Taxation (Research and Development Tax Credits) Bill

  • enacted

Taxation (Research and Development Tax Credits) Bill

Government Bill

108—3

As reported from the committee of the whole House

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Hon Dr Megan Woods

Taxation (Research and Development Tax Credits) Bill

Government Bill

108—3

Contents

Key
1Title
2Commencement
Part 1
Research and development tax credits: year 1
3Application
Amendments to Income Tax Act 2007
4Income Tax Act 2007 amended
5Flowchart B4 amended (Satisfying income tax liability)
6Section EE 6 amended (What is depreciable property?)
7New heading and section GB 56 inserted
Arrangements involving research and development tax credits
GB 56Arrangements involving research and development tax credits
8Section LA 4 amended (When total tax credit more than income tax liability)
9Section LA 5 amended (Treatment of remaining credits)
10New subpart LY inserted (Research and development tax credits)
Subpart LY—Research and development tax credits
LY 1Research and development tax credits
LY 2Key terms
LY 3When this subpart applies
LY 4Calculation of tax credit
LY 5Eligible research and development expenditure
LY 6Contracted research and development expenditure
LY 7Foreign research and development expenditure
LY 8Carry forward for remaining research and development tax credits
LY 9Orders in Council
LY 10Evaluation
11Section OB 4 amended (ICA payment of tax)
12New section OB 9C inserted (ICA credit for research and development tax credit)
OB 9CICA credit for research and development tax credit
13Table O1 amended (Imputation credits)
14Section OK 2 amended (MACA payment of tax)
15New section OK 6C inserted (MACA research and development tax credit)
OK 6CMACA research and development tax credit
16Table O17 amended (Maori authority credits)
17Section OP 5 amended (When credits and debits arise only in consolidated imputation group accounts)
18Section OP 7 amended (Consolidated ICA payment of tax)
19New section OP 11C inserted (Consolidated ICA credit for research and development tax credit)
OP 11CConsolidated ICA credit for research and development tax credit
20Table O19 amended (Imputation credits of consolidated imputation groups)
21Section YA 1 amended (Definitions)
22New schedules 21 and 21B inserted
Amendments to Tax Administration Act 1994
23Tax Administration Act 1994 amended
24Section 3 amended (Interpretation)
25New heading and section 124ZH inserted
Research and development
124ZHApproved research providers
26Section 22 amended (Keeping of business and other records)
27New section 33E inserted (Research and development tax credits: supplementary return)
33EResearch and development tax credits: supplementary return
28New section 36BE inserted (Research and development tax credits: electronic formats)
36BEResearch and development tax credits: electronic formats
29Section 36C amended (Particulars furnished in electronic format)
30New heading and sections 68CB, 68CC, 68CD, and 68CE inserted
Research and development
68CBResearch and development tax credits: general approval 2019–20 income year pilot
68CCResearch and development tax credits: greater than $2 million approval 2019–20 income year pilot
68CDResearch and development tax credits: approved research and development cap
68CEResearch and development tax credits: publication of details
32Section 89DA amended (Taxpayer may issue notice of proposed adjustment for taxpayer assessment)
33Section 108 amended (Time bar for amendment of income tax assessment)
34Section 113D repealed (Amended assessments for research and development tax credits
35New section 113E inserted (Amended assessments: research and development tax credits)
113EAmended assessments: research and development tax credits
36Section 138E amended (Certain rights of challenge not conferred)
37Section 141EC amended (Definition of promoter)
37BSchedule 7 amended (Disclosure rules)
39Agencies for research and development
Part 2
Research and development tax credits: year 2 and subsequent years
38Application
Amendments to Income Tax Act 2007
38BIncome Tax Act 2007 amended
39Section LY 3 amended (When this subpart applies)
39BNew heading and section LZ 13 inserted
Research and development tax credits
LZ 13Part-year override of section LY 3(2)(b)
Amendments to Tax Administration Act 1994
40Tax Administration Act 1994 amended
41Section 3 amended (Interpretation)
42New section 124ZI inserted (Certificates for research and development)
124ZICertificates for research and development
43Sections 68CB and 68CC replaced
68CBResearch and development tax credits: general approval
68CCResearch and development tax credits: greater than $2 million approval
44Section 138E amended (Certain rights of challenge not conferred)
Schedule 1
New schedules 21 and 21B inserted
Legislative history

The Parliament of New Zealand enacts as follows:

1 Title

This Act is the Taxation (Research and Development Tax Credits) Act 2018.

2 Commencement

(1)

Part 1 of this Act comes into force on 1 April 2019.

(2)

Part 2 of this Act comes into force on 1 April 2020.

Part 1 Research and development tax credits: year 1

3 Application

This Part applies for the 2019–20 and later income years.

Amendments to Income Tax Act 2007

4 Income Tax Act 2007 amended

Sections 5 to 22 amend the Income Tax Act 2007.

5 Flowchart B4 amended (Satisfying income tax liability)

Flowchart B4 is amended by inserting the following immediately before the box labelled “Remaining credits”:

New step in flowchart B4
6 Section EE 6 amended (What is depreciable property?)

(1)

In section EE 6(1)(b), replace “income.” with “income; or”, and insert:

(c)

in deriving exempt income, and it is used in performing research and development activities.

(2)

In section EE 6, in the list of defined terms, insert “research and development activities”.

7 New heading and section GB 56 inserted

Before the heading to subpart GC, insert:

Arrangements involving research and development tax credits

GB 56 Arrangements involving research and development tax credits
When this section applies

(1)

This section applies when an arrangement has a purpose or effect, not being a merely incidental purpose or effect, of defeating the intent and application of subpart LY (Research and development tax credits).

Credit reduced

(2)

A person’s entitlement to a research and development tax credit is reduced to the amount that the Commissioner thinks appropriate, whether or not the person is a party to the arrangement.

Defined in this Act: arrangement, eligible research and development expenditure, goods, research and development tax credit, services

8 Section LA 4 amended (When total tax credit more than income tax liability)

(1)

After section LA 4(1)(c), insert:

(cb)

fourth, a research and development tax credit under section LY 1(3)(b):

(cc)

fifth, a research and development tax credit under section LY 1(3)(a):

(2)

In section LA 4(1)(d), replace “fourth” with “sixth”.

(3)

In section LA 4, in the list of defined terms, insert “research and development tax credit”.

9 Section LA 5 amended (Treatment of remaining credits)

(1)

After section LA 5(4), insert:

Research and development tax credits

(4B)

A person’s research and development tax credit is used by—

(a)

first, the Commissioner refunding the tax credit up to a maximum of $255,000, by treating it as a refundable tax credit and applying section LA 6(2), if the person—

(i)

meets the corporate eligibility criteria in section MX 2 (Corporate eligibility criteria); and

(ii)

meets the wage intensity criteria in section MX 3 (Wage intensity criteria); and

(iii)

does not derive exempt income, ignoring exempt income under sections CW 9 and CW 10 (which relate to income from dividends); and

(iv)

is not associated with a person that derives exempt income, ignoring exempt income under sections CW 9 and CW 10:

(b)

secondly, applying section LY 8 (Carry forward for remaining research and development tax credits), to the extent to which paragraph (a) does not apply to the tax credit.

(2)

In section LA 5, in the list of defined terms, insert “associated person”, “exempt income”, “listed company”, and “research and development tax credit”.

