Over the past three years, Australian and New Zealand manufacturers have seen significant legislative changes in how R&D Tax Incentive claims are administered.
The 2019 introduction of the R&D Tax Incentive in New Zealand has fostered competition with the existing Australian regime. This, combined with the rapid pace of other changes during three pandemic-impacted years, has resulted in greater innovation support for businesses on both sides of the Tasman.
In the aftermath of Covid, businesses around the globe have innovated at a speed never seen before to stay relevant. This has made government support for R&D more crucial than ever for innovation.
In both countries, enterprises from start-ups to multinationals are likely entitled to R&D support through the R&D Tax Incentive program.
Understanding the framework is key to maximising the benefit available.
Common principles are the basis of R&D Tax Incentives in both countries, however there are differences that can vary significantly such as:
- Absence of an “experimental” requirement in the New Zealand definition;
- inclusion of “technological uncertainty” in the New Zealand definition; and
- lower threshold for supporting activities in Australia.
Manufacturers wanting to access either country’s R&D Tax Incentives are encouraged to seek professional advice to ensure they understand the meaning of key legislative terms and the guidance from authorities in each jurisdiction.
The manner in which the activities are registered is crucial in order to be legally binding down the track if challenged in court.
In Australia the R&D Tax Incentive is delivered by a tax offset, which can be refundable or non-refundable (and the rate can differ) depending on the aggregated turnover of the R&D entity.
In New Zealand it is delivered by a tax credit, which can be refundable up to a certain cap.
In practice, both jurisdictions offer a reduction in tax where there is tax payable. If the business is in a tax loss position, an amount of R&D expenditure may be refundable if certain conditions are met.
In Australia, the headline rate has been amended and is now more generous, however calculating the rate can be complex:
A refundable tax offset equal to the entity’s company tax rate plus an 18.5 per cent premium for eligible companies with an aggregated turnover of less than $20 million per annum. With most companies enjoying a 25 per cent corporate tax rate, this equates to a 43.5 per cent refundable R&D tax offset. If a company’s corporate tax rate is 30 per cent (in limited circumstances for businesses under $20 million aggregated turnover), the potential R&D refundable tax offset is 48.5 per cent.
A non-refundable tax offset for all other eligible entities equal to the entity’s company tax rate plus a two-tiered premium determined on notional R&D expenditure as a proportion of total expenditure for the income year. Broadly, this is corporate tax rate plus:
- 8.5 per cent for R&D expenditure up to 2 per cent of total expenditure of R&D entity for year
- 16.5 per cent for R&D expenditure above 2 per cent of total expenditure of R&D entity for year.
In New Zealand, the headline rate is a refundable 15 per cent tax credit for eligible R&D activities up to a cap of total labour related taxes paid by the R&D entity in the year, regardless of aggregated turnover. Since 2015 New Zealand also offers a 28 per cent tax credit for R&D tax losses.
If both programs are accessed together, the total refundable tax credit rate can be up to 43 per cent. The R&D tax loss cash-out program has additional rules and may include a pay-back mechanism when certain trigger events occur (e.g. certain sales events).
Other key differences
While there are a myriad of subtle differences between what’s on offer in Australia and New Zealand, some key differences to consider include:
IP ownership requirement to access the R&D Tax Incentive
Australia requires R&D activities be undertaken “for” the R&D entity, with rules around expenditure at risk. Broadly, New Zealand IP requirements are a related party worldwide has ownership of the IP, or IP can be accessed for no further cost. New Zealand also has anti-double dipping provisions, however often if the other party cannot access the R&D Tax Incentive the New Zealand rules allow an entity to access benefits it may not otherwise be able to access.
Overseas expenditure
On face value, New Zealand offers a more generous allowance of up to 10 per cent of total eligible expenditure for activities conducted outside of New Zealand or by non-residents (subject to other eligibility conditions). In Australia, legislation broadly limits the R&D claim only to eligible activities conducted physically and solely within Australia; however it provides the ability for a company to apply for an Overseas Finding and if successful, claim certain overseas R&D activities and associated costs in specific circumstances.
“Foreign owned” R&D
IP ownership and funding of R&D rules in New Zealand are relatively easier to meet compared to Australia. Where there is foreign investment into the country, Australian rules contain specific provisions for “foreign owned” R&D where a separate set of conditions must be met. New Zealand’s rules appear to cater to this possibility without introducing a separate set of rules. It is important to ensure in these circumstances the specific rules are met in either jurisdiction.
Quarterly funding
This is to be introduced in New Zealand in 2023. At this stage Australia does not offer quarterly funding, however in-year funding may be sought through alternate means such as external R&D debt financiers which exist in Australia.
RSM Australia is one of Australia’s leading professional services firms. With 32 offices around the country, the company ensures clients are at the forefront of world’s best practices, technology, and innovation within a rapidly changing global economy. Jessica Olivier is partner, R&D Tax and Government Incentives, and national leader – Manufacturing Services.
