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—
(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—
(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:
(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—
(b)
remove the description of an activity or of an expenditure or loss, as applicable, from—
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