10 New subpart LY inserted (Research and development tax credits)

After subpart LX, insert:

Subpart LY—Research and development tax credits

LY 1 Research and development tax credits
Purpose

(1)

The purpose of this subpart is to—

(a)

provide a tax credit (a research and development 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

(b)

ensure that activities, expenditure and losses do not inappropriately qualify for research and development tax credits.

General structure of this subpart

(2)

In this subpart—

(a)

research and development activity is defined in section LY 2, along with other key terms:

(b)

section LY 3 provides when this subpart applies:

(c)

the amount of a person’s research and development tax credit for a tax year is calculated under section LY 4 by reference to their expenditure or loss in relation to their research and development activities. Sections LY 5, 6, and 7 LY 6, and LY 7 provide detailed rules as to what is eligible expenditure:

(d)

section LY 8 provides for the carry forward of unused research and development tax credits from the current tax year:

(e)

section LY 9 provides an empowering provision for the Governor-General to make Orders in Council to maintain the lists in schedules 21 and 21B (which relate to activities and expenditure or loss for the research and development tax credit):

(f)

section LY 10 provides for a 5-yearly evaluation of the research and development tax credit regime.

Tax credit

(3)

A person has a tax credit for the tax year equal to the total of—

(a)

their credit calculated under section LY 4; and

(b)

their credit carried forward and credited to the year, as provided by section LY 8.

Tax credit: joint venturers’ apportionment

(3B)

Despite subsection (3), a person who is a member of a joint venture in relation to research and development activities has a tax credit for the tax year equal to their proportion of their interest in the income of the joint venture.

Anti-avoidance

(4)

Section GB 56 (Arrangements involving research and development tax credits) provides a specific anti-avoidance provision.

Expenditure or loss: GST

(5)

For the purposes of calculating the amount of a person’s expenditure or loss, section DB 2 (Goods and services tax) is applied to the amounts.

Defined in this Act: amount, goods, income year, research and development activity, research and development tax credit, services, tax year

LY 2 Key terms
Meaning of core research and development activity

(1)

Core research and development activity—

(a)

means an activity that—

(i)

is conducted using a systematic approach; and

(ii)

has a material purpose of creating new knowledge, or new or improved processes, services, or goods; and

(iii)

has a material purpose of resolving scientific or technological uncertainty; but

(b)

does not include an activity, if knowledge required to resolve the uncertainty, described in paragraph (a)(iii), is—

(i)

publicly available:

(ii)

deducible by a competent professional in the relevant scientific or technological field; and

(c)

does not include an activity to the extent to which it is performed outside New Zealand; and

(d)

does not include an activity to the extent to which it is described in schedule 21, part A.

Meaning of research and development activity

(2)

Research and development activity, for a person, means an activity that is—

(a)

a core research and development activity:

(b)

a supporting research and development activity.

Meaning of supporting research and development activity

(3)

Supporting research and development activity—

(a)

means an activity that has the only or main purpose of, is required for, and integral to, conducting a person’s core research and development activity; but

(b)

does not include an activity to the extent to which it is described in schedule 21, part B.

Defined in this Act: core research and development activity, goods, New Zealand, research and development activity, services, supporting research and development activity

LY 3 When this subpart applies
When this subpart applies

(1)

This subpart applies for a person for an income year, if—

(a)

the person or a joint venture of which the person is a member performs a core research and development activity in New Zealand, or, if the person does not perform a core research and development activity in New Zealand, a research and development contractor performs a core research and development activity in New Zealand on behalf of the person as part of a business that the contractor carries on in New Zealand through a fixed establishment in New Zealand; and

(b)

the person or a joint venture of which the person is a member carries on a business in New Zealand through a fixed establishment in New Zealand; and

(c)

the person or a joint venture of which the person is a member may use the results of the relevant core research and development activity and any related supporting research and development activities for no consideration, or the results of the relevant core research and development activity and any related supporting research and development activity are—

(i)

owned by the person:

(ii)

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 double tax treaty, and the other company is in the same group of companies as the person:

(iii)

owned by a joint venture of which the person is a member; and

(d)

where the person is part of the in-year approval pilot under section 68CB or 68CC of the Tax Administration Act 1994, the relevant research and development activity and the person, as applicable, are approved under those sections. If the Commissioner declines to approve the relevant research and development activity or the person under the in-year approval pilot, the person may choose to ignore this paragraph.

When this subpart does not apply

(2)

Despite subsection (1), this subpart does not apply for a person, for an income year,—

(a)

if they fail to file a return of income for the income year on or before the date that is 1 year after the latest date for them to file the return of income for the year under section 37 of the Tax Administration Act 1994:

(b)

if they receive a Callaghan Innovation Growth Grant, or they are directly or indirectly controlled by, or associated with, a recipient of a Callaghan Innovation Growth Grant:

(c)

to the extent to which the person is a research and development contractor for another person (person B) in relation to a research and development activity, if person B carries on a business in New Zealand through a fixed establishment in New Zealand:

(d)

if the person is, or is directly or indirectly controlled by, or is associated with,—

(i)

a Crown research institute:

(ii)

a district health board:

(iii)

a tertiary education organisation:

(e)

if the person is a member of a joint venture or a partner in a partnership or has owner’s interests for a look-through company, and the person is not resident in New Zealand in the tax year.

Exception: carry forward

(3)

Despite subsection (1), sections LY 1(3)(b) and LY 8 may apply to carry forward a person’s research and development tax credit.

Special rule: non-business researcher

(4)

For the purposes of subsection (1), a person that is a non-business researcher is treated as carrying on a business in New Zealand through a fixed establishment in New Zealand.

Defined in this Act: associated, business, core research and development activity, fixed establishment, group of companies, look-through company, New Zealand, non-business researcher, owner’s interests, partner, partnership, research and development contractor, return of income

LY 4 Calculation of tax credit
When this section applies: thresholds

(1)

This section applies for a tax year and a person, ignoring, for purposes of this subsection only, sections HB 1 and HG 2 (which relate to entity transparency) and substituting as the relevant person the person’s partnership or look-through company, when—

(a)

the person’s eligible research and development expenditure, together with eligible research and development expenditure for any joint venture of which the person is a member, is $50,000 or more for the year:

(b)

the person has, for the year, eligible research and development expenditure for an approved research provider performing a research and development activity on behalf of the person.

Calculation of tax credit

(2)

A person’s research and development tax credit for a tax year is calculated using the formula—

0.15 × total eligible R & D expenditure.

Definition of item in formula

(3)

In the formula, total eligible R & D expenditure means the lesser of—

(a)

$120 million, or the person’s approved research and development cap if the person has an approved research and development cap:

(b)

the total amount of the person’s eligible research and development expenditure for the corresponding income year.

Defined in this Act: amount, approved research and development cap, approved research provider, eligible research and development expenditure, look-through company, loss, partnership, research and development activity, tax year

LY 5 Eligible research and development expenditure
Eligible research and development expenditure

(1)

For the purposes of this subpart, eligible research and development expenditure—

(a)

means expenditure or loss, described in schedule 21B, part A, to the extent to which the expenditure or loss is incurred on a research and development activity for the income year; but

(b)

does not include expenditure or loss, to the extent to which the expenditure or loss is described in schedule 21B, part B:

(c)

does not include expenditure or loss that would have been incurred in the absence of the research and development activity, if—

(i)

the research and development activity is performed in the course of commercial production; and

(ii)

the expenditure or loss is not in relation to an employee’s contribution to a research and development activity.

