What R&D spend applies to the RDTI?
For the purposes of the RDTI, there is a specific statutory definition of ‘R&D’ which is not the same as the commercial, engineering or accounting definitions. The tax credit is not just for scientific research but also for development activity that meets the eligibility criteria.
There are clear criteria around what does and doesn’t qualify as eligible R&D for claiming the RDTI and these should be considered in detail before launching a project.
To claim the RDTI you must be able to identify which expenditure is directly connected to R&D activities and meets the eligibility criteria. It must be greater than $50,000 in the year, unless it is for a contract with an approved research provider (ARP). The maximum eligible expenditure in any year is $120m unless you receive approval for a higher limit.
Amounts you spend can generally only be claimed to the extent they relate to R&D. A special rule applies for R&D done in a commercial production environment, such as a manufacturing line. For more information on the commercial production rule, refer to page 66 of Inland Revenue's detailed RDTI guide.
Types of eligible expenditure
You can’t claim the RDTI on assets you acquire and use in your R&D activity, but you can claim depreciation on them. Depreciation is calculated using the same rates and methods you use to calculate your income tax deductions.
Where assets are used for eligible activities and other purposes, the depreciation must be reasonably apportioned between them. This would normally be based on the time used for each, ignoring any downtime.
Special rules apply for amounts you spend creating new assets. For more information on these rules, please refer to page 76 of the detailed RDTI guide.
You can claim your costs for employees involved in eligible activities, including:
• Salaries, wages, overtime, bonuses, sick, annual and long service leave
• The cost of shares issued to employees.
If employees are performing other duties, their costs must be reasonably apportioned and documented with time sheets, project plans, or other documents giving a clear breakdown.
Goods and services
You can claim the RDTI on the cost of acquiring goods and services (other than assets) you use in your R&D. This includes overheads, materials used, and paying contractors performing R&D for you.
If you acquire goods, services, property, or a right to use property from an associate, you can only claim the cost they incurred to acquire the property or service, or the market value of your right to use it.
If you contract out your R&D, you must deduct any ineligible expenditure incurred by the contractor from the expenditure you claim. For example, if your payment to the contractor includes an amount for them to purchase specialised equipment (depreciable property for the contractor), you can’t include the cost of that equipment (but you might include an amount for depreciation loss on the item while it was being used in your R&D).
For further detailed information, download our How-To Guide: Claiming R&D performed by a contractor.
If you perform your R&D in the course of normal commercial production, you can only claim the employee and additional costs related to the actual R&D. This means that costs like rent, rates, insurance and maintenance won’t qualify.
If you carry out R&D activities outside New Zealand which are not integral to a core R&D activity you conduct in New Zealand, the expenditure on those activities is ineligible.
Expenditure on supporting R&D activities conducted outside New Zealand might be eligible for the RDTI, but can’t exceed 10% of your total eligible expenditure.
Special rules mean that amounts you pay non-resident contractors and employees to do R&D in New Zealand are considered foreign expenditure, and come within the 10% cap. For more information on this, refer to page 70 of the detailed RDTI guide.
You can’t claim the RDTI on the following:
- The GST input portion of expenditure
- Someone else’s eligible expenditure
- Amounts in excess of $120m unless you have approval for a higher amount (this includes any amounts spent by your associates on R&D)
- Expenditure incurred in acquiring depreciable property
- Expenditure that contributes to the cost of depreciable tangible property (other than prototypes)
- Depreciation on property to the extent the cost of the property is eligible expenditure
- Depreciation on pooled property where an item in the pool is not used solely in performing R&D
- Depreciation when as asset is written off or sold below its adjusted tax value
- Certain amounts of depreciation when property is acquired from an associate
- Profits on R&D services and property provided by associates
- Amounts in excess of market value for leasing assets from associates
- Expenditure to purchase land
- Interest and other financing costs
- Professional fees for determining your entitlement to the RDTI
- Expenditure to acquire an interest in intangible property other than software
- Expenditure on bespoke software
- Internal software development expenditure in excess of $25m (this includes any amounts spent by your associates on R&D)
- Expenditure on goods or services in excess of market value
- The cost of acquiring technology that is used as a basis for further R&D activities
- Expenditure to commercialise the results of R&D activity
- Expenditure that relates to a government or local authority grant
- Expenditure on inputs used, or subject to a process or transformation, to the extent the expenditure does not exceed the value of the output from that expenditure (feedstock rule).
- Expenditure for which you have received an R&D tax credit from another country
- If your eligible expenditure is less than $50,000, expenditure or loss that is not for an approved research provider (ARP).