Incentive in New Zealand in 2019 brought competition with the Australian regime and has ultimately resulted in greater innovation support for businesses across both sides of the Tasman Sea. In the first part of two articles, we explore both jurisdictions and break down the current definitions of R&D. Our second article explores some key considerations for leveraging these incentives.
Across Australia and New Zealand, businesses ranging from start-ups to multi-nationals are likely to be entitled to R&D support through the R&D Tax Incentive program. However, there are subtle variances in definitions and administrative requirements that means access can vary significantly. Understanding the framework, the differences and how to effectively plan for the R&D Tax Incentive is therefore critical to maximising the benefits available. We take a deeper look into these key differences and what it means for businesses wishing to access and retain R&D Tax Incentive benefits.
What is the definition of R&D under the R&D Tax Incentive?
It is important to note that outside of the R&D Tax Incentive program, there are additional areas of support for innovation in both countries including grants and other government incentives. This article will not explore these in detail, however in New Zealand the 2015 introduction of an R&D Tax Loss Cashout program is a key complementary programme which can be used to supplement the R&D Tax Incentive.
The more mature R&D Tax Incentive programme is in Australia, which was introduced on 1 July 2011. The definitions broadly follow the OECD guidelines and have not been amended since inception. However over the past 5 years there have been court cases which have significantly altered how these definitions are interpreted.
To qualify as eligible R&D activities in Australia, a set of interrelated activities must contain at least 1 eligible core R&D activity. Upon qualifying, eligible supporting R&D activities which are either directly related to the core activity, or have the dominant purpose of supporting the core R&D activity can also be claimed. The dominant purpose test is applicable where an activity might appear on an exclusions list for core R&D activities or broadly relates to the production of goods or services.
An eligible core activity is defined as an experimental activity where the outcome cannot be known or determined in advance based on current knowledge, but can only be determined by applying a systematic progression of work that:
- Is based on principles of established science.
- Proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions.
- Is conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).
Prior to the landmark case in the Federal Court of Moreton Resources Ltd v Innovation and Science Australia 2019 the assessment of the eligibility of activities in Australia by the relevant authorities placed heavy emphasis on words such as ‘experiment’ and ‘new knowledge’. This meant that a narrow interpretation was often adopted whereby activities such as applying certain scientific methods to deal with site specific issues would be deemed as high risk from an eligibility perspective. Since Moreton, the administrators have significantly modified their approach, resulting in a broader application of the relevant provisions and supporting a wider range of activities.
Whereas, to qualify as eligible R&D in New Zealand, the core activity must:
- Be conducted using a systematic approach.
- Have a material purpose of creating new knowledge, or new or improved processes, services or goods.
- Have a material purpose of resolving scientific or technological uncertainty.
The New Zealand legislation further contains negative limbs, whereby even if an activity meets the above definition, it will be deemed ineligible if the knowledge required to resolve the uncertainty is publicly available, or deducible by a competent professional in that relevant scientific or technological field.
For eligible supporting R&D activities, the New Zealand definition provides that the main or only purpose of the supporting activity must be to support the core activity and is required for and integral to the core R&D activities.
With any broad-based, self-assessment programme (which the R&D Tax Incentive is in both jurisdictions), the meaning which is ascribed to the legislation by the Courts and the way the legislation is interpreted by the relevant administrator is always important. As noted above, in Australia there are now judicial precedents for some of the key definitions.
Given the infancy of the programme in New Zealand, to date there have been no court cases on any of the definitions. However, the New Zealand authorities (Callaghan Innovation) and Inland Revenue Department (IRD) have both approached administration in recent years with a collaborative approach seeking to support businesses on their innovation journey. This, coupled with some key wording differences and in-year review mechanism, has meant the New Zealand R&D Tax Incentive has delivered a level of ease in accessibility that rivals not only Australia but any R&D Tax Incentive regime in the world.
Key Similarities and Differences
As it can be observed above, Australia and New Zealand both follow a similar three-limb approach for conducting R&D activities, specifically involving:
- Systematic approach.
- New knowledge purpose.
- Resolving uncertainty based on principles of ’hard’ sciences (i.e., excluding social sciences).
- Supporting activities: eligible if it meets the requisite level of “support” for the core R&D activities.
Notwithstanding the similarities in definition between the two jurisdictions, there are some key differences in the definitions set out above, including:
- The absence of an “experimental” requirement in the New Zealand definition.
- The inclusion of “technological uncertainty” in the New Zealand definition.
- The higher threshold for supporting activities in New Zealand when compared to Australia.
It is important for claimants seeking to access the programme in either jurisdiction to seek professional advice to understand the meaning of key legislative terms and the guidance from the authorities in each jurisdiction. Given the different overlapping definitional differences, the way the activities are registered is therefore crucial to deal with any challenge from the authorities.
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