Modification of eligible research and development expenditure

(2)

Despite subsection (1), for an amount that is otherwise eligible research and development expenditure,—

(a)

an amount that is for a research and development contractor to perform research and development activities for the person is only eligible research and development expenditure to the extent to which section LY 6 provides:

(b)

an amount that is incurred on a research and development activity performed outside New Zealand, or is a payment of salary or wages to a non-resident, or is a payment for a service performed by a non-resident is only eligible research and development expenditure to the extent to which section LY 7 provides.

No double dip for contractors and others

(3)

A person does not have eligible research and development expenditure to the extent to which the relevant expenditure or loss is eligible research and development expenditure of another person.

Defined in this Act: amount, eligible research and development expenditure, income year, loss, New Zealand, non-resident, pay, research and development activity, research and development contractor, salary or wages

LY 6 Contracted research and development expenditure
When this section applies

(1)

This section applies for a person for the purposes of section LY 5(2)(a) if the person has an amount of expenditure or loss (contracted research and development expenditure) for a research and development contractor to perform research and development activities for them.

Calculation of eligible research and development expenditure: contracted research and development expenditure

(2)

For the purposes of section LY 5(2)(a), eligible research and development expenditure includes an amount of contracted research and development expenditure, described in subsection (1), to the extent of the amount calculated using the formula—

contract amount − ineligible expenditure.

Definition of items in formula

(3)

In the formula,—

(a)

contract amount means the amount of consideration paid or payable by the person to a contractor to perform research and development activities:

(b)

ineligible expenditure means the contractor’s expenditure or loss in relation to performing the research and development activity, to the extent to which the expenditure or loss is not eligible research and development expenditure under section LY 5(1), treating the contractor as the relevant person for the purposes of that section.

Relationship with subject matter

(4)

If an amount of contracted research and development expenditure, described in subsection (1), is also foreign research and development expenditure, described in section LY 7(1), then section LY 7 overrides this section in relation to that amount.

Defined in this Act: amount, eligible research and development expenditure, loss, research and development activity, research and development contractor

LY 7 Foreign research and development expenditure
When this section applies

(1)

This section applies for a person for the purposes of section LY 5(2)(b) if the person has an amount of expenditure or loss (foreign research and development expenditure) that—

(a)

is incurred on a supporting research and development activity performed outside New Zealand:

(b)

is a payment of salary or wages to a non-resident person, and the non-resident performs the relevant activity in New Zealand:

(c)

is a payment for a service performed by a non-resident person, and the non-resident performs the relevant activity in New Zealand.

Calculation of eligible research and development expenditure: foreign research and development expenditure

(2)

For the purposes of section LY 5(2)(b), eligible research and development expenditure includes an amount of foreign research and development expenditure, described in subsection (1), to the extent the amount is less than or equal to the lesser of—

(a)

the amount given by the formula in subsection (3):

(b)

the amount given by the formula in subsection (5).

Actual overseas expenditure amount

(3)

For the purposes of subsection (2)(a), the amount is calculated using the formula—

contract amount − ineligible expenditure + foreign in-house amount.

Definition of items in formula

(4)

In the formula in subsection (3),—

(a)

contract amount means the amount of foreign research and development expenditure, described in subsection (1)(a) and (c), for another person (a foreign contractor) to perform research and development activities on behalf of the person:

(b)

ineligible expenditure means the foreign contractor’s expenditure or loss in relation to performing the research and development activities, to the extent to which the expenditure or loss is not eligible research and development expenditure under section LY 5(1), treating the foreign contractor as the relevant person for the purposes of that section:

(c)

foreign in-house amount means the amount of foreign research and development expenditure, described in subsection (1), under section LY 5(1) but ignoring amounts for a foreign contractor to perform research and development activities for the person.

Capped overseas expenditure amount

(5)

For the purposes of subsection (2)(b), the amount is calculated using the formula—

0.1 × total NZ R & D expenditure ÷ 0.9.

Definition of item in formula

(6)

In the formula in subsection (5), total NZ R & D expenditure means the amount of eligible research and development expenditure under section LY 5, but excluding any amount in relation to foreign research and development expenditure, described in subsection (1).

Defined in this Act: amount, core research and development activity, eligible research and development expenditure, loss, New Zealand, non-resident, research and development activity

LY 8 Carry forward for remaining research and development tax credits
Carry forward

(1)

For the purposes of section LA 5(4B) (Treatment of remaining credits), a person’s remaining research and development tax credit for a tax year is carried forward to the next tax year and credited under section LY 1(3)(b) for that next tax year.

Carry forward: exception

(2)

Despite subsection (1), if the person is a company, the remaining tax credit is extinguished and must not be carried forward and credited, unless the continuity rules in subsection (3) are met.

Continuity rules

(3)

For a company, the remaining tax credit is carried forward and credited if a group of persons exists that has, for the continuity period,—

(a)

minimum voting interests in the company that total 49% or more; and

(b)

when a market value circumstance exists for the company in the continuity period, minimum market value interests in the company that total 49% or more.

Some definitions

(4)

In this section,—

continuity period means the period that starts on the first day of the income year that corresponds to the tax year in which the research and development tax credit first arises and ends on the last day of the income year that corresponds to the tax year to which the credit is being carried forward and credited to:

minimum market value interest means the lowest market value interest that a person has in the company for the continuity period:

minimum voting interest means the lowest voting interest that a person has in the company for the continuity period.

Credits for earlier income years

(5)

Despite a breach of continuity under subsection (3), a person’s remaining research and development tax credit for an earlier tax year is carried forward to a tax year (year A) and credited under section LY 1(3)(b) to the extent to which—

(a)

the requirements for continuity of ownership would be met if the continuity period included only part of the income year of the company that corresponds to year A; and

(b)

the company provides the Commissioner with adequate financial statements relating to the continuity period, calculating the amount of the person’s income tax liability for the relevant part of the corresponding income year.

Credits for year of breach

(6)

Despite a breach of continuity under subsection (3), a person’s remaining research and development tax credit is carried forward to the tax year (year B) from year A and credited under section LY 1(3)(b) to the extent to which—

(a)

the requirements for continuity of ownership would be met if the continuity period included only part of the income year of the company that corresponds to year A; and

(b)

the company provides the Commissioner with adequate financial statements relating to the continuity period, calculating the amount of the person’s research and development tax credit for the relevant part of the corresponding income year.

Defined in this Act: company, continuity period, corresponding income year, group of persons, income year, market value circumstance, market value interest, minimum market value interest, minimum voting interest, research and development tax credit, tax credit, tax year, voting interest

LY 9 Orders in Council
Purpose

(1)

The purpose of subsection (2) is to provide a power to maintain the intent of the research and development tax credit regime in accordance with its stated purpose in section LY 1(1).

Order in Council

(2)

The Governor-General may, by Order in Council made on the joint recommendation of the Minister of Revenue and the Minister of Research, Science, and Innovation,—

(a)

add the description of an activity or of an expenditure or loss, as applicable, to—

(i)

schedule 21:

(ii)

schedule 21B:

(b)

remove the description of an activity or of an expenditure or loss, as applicable, from—

(i)

schedule 21:

(ii)

schedule 21B.

Recommendation

(3)

Before making a recommendation referred to in subsection (2), the Ministers must be satisfied that—

(a)

they have consulted with persons they consider to be appropriate in light of the relevant addition or removal; and

(b)

they have had regard to—

(i)

the purpose in section LY 1(1) and maintaining the intent of the definitions of research and development activity and eligible research and development expenditure; and

(ii)

the effect of the recommendation on the creation of new scientific or technological knowledge; and

(iii)

the fiscal impact of the recommendation.

