Authors: Jessica Olivier and Peter Xi, RSM Australia and Lisa Murphy, RSM New Zealand
The pace of change across all areas of business has been unprecedented over the past 3 years. As a result businesses all over the world are innovating at speed to stay relevant. Government support for R&D has been crucial in the innovation ecosystem.
In our last article on a 2023 guide to R&D tax incentives across Australia and New Zealand, we broke down and compared the definition of R&D in both jurisdictions. Here we go through some key considerations for businesses when looking to leverage the R&D tax incentive across Australia and New Zealand.
Does the jurisdiction deliver the R&D funding by a deduction, grant or a tax incentive?
- In Australia, the R&D Tax Incentive is delivered by a tax offset, which can be refundable or non-refundable (and the rate can differ) depending on the aggregated turnover of the R&D entity.
- In New Zealand, the R&D Tax Incentive is delivered by a tax credit, which can be refundable up to a certain cap.
In practice, both jurisdictions offer a reduction in tax where there is tax payable. If the business is in a tax loss an amount of R&D expenditure may be refundable if certain conditions are met.
What is the applicable headline rate?
In Australia, the headline rate is more generous than prior to 2021 due to recent amendments. However, it can be complex in its calculation. The rates are:
- A refundable tax offset equal to the company’s tax rate plus an 18.5% premium for eligible companies with an aggregated turnover of less than $20 million per annum. With most companies enjoying a 25% corporate tax rate, this equates to a 43.5% refundable R&D tax offset (being the same as pre-1 July 2021). If a company’s corporate tax rate is 30% (in limited circumstances for businesses under $20 million), the potential R&D refundable tax offset is 48.5%.
- A non-refundable tax offset for all other eligible entities equal to the entity’s company tax rate plus a two-tiered premium determined on the R&D expenditure as a proportion of total expenditure for the income year. Broadly, the rates will be the corporate tax rate plus:
- 8.5% for R&D expenditure up to 2% of total expenditure of the R&D entity for the year.
- 16.5% for R&D expenditure above 2% of total expenditure of the R&D entity for the year.
The above requires a detailed calculation and it is noted that as the ordinary tax deduction is also forgone so that the net benefit for claiming the R&D Tax Incentive per dollar of eligible expenditure is effectively the 8.5% or 16.5% set out above (or combination of both if the relevant intensity is met).
In New Zealand, the headline rate is a refundable 15% tax credit for eligible R&D activities up to a cap of total labour related taxes paid by the R&D entity in the year, regardless of aggregated turnover. It is noted that since 2015 New Zealand also offers a tax credit for R&D tax losses, at a rate of 28%. If both programs are accessed together, the total refundable tax credit rate can be up to 43% (15% + 28%).
What is the registration or claim process and who can claim?
In Australia only limited entities can access the R&D Tax Incentive. This generally only includes incorporated entities, or certain Permanent Establishments of foreign entities. The Australian R&D Tax Incentive also requires minimum eligible R&D expenditure of AUD $20,000 and an upper ceiling of AUD $150 million per year.
In New Zealand, eligible entities are not limited to companies and generally other types of entities such as sole traders and partnerships can also access the R&D Tax Incentive. New Zealand has a minimum expenditure of NZD $50,000 and an upper ceiling of NZD $120 million. As a common theme of flexibility across the New Zealand programme, the upper ceiling can be increased via application with the NZ authorities.
In Australia, R&D claims are made within the entity’s income tax return. Companies must first register their R&D activities with AusIndustry and receive a unique registration number:
- For every income year they want to claim the offset.
- Within 10 months of the end of their company’s income year.
- Prior to claiming the R&D tax offset in their company tax return.
After registration with AusIndustry, the company claims the R&D tax offset by completing an R&D tax incentive schedule along with the relevant labels in its company tax return and lodges them with the Australian Tax Office. If the tax return has already been lodged for an income year, an amended income tax return can be lodged within the general amendment period of 2 or 4 years.
New Zealand process
Similarly, in New Zealand the R&D Tax claim is completed with the income tax return. However, there are some key differences to Australia:
The New Zealand claim process is as follows:
In-year approval of eligible R&D activities: Perhaps the biggest difference is New Zealand’s in-year review process for eligible R&D activities. Unlike the Australian process where the application can be subject to subsequent review, the New Zealand programme requires all activities to be presented for upfront review and approval.
This key difference has delivered far greater certainty to claimants when compared to other jurisdictions around the world, where there may be subsequent challenges by the authorities around eligible activities. With the definitions of eligibility often being less black and white, this has resulted in lengthy, complex and expensive disputes in other jurisdictions. The New Zealand process has been praised by many in providing certainty to claimants without the fear of subsequent clawback.
The in-year approval process is generally due within 1 month and 7 days of the end of the relevant income year of the R&D entity.
- Retrospective claim: Must lodge tax return within 1 year of the latest filing due date and lodge R&D supplementary return within 30 days of lodging the income tax return.
- Registration of R&D projects and activities: The R&D supplementary return (filed electronically).
- R&D Expenditure: Include in the Income Tax Return and R&D supplementary return.
For both Australia and New Zealand, documented evidence for technical and financial support must be maintained throughout the undertaking of the R&D activities (contemporaneous documentation).
Are there any other key differences?
As noted earlier in this article, there are a number of key differences including:
- IP ownership requirement – Australia requires that the R&D activities be undertaken ‘for’ the R&D entity, and there are certain rules around expenditure at risk. Broadly, the New Zealand requirements on IP are that a related party worldwide has ownership of the IP, or IP can be accessed for no further cost. Furthermore, whilst New Zealand also has anti-double dipping provisions, it may be that if the overseas entity cannot access the R&D Tax Incentive the New Zealand rules will allow the New Zealand entity to access the benefit that might not otherwise be available.
- Overseas expenditure – Prima facie, New Zealand offers a more generous allowance of up to 10% of total eligible expenditure for activities conducted outside of New Zealand or by non-residents of New Zealand. Generally, in Australia the legislation limits the R&D claim only to eligible activities conducted physically and solely within Australia. However, Australian legislation provides the ability for a company to apply for an Overseas Finding and if successful, claim certain overseas R&D activities and associated costs in specific circumstances and if specific conditions are met.
- ‘Foreign owned’ R&D – As noted above, the IP ownership and funding of R&D rules in New Zealand are relatively easier to meet when compared to Australia. Where there is foreign investment, the Australian rules do contain specific provisions for ‘foreign owned’ R&D where a separate set of conditions must be met. The New Zealand rules appear to cater to this possibility without introducing a separate set of rules. It is important to ensure that in these circumstances the specific rules are met in either jurisdiction.
- Quarterly funding – to be introduced in New Zealand in 2023. At this stage, Australia does not offer quarterly funding, however in-year funding may be sought through alternate mean such as external R&D debt financiers which currently exist in Australia.
If you have any questions around the insights shared in this article, please contact us.