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Research & Development Tax Credits Get Go-Ahead

17 May 2007

Research & Development Tax Credits Get the Go-Ahead

It was confirmed in today's Budget that the Government is introducing a Research & Development (R&D) Tax Credit regime providing financial incentives to New Zealand businesses undertaking R&D predominantly in New Zealand. Claimants will benefit from a tax credit of 15% of eligible expenditure. Loss making companies may receive the tax credit as a cash payment. The regime will apply to qualifying expenditure from the 2008/09 income year.

This rate compares favourably with those already in existence in other jurisdictions. For example, Australia's standard rate of benefit is 7.5% and 22.5% for incremental increasing R&D only. The rates of benefit in the UK will range from 8.4% to 21% depending on the size of the entity making the claim when recent announcements have been enacted.

In order to be eligible for the tax credit, the expenditure must be incurred by a New Zealand business and exceed $20,000 per annum. While this regime specifically excludes entities such as tertiary institutions, crown research institutes and district health boards from accessing R&D credits, the costs of commissioning R&D projects with such entities will be eligible to the funding New Zealand businesses.

The definition of eligible R&D activities is similar in substance to that used in Australia and many other regimes around the world with a clear effort to incorporate the best elements of the global R&D regimes. The scope is much wider than it may appear - new product development, production process improvements for manufacturers, new software systems (including software developed in-house capped at $2 million) and R&D in the food and construction industries are areas that could potentially qualify.

The key structural problems of the Australian R&D system appear also to have been addressed, again with the view of making New Zealand an internationally attractive R&D investment destination. Key improvements include the provision of imputation credits for R&D credits, a broader business entity eligibility test, and the inclusion of in-house software development (up to the $2 million cap).

The adoption of consistent definitions as used globally, and in particular Australia, will assist businesses already making R&D claims in other jurisdictions when identifying eligible activities and the existing judicial guidance issued in Australia could be used in New Zealand.

The R&D programme must be undertaken by a New Zealand business and carried out predominantly in New Zealand although up to 10% of the project costs may be undertaken overseas.

Pleasingly, the R&D credit will be given on a 'volume basis' i.e. all qualifying expenditure on eligible activities can qualify for the 15% tax credit, as opposed to following the US model where relief is only provided for increased R&D spending over previous periods.

It is unclear whether the requirement that project results arising from R&D be owned in New Zealand includes strict intellectual property legal ownership. Australia is currently proposing to remove this requirement from their R&D regime as it is considered this requirement inhibits their ability to attract foreign R&D investment.

We commend the Government's decision to make the financial incentives for undertaking R&D internationally competitive and it is likely to be a factor taken into account when multinational groups are considering where to locate their R&D activities. We await with interest the release of the documentation and compliance requirements that will underpin this new tax incentive as it is essential that they are not so onerous as to discourage participation. We note that the regime has operated successfully in Australia where a non tax body focused on encouraging innovation administers part of the claim process.

Deloitte will be hosting seminars on the application of the regime over the coming months as well as providing further details in later Alerts. These will include coverage of the potential application of the regime to specific industries.

To arrange for an interview please contact PR Manager Paula des Tombe (04) 470 3605 or contact the below directly for information regarding the release;

Peter Felstead Partner, Deloitte DDI: +64 (0) 9 303 0860 Email: pfelstead@deloitte.co.nz

Aaron Thorn Partner, Deloitte Brisbane DDI: +61 (0)7 3308 7023 Email: aathorn@deloitte.com.au

Simon Taylor Associate Director, Deloitte DDI: +64 (0) 9 303 0761 Email: simontaylor@deloitte.co.nz

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