Application for future tax years

(4)

An addition or removal by Order in Council under this section must apply for the income year corresponding to the tax year after the tax year in which it is made, and subsequent income years.

Sunset

(5)

An Order in Council under this section expires on the date that is 3 years after the last day of the tax year that the Order first applies for.

Defined in this Act: eligible research and development expenditure, income year, loss, research and development activity, research and development tax credits, tax year

LY 10 Evaluation

The Minister of Research, Science, and Innovation will lay a report before the House of Representatives as soon as practicable after the end of the 2023–24 tax year, and every 5 years subsequent, objectively and independently evaluating the research and development tax credit regime in terms of all of the following:

(a)

the delivery of the policy intent of the regime:

(b)

the stimulation of spending on research and development activities:

(c)

the compliance costs of the regime:

(d)

the administration of the regime:

(e)

the compliance with the legal requirements of the regime by taxpayers:

(f)

any other criteria specified by the Minister of Research, Science, and Innovation.

Defined in this Act: research and development activities, research and development tax credits

11 Section OB 4 amended (ICA payment of tax)

(1)

After section OB 4(3)(f), insert:

(fb)

income tax paid by crediting a research and development tax credit against income tax liability; or

(2)

In section OB 4, in the list of defined terms, insert “research and development tax credit”.

12 New section OB 9C inserted (ICA credit for research and development tax credit)

After section OB 9B, insert:

OB 9C ICA credit for research and development tax credit
Credit

(1)

An ICA company has an imputation credit for the amount of research and development tax credit it is entitled to.

Table reference

(2)

The imputation credit in subsection (1) is referred to in table O1: imputation credits, row 7C (Research and development tax credits).

Credit date

(3)

The credit date is the date the company files its return of income for the income year.

Defined in this Act: amount, ICA company, imputation credit, research and development tax credit

13 Table O1 amended (Imputation credits)

After table O1, row 7B, insert:

7CResearch and development tax creditsday on which return of income for income year is filedsection OB 9C
14 Section OK 2 amended (MACA payment of tax)

(1)

After section OK 2(3)(c) insert:

(cb)

income tax paid by crediting a research and development tax credit against income tax liability; or

(2)

In section OK 2, in the list of defined terms, insert “research and development tax credit”.

15 New section OK 6C inserted (MACA research and development tax credit)

After section OK 6B, insert:

OK 6C MACA research and development tax credit
Credit

(1)

A Maori authority has a Maori authority credit for the amount of research and development tax credit it is entitled to.

Table reference

(2)

The Maori authority credit in subsection (1) is referred to in table O17: Maori authority credits, row 6C (Research and development tax credits).

Credit date

(3)

The credit date is the date the Maori authority files its return of income for the income year.

Defined in this Act: amount, ICA company, imputation credit, research and development tax credit

16 Table O17 amended (Maori authority credits)

After table O17, row 6B, insert:

6CResearch and development tax creditsday on which return of income for income year is filedsection OK 6C
17 Section OP 5 amended (When credits and debits arise only in consolidated imputation group accounts)

Replace section OP 5(2)(bb) with:

(bb)

section OP 11C, row 6C (Research and development tax credits):

18 Section OP 7 amended (Consolidated ICA payment of tax)

(1)

After section OP 7(3)(g), insert:

(gb)

income tax paid by crediting a research and development tax credit against income tax liability; or

(2)

In section OB 7, in the list of defined terms, insert “research and development tax credit”.

19 New section OP 11C inserted (Consolidated ICA credit for research and development tax credit)

Before section OP 12, insert:

OP 11C Consolidated ICA credit for research and development tax credit
Credit

(1)

A consolidated imputation group has an imputation credit for the amount of research and development tax credit that a group company is entitled to.

Table reference

(2)

The imputation credit in subsection (1) is referred to in table O19: imputation credits of consolidated imputation groups, row 6C (Research and development tax credits).

Credit date

(3)

The credit date is the date the group company files its return of income for the income year.

Defined in this Act: amount, company, consolidated imputation group, imputation credit, research and development tax credit

20 Table O19 amended (Imputation credits of consolidated imputation groups)

Before table O19, row 7, insert:

6CResearch and development tax creditsday on which return of income for income year is filedsection OP 11C
21 Section YA 1 amended (Definitions)

(1)

This section amends section YA 1.

(2)

Insert, in appropriate alphabetical order:

approved research and development cap is defined in section 3(1) of the Tax Administration Act 1994

(3)

Insert, in appropriate alphabetical order:

approved research provider is defined in section 3(1) of the Tax Administration Act 1994

(4)

In the definition of continuity period, after paragraph (b), insert:

(c)

is defined in section LY 8(4) (Carry forward for remaining research and development tax credits) for the purposes of that section

(5)

In the definition of continuity provisions, before paragraph (fb), insert:

(fba)

section LY 8 (Carry forward for remaining research and development tax credits):

(6)

Insert, in appropriate alphabetical order:

core research and development activity is defined in section LY 2 (Key terms)

(7)

Insert, in appropriate alphabetical order:

eligible research and development expenditure is defined in section LY 5 (Eligible research and development expenditure)

(8)

In the definition of goods,—

(a)

replace “in subpart MX (Tax credits for R&D tax losses)” with “in subparts LY (Research and development tax credits) and MX (Tax credits for R&D tax losses)”:

(b)

replace “and EA 3 (Prepayments)” with “EA 3 (Prepayments), and GB 56 (Arrangements involving research and development tax credits)”

(8B)

Insert, in appropriate alphabetical order:

ineligible internal software development—

(a)

means software development for the purpose of the internal administration of a person’s business or an associate’s business; but

(b)

does not include software development if and to the extent to which—

(i)

the software development is for the main purpose of disposing of the software or a right to use the software to recipients who are not associated with the person:

(ii)

the software is an integral part of goods that the person disposes of in the ordinary course of business:

(iii)

the software is developed for the purpose of providing services, and the main reason why the recipients of the services use the services is not the use of the person’s computer technology or software itself, but rather the services themselves.

(9)

Insert, in appropriate alphabetical order:

ineligible technology expenditure—

(a)

means, for a person, expenditure or loss that is incurred to acquire the right to use technology upon which a core research and development activity is based:

(b)

includes expenditure or loss that is incurred to acquire the right to use technology, if the relevant research and development activities to which the technology relates are an extension, continuation, development, or completion of the activities that produced that technology

(10)

Insert, in appropriate alphabetical order:

internal software development expenditure—

(a)

means, for a person, expenditure or loss that is incurred on developing software for the purpose of providing services, and the main reason why the recipients of the services use the services is not the use of the person’s computer technology or software itself, but rather the services themselves; but

(b)

does not include expenditure or loss that is incurred for the purpose of developing software, if—

(i)

the person’s main purpose is disposing of the software or a right to use the software to recipients who are not associated with the person:

(ii)

the software is an integral part of goods that the person disposes of in the ordinary course of business

(11)

In the definition of minimum market value interest, after paragraph (b), insert:

(c)

is defined in section LY 8(4) (Carry forward for remaining research and development tax credits) for the purposes of that section

(12)

In the definition of minimum voting interest, after paragraph (b), insert:

(c)

is defined in section LY 8(4) (Carry forward for remaining research and development tax credits) for the purposes of that section

(13)

Insert, in appropriate alphabetical order:

non-business researcher means—

(a)

a tax charity:

(b)

an industry organisation to which a levy is payable under New Zealand statute

(14)

Insert, in appropriate alphabetical order:

research and development activity is defined in section LY 2 (Key terms)

(15)

Insert, in appropriate alphabetical order:

research and development contractor—

(a)

means, for a research and development activity and a person (person A), another person (the contractor) that performs the research and development activity on behalf of person A:

(b)

does not include a non-business researcher described in the definition of non-business researcher, paragraph (b)

(16)

Insert, in appropriate alphabetical order:

research and development tax credit means a tax credit under section LY 1 (Research and development tax credits)

(17)

In the definition of residual income tax, after paragraph (b)(ix), insert:

(x)

section LY 1 (Research and development tax credits):

(18)

In the definition of services,—

(a)

in paragraph (a), delete “, and subpart MX (Tax credits for R&D tax losses),”:

(b)

in paragraph (b), replace “in subpart MX, in” with “GB 56 (Arrangements involving research and development tax credits), subparts LY and MX, and”.

