Some positive news amidst uncertainty
Some positive news amidst uncertainty
In this update (from our home offices), we explain the R&D tax credit changes in the COVID-19 Bill, which received Royal Assent on 26 March.
The bill also contained several other tax changes, which have been summarised in our Taxmail here.
More accessible refundability for loss-making businesses
As part of the wider package put together by Government, Inland Revenue have a made a number of tax changes to ease the financial burden on New Zealand businesses. As well as easing the financial burden, the R&D changes are aimed at encouraging those businesses performing R&D to continue performing R&D, by facilitating faster and easier access to refundability.
In 2019/20 Inland Revenue introduced broader refundability rules for the R&D tax credit, to apply from year two of the scheme (i.e. 2020/21 tax year) – The COVID-19 Bill brings forward those rules to apply in the first year of the scheme (2019/20 tax year).
What that means for businesses is:
- In year one, those businesses that didn’t qualify for refundability under the limited rules, will now be able to apply the broader refundability rules.
- Businesses will have the ability to choose between the limited rules or the broader rules, it’s possible that the limited rules will give a better result for some businesses.
- The broader rules will be the default position. You cannot use both rules.
For businesses with a standard balance date, the first year you can access a refund will be for the year ended 31 March 2020 – You will be able to access your R&D tax credit refund once you have filed your 2019/2020 income tax return.
The new rules provide a good opportunity for those loss-making, and businesses in losses to put some much-needed cash back into the business, for R&D that has already been performed.
We include a more detailed analysis on the changes below.
Existing rules – what’s changing?
Most businesses will be aware that broader refundability of R&D tax credits was proposed only for year two of the scheme – with year one being a transitional year in which loss-making businesses (or businesses with carry forward losses) would have refundability limited to $255k. As well as the limited cash refund, many businesses did not qualify because of the wage intensity and corporate eligibility criteria.
The existing rules were designed as a stop-gap while work was completed on wider refundability, with rules put in place to facilitate broader refundability from year two.
Today’s Royal Assent of the Bill brings forward those broader refundability rules, allowing businesses to more easily access a cash refund following the filing of their 2019/20 income tax return.
How it works
The broader refundability rules will apply by default, though you can choose to use the limited refundability rules for the 2019/20 income year. You cannot use both rules.
You still need to be eligible for the R&D tax credit under the general tax credit rules.
The broader refundability rules remove the wage intensity and corporate requirements imposed by the limited refundability rules, as well as extending the refundable amount from $255k to a labour-related tax amount.
The maximum amount you can have refunded will be limited to labour related tax amount (PAYE, ESCT, and FBT):
- paid by the business; and
- paid by companies the business is controlled by or which sit within the same wholly-owned group, if these companies have allocated amounts to the business for the purposes of the cap.
There is no cap for levy bodies or for eligible costs incurred on approved research providers.
For the 2019-20 income year you can still choose to apply the limited refundability rules. The criteria to enable the use of the limited rules however is harder to satisfy than the broader rules.
To apply the limited rules, you must be a company, and:
- be in a tax loss position, or have insufficient income tax liability to utilise all of your R&D tax credits in the 2019–20 income year;
- satisfy the R&D tax loss cash-out corporate eligibility and wage intensity criteria in sections MX 2 and MX 3 (corporate eligibility, and wage intensity);
- not derive exempt income, and not be associated with a person who derives exempt income;
- not be a listed company, and not be associated with a listed company; and
- not have an outstanding tax liability.
Note that under the limited rules the refundable amount is limited to $255k (or $1.7m eligible R&D spend). Remaining R&D tax credits will be carried forward subject to shareholder continuity rules.
Key points to consider
You will need to file your 2019/20 income tax return to access the R&D tax credit refund.
You can choose to apply the broader or the limited rules. Some businesses may have a better outcome under the limited rules where the labour cost in the business is a significantly lower proportion of the overall R&D claim/costs.
Essential to maximising any potential refund is collating all of your R&D information and building up your claim as soon as possible. This will allow you to seamlessly incorporate your R&D claim into your 2019/20 tax return, minimising the amount of time between your 2019/20 tax return filing and receipt of your tax refund.
A message from the Innovation & Growth Advisory team
We know it’s an uncertain time for all businesses in New Zealand, and we think that the steps taken by Inland Revenue are timely and appropriate to support those businesses that need it. We understand that R&D tax credits won’t be the focus of many businesses right now, rather bringing some normality to working from home or continuing on in as ‘normal’ fashion as possible will be.
As the next couple of months unfold, we hope that businesses have a chance to resume normal operation. As businesses resume normal operation, the new rules do provide a good opportunity for those loss-making, and businesses in losses to put some much-needed cash back into the business, for the R&D that has already been performed.
As noted in our prior update, there is also the option to disclose the credit as additional revenue in your financial statements.
In recognition of the new circumstances we now operate within, we also understand the need to readily accommodate remote support for businesses. While the team are all working remotely, we are all available. And, while R&D may not be a focus, we are more than happy to pick up the phone for a chat, R&D or otherwise.
First and foremost though, take care of yourselves and family.
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