By Marion Tasker, Senior Manager R&D, KPMG and Scott Olding, Director, KPMG

The Government has introduced a R&D Tax Credit regime with effect from the beginning of the 2008/09 income year. This regime is designed to promote R&D within NZ Industry and to improve NZ’s competitiveness worldwide. The tax credit is valued at 15c for every $1 of qualifying R&D expenditure incurred on an eligible project after the start of the 2008/09 income year (the project itself could have started prior to this date).

The NZ regime incorporates a number of key features of the Australian R&D tax concession, which has been operating for over 20 years. The NZ credit is set at twice the value of that of our Australian cousins. Another very positive feature of the NZ regime is that the credit is a “cash” credit (i.e. the credit will offset your tax liability if you are paying tax but will be refunded in cash if you are in a tax loss or if you are a tax exempt entity).

It is very important to appreciate the “R&D” definition as used in the NZ legislation. Discussing your activities with a qualified R&D tax adviser may assist you determine the boundaries of this definition in the context of your business. It is possible that the R&D definition is broader than the activities that many organisations internally class as R&D.

The R&D credit is claimed from the IRD as part of the tax return filing for the organisation. There is also an additional supporting statement that must be lodged with the IRD before the benefit of the credit is made available.

A checklist for your assessment:

• Consider your activities against the R&D definition and seek advice from a qualified R&D adviser. Taking this issue out of finance is important - “what is R&D” is a technical issue. Therefore your R&D adviser needs to have sound technical and industry experienced people to really assist you in this process to identify the maximum amount of eligible R&D activities. 
• Read up on the legislation, discuss and understand terms such as “novelty”, “scientific or technological uncertainty”, “supporting R&D”, “listed research provider”, ”eligible and ineligible expenditure”. 
• Identify all potential R&D projects within the business and compare them to the criteria for eligible projects set in the legislation. 
• Educate all stakeholders across the business. The nature of this regime will typically require a sponsoring group made up from technical, finance, and senior management. 
• Collate and monitor on an ongoing basis all relevant information for each project, including all costs incurred, not forgetting peoples’ time. This may prove to be a challenge as not many companies are using full project based costing methods. 
• Talk to your R&D adviser about the various ways to meet these evidentiary requirements, especially as you are required to separate “core” from “supporting” R&D activities. 
• Check or review your internal systems and record keeping processes to test whether they are sufficient to meet the IRD’s documentation standards. 
• Remember you will want to ensure record keeping is such that each project claimed will pass an audit by the IRD - they may audit up to 4 years after the tax year the claim has been lodged in. 
• Once you are satisfied that your systems work, monitor projects and costs throughout the year. This is better to do as you go rather than to look back after year end. 
• Substantiate your projects, and meet the supporting statement requirements. 
• Lodge the claim with the IRD, and conduct an internal review of your process to make improvements going forward. 
• Receive the cheque and celebrate!

The new R&D Tax Credit regime is an opportunity not to be missed for NZ organisations undertaking R&D activities. The objective of eligible organisations should be to maximise the value of the credit but minimise disruption and risk of challenge from the IRD. KPMG has established a Technical R&D team where experienced R&D professionals work alongside Tax professionals and experienced R&D tax staff from our Australian practice to assist organisations achieve the above objective. KPMG offers tailored R&D tax services, including full outsourcing.

Contact Marion on (09) 367 5941 / mariontasker@kpmg.co.nz or Scott Olding on (09) 363 3664 / solding@kpmg.co.nz

About the Tax Credit

The PDMA New Zealand also offers the following sites for information about the New Zealand R&D tax credit regime: www.ird.govt.nz/rd-tax-credit and, for a copy of the handbook “Making Innovation Pay” by Auckland Plus and MoRST visit www.aucklandplus.com/subsites/aplus/news-and-events/news/making-innovation-pay.cfm

An enterprising New Zealand developer has also developed a website which helps businesses comply with the regime, and file the necessary paperwork. See www.rdtools.co.nz