(19)

Insert, in appropriate alphabetical order:

supporting research and development activity is defined in section LY 2 (Key terms)

22 New schedules 21 and 21B inserted

After schedule 20, insert, as set out in schedule 1 of this Act, schedules 21 and 21B.

Amendments to Tax Administration Act 1994

23 Tax Administration Act 1994 amended

Sections 24 to 37 37B amend the Tax Administration Act 1994.

24 Section 3 amended (Interpretation)

(1)

This section amends section 3(1).

(2)

Insert, in appropriate alphabetical order:

approved research and development cap means the approved research and development cap described in section 68CD

(3)

Insert, in appropriate alphabetical order:

approved research provider means an approved research provider described in section 124ZH

(4)

In the definition of proscribed question, after paragraph (d), insert:

(e)

a question related to research and development tax credits under subpart LY of the Income Tax Act 2007

25 New heading and section 124ZH inserted

Before section 125A, insert:

Research and development

124ZH Approved research providers

(1)

A person is an approved research provider, if the Commissioner approves the person, as provided by subsections (2) to (7), and the person keeps records in accordance with section 22(2)(kd).

(2)

The Commissioner may, in accordance with this section, approve a person, if the person makes an application in accordance with subsection (3).

(3)

A person must apply to the Commissioner for approval in the form prescribed by the Commissioner.

(4)

The Commissioner may only approve a person if, in the opinion of the Commissioner, the person—

(a)

is capable of performing research and development activities on behalf of other persons; and

(b)

has in New Zealand the facilities needed to perform research and development activities; and

(c)

is available to perform research and development activities on behalf of other persons not associated with them; and

(d)

performs or will perform research and development activities on behalf of other persons for market value consideration.

(5)

A person may apply for approval as an approved research provider by providing information to the Commissioner in the prescribed form. They may also apply for a revocation of approval.

(6)

If the Commissioner approves a person, the Commissioner must notify the person and publish the approval, in a publication chosen by the Commissioner.

(7)

The Commissioner may, at the Commissioner’s discretion, revoke approval as an approved research provider. The Commissioner must give the person reasons for the exercise of the Commissioner’s discretion, and specify the date from which the revocation takes effect.

26 Section 22 amended (Keeping of business and other records)

(1)

In section 22(2)(eb), replace “section LH 2” with “subpart LY”.

(2)

Replace section 22(2)(ec) with:

(ec)

is an approved research provider:

(3)

In section 22(2)(kc), replace “section LH 2” with “subpart LY”.

(4)

Replace section 22(2)(kd) with:

(kd)

if the person is an approved research provider, the following matters:

(i)

ongoing compliance with section 124ZH(4); and

(ii)

amounts derived and incurred by the person performing research and development activities on behalf of other persons; and

27 New section 33E inserted (Research and development tax credits: supplementary return)

After section 33D, insert:

33E Research and development tax credits: supplementary return

A person who is entitled to a research and development tax credit must file a research and development supplementary return for a tax year in an electronic format prescribed by the Commissioner on or before the day that is 30 days after—

(a)

the due date on which they are required to file a return of income for the tax year under section 37; or

(b)

the due date on which they would be required to file a return under section 37, if they had assessable income.

28 New section 36BE inserted (Research and development tax credits: electronic formats)

After section 36BD, insert:

36BE Research and development tax credits: electronic formats

(1)

The Commissioner must prescribe 1 or more electronic formats in which a research and development supplementary return under section 33E must be filed.

(2)

The Commissioner may, from time to time, set specifications for software for use in populating the research and development supplementary return, and related criteria for the use of specified software.

29 Section 36C amended (Particulars furnished in electronic format)

In section 36C(1), replace “35, 36” with “33E, 35, 36, 36BE”.

30 New heading and sections 68CB, 68CC, 68CD, and 68CE inserted

After section 68C, insert:

Research and development

68CB Research and development tax credits: general approval 2019–20 income year pilot

(1)

This section applies in accordance with section LY 3(1)(d) of the Income Tax Act 2007, for the purpose of instituting an in-year approval pilot for a representative group of taxpayers for the 2019–20 income year. For a taxpayer to be part of the in-year approval pilot, the taxpayer and the Commissioner must agree that they are part of it.

(2)

A person’s research and development activities are approved for the income year, if the Commissioner approves the activities, as provided by subsections (3) to (7), and—

(a)

the person’s application for approval does not contain a material omission or misrepresentation; and

(b)

the person complies with any conditions in the Commissioner’s approval; and

(c)

there is no material change in the provisions in subpart LY of that Act and any associated provisions.

(3)

The Commissioner may, in accordance with this section, approve a person’s research and development activities for the 2019–20 income year, if the person makes an application in accordance with subsection (4) on or before the date prescribed by the Commissioner for the purpose of the pilot approval scheme.

(4)

A person must apply to the Commissioner for approval in the form prescribed by the Commissioner, including—

(a)

the activities the person wants the Commissioner to approve; and

(b)

any other information required by the Commissioner.

(5)

The Commissioner may only approve a person’s activities to the extent to which, in the opinion of the Commissioner, the relevant activity is a core research and development activity or a supporting research and development activity.

(6)

If the Commissioner approves a person’s activities for the income year, the Commissioner must notify the person what activities of the person the Commissioner approves of as core research and development activities or supporting research and development activities, and any conditions upon which the approval is made.

(7)

The Commissioner must notify the person of the intention to decline the application before the application is declined.

68CC Research and development tax credits: greater than $2 million approval 2019–20 income year pilot

(1)

This section applies in accordance with section LY 3(1)(d) of the Income Tax Act 2007, for the purpose of instituting an in-year approval pilot for a representative group of taxpayers for the 2019–20 income year. For a taxpayer to be part of the in-year approval pilot, the taxpayer and the Commissioner must agree that they are part of it.

(2)

This section applies ignoring, for purposes of this subsection only, sections HB 1 and HG 2 of the Income Tax Act 2007 (which relate to entity transparency) and substituting as the relevant person the person’s partnership or look-through company, if a person chooses to apply this section, and—

(a)

has, or reasonably estimates that the person together person, together with any joint venture of which the person is a member will have, member, will have eligible research and development expenditure greater that greater than $2 million for an income year; or

(b)

is a member of a group of companies that has, or reasonably estimates that they will have, eligible research and development expenditure greater than $2 million for an income year.

(3)

A person is approved for the income year to the extent to which the Commissioner approves the person’s criteria and methodologies, as provided by subsections (4) to (8), and—

(a)

the person’s application for approval does not contain a material omission or misrepresentation; and

(b)

the person complies with any conditions in the Commissioner’s approval; and

(c)

there is no material change in the provisions in subpart LY of the Income Tax Act 2007 and any associated provisions.

