The Government has set a target of raising the total amount of R&D performed in New Zealand to 2% of gross domestic product (GDP) by 2028.
This is expected to help build a high-skill, knowledge-based and more productive economy. Meeting this goal requires a significant increase in the amount of business R&D performed in New Zealand.
The RDTI aims to incentivise businesses already performing R&D to do more, and for other firms to start undertaking R&D.
How does the RDTI incentivise investment in R&D?
A common reason why businesses under-invest in R&D is that the investing firm does not necessarily capture all the benefits of the investment - some of the benefits flow to other businesses or consumers.
By lowering the cost to businesses of performing R&D, the RDTI aims to help offset this potential loss of benefits to other firms and individuals.
Why a tax credit?
Because of the tax system’s wide reach, i.e. all businesses are already linked to the system, it’s an efficient way to deliver this financial subsidy to as many businesses as possible that are eligible.
What definition of R&D is the RDTI based on?
The definition of R&D that the RDTI is based on reflects a modified version of how R&D is defined in the Frascati Manual. This is an OECD publication that defines research and development for statistical purposes.
The RDTI definition is expected to apply to a wide range of R&D activities in a variety of industries. It’s accepted, however, that some activities which businesses refer to as R&D won’t be eligible for the tax credit.
This is because the RDTI is about more than simply incentivising the development of new or innovative products - its aim is to encourage development that goes beyond what is known can be achieved with existing knowledge.
This definition reflects elements of R&D tax credit definitions used in Australia, Canada and the United Kingdom, and is aimed at incentivising the type of activity most likely to generate “spill-over” benefits in New Zealand - such as an increased number of high-skill jobs for New Zealanders.
Evaluating the RDTI’s contribution
The RDTI will be evaluated in 2024/25, five years after its launch, to determine its effectiveness in helping meet the Government’s objectives.