Dinesh Naik –
The Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill released last fortnight included new rules to cash-up R&D tax losses for start-up businesses, clarified the GST treatment of bodies corporate, and contained various remedial changes to New Zealand’s international tax rules.
R&D Tax Loss
The Bill will allow certain businesses to cash-up tax losses generated from certain qualifying Research and Development activities from April 1, 2015.
In order to quality, a business should have salary expenditure on R&D equal to at least 20% of its total labour expenditure (R&D wage intensity test). This is tested at the group level if the company is part of a group of companies.
A New Zealand resident company that is not a Look Through Company (or qualifying company) and not part of a group that includes a foreign company will also qualify.
The amount cashed-up is the lower of 28% of net losses up to $500,000 in 2015-16 (i.e. a refund of up to $140,000) rising by $300,000 each year to $2 million by 2020-21.
The other requirements total qualifying R&D spend and 1.5 times the salary expenditure on R&D. Any loss cash-up must be repaid if the company sells the resulting R&D asset, more than 90% of the company is sold, or the company is liquidated.
The losses will then be reinstated.
Some hurdles
The proposal was raised in 2013 and confirmed in Budget 2014. It is aimed at alleviating cash-flow problems for start-up companies, many of which struggle for positive cash-flow when the business needs it the most.
While the proposal is welcome, there are a number of hurdles to qualify, including a strict definition of eligible R&D (R&D activity undertaken offshore will be excluded), that must be worked through.
As with any income tax based policy, a Company will only receive the cash when it files tax returns. This will generally be after the cash is spent as most companies have 12 month or longer to file their returns.
Limited value
The 20% R&D wage intensity test means that the proposal will be of limited value to many medium to large businesses. However, they may qualify for other assistance. Much of this is outside the tax system.
One of the challenges for business is to understand the different types of government assistance available. Businesses should do their homework as the government has committed significant funding for R&D and innovation but only a fraction is currently being accessed.
There is also a role for advisors, the government and its agencies in better communicating and socialising the available R&D assistance with the business community.
Black-hole expenditure
The Bill allows the following types of non-deductible and non-depreciable (black-hole) expenditure to be claimed from the 2015-2016 income year:
A deduction for non-depreciable intangible assets will be available when the asset is derecognised for accounting. This deduction will be clawed-back if the asset is sold or becomes useful again; The cost of a depreciable asset (such as a patent) will include amounts which are not currently included in the asset’s depreciable cost base (because the expenditure does not directly relate to the patent application); and Design registrations and industrial copyrights will be added to the list of depreciable assets
Detailed study
Budget 2014 confirmed these proposals. They are a useful extension of the deductibility and depreciation rules to capitalised costs (mainly relating to the ‘development’ phase of R&D) which are currently not claimable.
We believe that the issue of black hole expenditure should be dealt with comprehensively rather than in the current ad hoc manner.
Dinesh Naik is Tax Partner at KPMG based in Auckland. KPMG is a Sponsor of the Indian Newslink Indian Business Awards 2015.