(4)

The Commissioner may, in accordance with this section, approve a person’s criteria and methodologies for the 2019–20 income year, if the person makes an application in accordance with subsection (5) on or before the date prescribed by the Commissioner for the purposes of the pilot.

(5)

A person must apply to the Commissioner for approval in the form prescribed by the Commissioner, including—

(a)

the criteria and methodologies the person wants the Commissioner to approve; and

(b)

any other information required by the Commissioner.

(6)

The Commissioner may approve—

(a)

appropriate criteria and methodologies for determining whether an activity is a core research and development activity, a supporting research and development activity, or not a research and development activity at all:

(b)

appropriate criteria and methodologies for determining whether an amount of expenditure or loss is or is not an amount of eligible research and development expenditure.

(7)

If the Commissioner approves a person’s criteria and methodologies for the income year, the Commissioner must notify the person notify to the person those criteria and methodologies of the person that the Commissioner approves of, and any conditions upon which the approval is made.

(8)

The Commissioner must notify the person of the intention to decline the application before the application is declined.

(9)

The Commissioner may revoke an approval, with effect from the beginning of the income year in which the revocation is made, if the Commissioner considers that the person has classified an activity, or an expenditure or loss, in such a way so as to defeat the purpose and application of subpart LY of the Income Tax Act 2007.

68CD Research and development tax credits: approved research and development cap

(1)

For the purposes of section LY 4 of the Income Tax Act 2007, the Commissioner may, in accordance with this section, approve for a person an amount greater than $120 million as the person’s approved research and development cap for an income year.

(2)

A person may request approval for an approved research and development cap by providing information to the Commissioner in the prescribed form on or before the 7th day of the 2nd month after the end of the income year.

(3)

The Commissioner must not approve an approved research and development cap for a person unless—

(a)

the relevant research and development activities give rise to substantial net benefit for New Zealand; and

(b)

the Commissioner has first consulted with the chief executive of the Ministry of Business, Innovation, and Employment.

68CE Research and development tax credits: publication of details

(1)

The Commissioner must publish, in a publication chosen by the Commissioner, the names of people who have received a research and development tax credit under subpart LY of the Income Tax Act 2007 and where the amount of their research and development tax credit falls for a tax year, using appropriate dollar bands.

(2)

The names and bands must not be published before 2 years elapse after the end of the tax year to which the relevant tax credit relates.

32 Section 89DA amended (Taxpayer may issue notice of proposed adjustment for taxpayer assessment)

After section 89DA(1)(a), insert:

(ab)

to the extent to which the assessment relates to an amount of research and development tax credit and the taxpayer has not filed a research and development supplementary return in relation to the credit within the time allowed under section 33E:

33 Section 108 amended (Time bar for amendment of income tax assessment)

(1)

Repeal section 108(1B).

(2)

After section 108(1D), insert:

(1E)

Despite subsection (1), the Commissioner may not amend an assessment so as to increase an amount of research and development tax credit if 1 year has passed from the latest date to provide a return of income for the relevant tax year.

34 Section 113D repealed (Amended assessments for research and development tax credits

Repeal section 113D.

35 New section 113E inserted (Amended assessments: research and development tax credits)

Before section 114, insert:

113E Amended assessments: research and development tax credits

(1)

A person may only—

(a)

issue 1 notice of proposed adjustment in relation to an increase in the amount of a person’s research and development tax credit for a tax year within 1 year after the due date to provide a return of income for the tax year; or

(b)

make 1 request under section 113 in relation to an increase in the amount of a person’s research and development tax credit for a tax year within 1 year after the due date to provide a return of income for the tax year.

(2)

A person must not make a request under section 113 in relation to research and development tax credits for a tax year unless they have filed a research and development supplementary return under section 33E for the year.

36 Section 138E amended (Certain rights of challenge not conferred)

In section 138E(1)(e)(iv), replace “120U,” with “120U, 124ZH,”.

37 Section 141EC amended (Definition of promoter)

(1)

In section 141EC(1)(a),—

(a)

replace “a plan” with “a plan, software,”:

(b)

replace “; or” with “:”.

(2)

In section 141EC(1)(b), replace “.” with “:”, and insert:

(c)

a person who provides services on a contingency fee basis in relation to research and development tax credit claims.

37B Schedule 7 amended (Disclosure rules)

Replace schedule 7, clause 39 with:

39 Agencies for research and development

(1)

Section 18 does not prevent the Commissioner communicating to an officer, employee, or agent of the Treasury (as defined in section 2 of the Public Finance Act 1989), of Callaghan Innovation, of the Ministry of Business, Innovation and Employment, or of a state sector entity responsible for any function related to research and development advice or incentives, information reasonably necessary for that person to perform their work in relation to evaluating (in accordance with section LY 10 of the Income Tax Act 2007), administering, statistical reporting on, and policy formation for, tax credits provided in subparts LY and MX of that Act.

(2)

Section 18 does not prevent the Commissioner communicating to an officer, employee, or agent of Callaghan Innovation or of the Ministry of Business, Innovation and Employment, information reasonably necessary for that person to perform their work in relation to offering research and development advice and incentives.

(3)

Section 18 does not prevent the Commissioner allowing an officer, employee, or agent of Callaghan Innovation access to information reasonably necessary for that person to perform their work in relation to administering tax credits provided in subparts LY and MX of the Income Tax Act 2007.

Part 2 Research and development tax credits: year 2 and subsequent years

38 Application

This Part applies for the 2020–21 and later income years.

Amendments to Income Tax Act 2007

38B Income Tax Act 2007 amended

Sections 39 and 39B amend the Income Tax Act 2007.

39 Section LY 3 amended (When this subpart applies)

(1)

Replace section LY 3(1)(d) with:

(d)

the relevant research and development activity and the person, as applicable, are approved under section 68CB or 68CC of the Tax Administration Act 1994 (which relate to in-year approval).

(2)

After section LY 3(4), insert:

Relationship with subject matter

(5)

Section LY 13 (Part-year override of section LY 3(2)(b)) overrides subsection (2)(c) for the 2020–21 income year.

39B New heading and section LZ 13 inserted

After section LZ 8, insert:

Research and development tax credits

LZ 13 Part-year override of section LY 3(2)(b)
When this section applies

(1)

This section applies for a person’s 2020–21 income year if—

(a)

the person’s 2020–21 income year starts after 1 April 2020; and

(b)

the person receives a Callaghan Innovation Growth Grant for only part of the 2020–21 income year.

Part-year override of section LY 3(2)(b)

(2)

Despite section LY 3(2)(b) (When this subpart applies), a person is eligible for a research and development tax credit for the part of the year after their Callaghan Innovation Growth Grant contract ends, to the extent to which they appropriately apportion their eligible research and development expenditure to the research and development tax credit and not to the Callaghan Innovation Growth Grant for that part of the year.

Defined in this Act: eligible research and development expenditure, income year, research and development tax credit

Amendments to Tax Administration Act 1994

40 Tax Administration Act 1994 amended

Sections 41 to 44 amend the Tax Administration Act 1994.

41 Section 3 amended (Interpretation)

(1)

This section amends section 3(1).

(2)

Insert, in appropriate alphabetical order:

research and development certificate means a research and development certificate described in section 124ZI

42 New section 124ZI inserted (Certificates for research and development)

After section 124ZH, as inserted by this Act, insert:

124ZI Certificates for research and development

(1)

For the purposes of section 68CC, a research and development certificate is a certificate, in the form prescribed by the Commissioner, in relation to a person’s research and development tax credit for an income year given to the person by another person who is an accepted research and development certifier that is not associated with the person.

(2)

For the purposes of this section, an accepted research and development certifier means any person that the Commissioner has approved as an accepted research and development certifier, if the person makes a statutory declaration of the following matters and gives it to the Commissioner, namely a declaration—

(a)

that the person is competent in applying appropriate accounting and legal standards in relation to research and development tax credits; and

(b)

declaring any other matters required by the Commissioner to be declared for the purposes of assuring the Commissioner that the person has the legal, accounting, and scientific or technical expertise to complete a research and development certificate.

(3)

A person may request approval as an accepted research and development certifier by providing information to the Commissioner in the prescribed form. They may also surrender approval.

(4)

The Commissioner must not approve a person whose approval the Commissioner has revoked under subsection (7) in the last 2 years. Also, the Commissioner must not approve a person who has surrendered their approval in the last 2 years, if the surrender was in anticipation of a revocation.

(5)

If the Commissioner approves a person, the Commissioner must notify the person, and publish the approval in a publication chosen by the Commissioner. The approval starts from the date that the person requests approval.

(6)

The Commissioner may, at the Commissioner’s discretion, revoke approval as an accepted research and development certifier. If the Commissioner revokes a person’s approval, the Commissioner must notify the person, and publish the revocation in a publication chosen by the Commissioner. The revocation starts from the date that the revocation is published.

(7)

The Commissioner must revoke a person’s approval if—

(a)

the person is liable for a promoter penalty under section 141EB:

(b)

the person has given a research and development certificate to another person who has, in the 2 years before the income year, been liable to a shortfall penalty under section 141D or 141E in relation to research and development tax credits.

43 Sections 68CB and 68CC replaced

Replace sections 68CB and 68CC, as inserted by this Act, with:

68CB Research and development tax credits: general approval

(2)

For the purposes of section LY 3(1)(d) of the Income Tax Act 2007, a person’s research and development activities are approved for the income year, if the Commissioner approves the activities, as provided by subsections (3) to (7), and—

(a)

the person’s application for approval does not contain a material omission or misrepresentation; and

(b)

the person complies with any conditions in the Commissioner’s approval; and

(c)

there is no material change in the provisions in subpart LY of that Act and any associated provisions; and

(d)

if the Commissioner approves a person and their activities for more than 1 income year, the person has given the Commissioner, on or before the 7th day of the 2nd month after the end of the relevant income year, notice that there have been no material changes for their business for the relevant income year.

(3)

The Commissioner may, in accordance with this section, approve a person’s research and development activities for an income year (the first income year) and up to 2 further consecutive income years, if the person makes an application in accordance with subsection (4) on or before the 7th day of the 2nd month after the end of the first income year.

(4)

A person must apply to the Commissioner for approval in the form prescribed by the Commissioner, including—

(a)

the activities the person wants the Commissioner to approve; and

(b)

the income years for which approval is sought; and

(c)

any other information required by the Commissioner.

(5)

The Commissioner may only approve a person’s activities to the extent to which, in the opinion of the Commissioner, the relevant activity is a core research and development activity or a supporting research and development activity.

(6)

If the Commissioner approves a person’s activities for an income year, the Commissioner must notify the person what activities of the person the Commissioner approves of as core research and development activities or supporting research and development activities, for which income years, and any conditions upon which the approval is made.

(6B)

The Commissioner must notify the person of the intention to decline the application before the application is declined.

(7)

The Commissioner may vary an approval, upon application, if the variation application meets the requirements in subsection (2)(a), the variation applied for meets the requirements of subsection (5), and the application is made on or before the 7th day of the 2nd month after the end of the relevant income year. If the Commissioner accepts the variation, then the Commissioner must notify the person in accordance with subsection (6).

68CC Research and development tax credits: greater than $2 million approval

(1)

This section applies ignoring, for purposes of this subsection only, sections HB 1 and HG 2 of the Income Tax Act 2007 (which relate to entity transparency) and substituting as the relevant person the person’s partnership or look-through company, if a person chooses to apply this section, and—

(a)

has, or reasonably estimates that the person together person, together with any joint venture of which the person is a member, will have eligible research and development expenditure greater that greater than $2 million for an income year; or

(b)

is a member of a group of companies that has or reasonably estimates that they will have eligible research and development expenditure greater than $2 million for an income year.

(2)

For the purposes of section LY 3(1)(d) of that Act, a person is approved for the income year to the extent to which—

(a)

the person and the relevant members of the group under subsection (1)(b), if applicable, have,—

(i)

on or before the 7th day of the 2nd month after the end of the income year, notified the Commissioner that they elect to use this section and, in the case of an estimate under subsection (1), further notified the amount of the estimate; and

(ii)

for the income year, given to the Commissioner a research and development certificate with their research and development supplementary returns (see: sections 33E and 124ZI):

(b)

the Commissioner approves the person’s criteria and methodologies, as provided by subsections (3) to (7), and—

(i)

the person’s application for approval does not contain a material omission or misrepresentation; and

(ii)

the person complies with any conditions in the Commissioner’s approval; and

(iii)

there is no material change in the provisions in subpart LY of the Income Tax Act 2007 and any associated provisions; and

(iv)

has, for the income year, given to the Commissioner a research and development certificate with the person’s research and development supplementary return (see: sections 33E and 124ZI).

(3)

The Commissioner may, in accordance with this section, approve a person’s criteria and methodologies for an income year (the first income year) and up to 2 further consecutive income years, if the person makes an application in accordance with subsection (4) on or before the 7th day of the 2nd month after the end of the first income year.

(4)

A person must apply to the Commissioner for approval in the form prescribed by the Commissioner, including—

(a)

the criteria and methodologies the person wants the Commissioner to approve; and

(b)

the income years for which approval of a criterion or methodology is sought; and

(c)

any other information required by the Commissioner.

(5)

The Commissioner may approve—

(a)

appropriate criteria and methodologies for determining whether an activity is a core research and development activity, a supporting research and development activity, or not a research and development activity at all:

(b)

appropriate criteria and methodologies for determining whether an amount of expenditure or loss is or is not an amount of eligible research and development expenditure.

(6)

If the Commissioner approves a person’s criteria and methodologies for an income year, the Commissioner must notify the person notify to the person those criteria and methodologies of the person that the Commissioner approves of, for which income years, and any conditions upon which the approval is made.

(6B)

The Commissioner must notify the person of the intention to decline the application before the application is declined.

(7)

The Commissioner may vary an approval, upon application, if the variation application meets the requirements in subsection (2)(b), the variation applied for meets the requirements of subsection (5), and the application is made on or before the 7th day of the 2nd month after the end of the relevant income year. If the Commissioner accepts the variation, then the Commissioner must notify the person in accordance with subsection (6).

(8)

The Commissioner may revoke an approval, with effect from the beginning of the income year in which the revocation is made, if the Commissioner considers that the person has classified an activity, or an expenditure or loss in such a way so as to defeat the purpose and application of subpart LY of the Income Tax Act 2007.

44 Section 138E amended (Certain rights of challenge not conferred)

(1)

In section 138E(1)(e)(iv), replace “124ZH” with “124ZH, 124ZI”.

(2)

In section 138E(1)(e)(iv), replace “63” with “63, 68CB, 68CC”.

Schedule 1 New schedules 21 and 21B inserted

s 22

Schedule 21 Excluded activities for research and development activities tax credits

s LY 2

Part A Activities that are excluded from the definition of core research and development activity

  • 1

    Preproduction activities, including demonstration of commercial viability and tooling up.

  • 2

    Routine de-bugging of existing computer software.

  • 3

    Supporting or making minor improvements to existing computer software using known methods.

  • 4

    Routine software and computer maintenance.

  • 5

    Prospecting for, exploring for, or drilling for, minerals, petroleum, natural gas, or geothermal energy.

  • 6

    Market research, market testing, market development, or sales promotion, including consumer surveys.

  • 7

    Commercial, legal, or administrative aspects of patenting, licensing, or other similar activities.

  • 8

    Activities involved in complying with statutory requirements or standards.

  • 9

    Management studies.

  • 10

    Activities relating to organisational design.

  • 11

    Ineligible internal software development.

  • 12

    Research in social sciences, arts, or humanities.

  • 13

    Quality control or routine testing of processes, services, or goods.

  • 14

    Routine collection of information.

  • 15

    Minor adaption of, or improvement to, existing processes, services, or goods.

  • 16

    Bug testing, beta testing, system requirement testing, user acceptance testing, and data integrity testing.

  • 17

    Data mapping and data migration testing.

  • 18

    Testing or comparing the efficiency of algorithms that are already known to work.

  • 19

    Testing security protocols or arrangements.

  • 20

    Converting existing systems to, or integrating existing systems with, new software platforms.

  • 21

    Making cosmetic or stylistic changes to processes, services, or goods.

  • 22

    Reproduction of a commercial product or process by a physical examination of an existing product or system, or from plans, blueprints, detailed specifications, or publicly available information.

  • 23

    Carrying out routine operations on data, including presentation of data.

  • 24

    If section 68CB of the Tax Administration Act 1994 applies for the person, activities that are not approved under that section.

Part B Activities that are excluded from the definition of supporting research and development activity

  • 1

    Preproduction activities, including demonstration of commercial viability and tooling up.

  • 2

    Routine de-bugging of existing computer software.

  • 3

    Supporting or making minor improvements to existing computer software using known methods.

  • 4

    Routine software and computer maintenance.

  • 5

    Prospecting for, exploring for, or drilling for, minerals, petroleum, natural gas, or geothermal energy.

  • 6

    Market research, market testing, market development, or sales promotion, including consumer surveys.

  • 7

    Commercial, legal, or administrative aspects of patenting, licensing, or other similar activities.

  • 8

    Activities involved in complying with statutory requirements or standards for pre-existing processes, services, or goods.

  • 9

    Management studies.

  • 10

    Activities relating to organisational design.

  • 11

    Ineligible internal software development.

Schedule 21B Expenditure or loss for research and development tax credits

s LY 5

Part A Eligible expenditure or loss for research and development tax credits

  • 1

    Depreciation loss for an item of depreciable property to the extent to which the depreciable property is used in performing a research and development activity.

  • 2

    Expenditure or loss, including amounts deductible under sections DB 49 and DB 50, that is not for employees and is incurred in acquiring goods and services that are not depreciable property, to the extent to which—

    (a)

    the goods and services relate to performing a research and development activity; and

    (b)

    the expenditure or loss is not an unexpired amount under section CH 1 or CH 2 (which relate to end of year adjustments).

  • 3

    Amounts for employees, to the extent to which the employee’s employment relates to performing a research and development activity.

Part B Ineligible expenditure or loss for research and development tax credits

  • 1

    Amounts that, but for this clause, are eligible research and development expenditure under section LY 5, to the extent to which the amounts, together with associated persons’ eligible research and development expenditure returned by them in their research and development supplementary return, are greater than $120 million or their approved research and development cap, as the case may be.

  • 2

    Expenditure or loss incurred in acquiring depreciable property.

  • 3

    Expenditure or loss to the extent to which it contributes to the cost of depreciable tangible property, if the depreciable tangible property is not used solely in performing a research and development activity.

  • 4

    Depreciation loss for an item of depreciable property to the extent to which the item’s cost is eligible research and development expenditure under section LY 5.

  • 5

    Depreciation loss for an item of depreciable property, if the item is in a pool of depreciable property and an item in the pool is not used solely in performing a research and development activity.

  • 5B

    Depreciation loss for an item of depreciable property under sections EE 11(2) to (6), and EE 39.

  • 6

    Depreciation loss for an item of depreciable property acquired from an associated person, if the associate has used the item for a research and development activity, to the extent to which the depreciation loss relates to consideration paid or payable to the associated person for the acquisition of the item in excess of the associate’s adjusted tax value for the property at the time of acquisition.

  • 7

    Amounts for goods or services, other than a right to use property, acquired directly or indirectly from an associated person to the extent to which the consideration paid or payable to the associated person for the goods or services is more than the lowest cost of the goods and services to an associate.

  • 8

    Amount for a right to use property acquired from an associate, to the extent to which the consideration paid or payable to the associate for the goods or services that relate to the right is more than the market value of the right.

  • 11B

    Expenditure to purchase land.

  • 12

    Expenditure under a financial arrangement.

  • 13

    A deduction under sections DB 5 to DB 15 (which relate to financing and financial arrangement adjustments).

  • 14

    Professional fees incurred in determining a person’s entitlement or lack of entitlement to a research and development tax credit.

  • 15

    Expenditure or loss to purchase, lease, or otherwise acquire an interest in intangible property other than software.

  • 16

    Expenditure or loss to purchase, lease, or otherwise acquire software that is bespoke or customised, or is not widely commercially available.

  • 17

    Amounts that, but for this clause, are both eligible research and development expenditure under section LY 5 and internal software development expenditure, to the extent to which the amounts, together with associated persons’ amounts that are both eligible research and development expenditure and internal software development expenditure, returned by them in their research and development supplementary return, are greater than $25 million. For the purposes of this clause only, sections HB 1 and HG 2 (which relate to entity transparency) are ignored and the person’s partnership or look-through company is substituted as the relevant person.

  • 18

    Expenditure or loss in relation to goods and services, to the extent to which the consideration paid or payable for the goods and services is greater than market value consideration.

  • 19

    Gifts.

  • 20

    Expenditure or loss that is ineligible technology expenditure.

  • 21

    Expenditure or loss for plant, machinery, or materials to commercialise research and development activities’ results, including preproduction expenditure or loss.

  • 22

    Expenditure or loss that is a precondition to, subject to the terms of, required by, or otherwise related to a grant made by the Crown or a local authority.

  • 23

    Expenditure or loss incurred in acquiring or producing goods, including expenditure or loss for energy (inputs), to the extent to which the expenditure or loss does not exceed the market value of goods that result from the total inputs being used in, or subject to, a process or transformation.

  • 24

    Expenditure or loss to the extent to which a country or territory outside New Zealand allows a credit of tax (a foreign credit) of a similar nature to the research and development tax credit for the expenditure or loss, and the person receives the foreign credit for the expenditure or loss.

  • 25

    Expenditure or loss that is not for an approved research provider performing a research and development activity on behalf of the person, if section LY 4(1)(b) applies, and section LY 4(1)(a) does not apply.

Legislative history

25 October 2018

Introduction (Bill 108–1)

1 November 2018

First reading and referral to Finance and Expenditure Committee

3 April 2019

Reported from Finance and Expenditure Committee (Bill 108–2)

11 April 2019

Second reading

30 April 2019

Committee of the whole House (Bill 108–3)