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The economy
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The economy
Research and development tax credits
If you have a business embarking on developing a new or improved product or service that hasn't been provided before, and that product involves significant innovation, then a research and development tax credit may be available to you. Sponsored by MoRST and supported by Auckland City Council, Kiran Bhikha, Director of O'Halloran HMT Research and Development Consultants Limited, described to around 70 Auckland business owners and leaders in June, how the tax credit regime available from 12 December 2007 may benefit them. This is a synopsis of the presentation. New Zealand's new research and development tax credit legislation follows in most respects an Australian model. It is credited as 15 per cent of total eligible research and development expenditure (both direct and indirect costs). The definition of 'research and development' is drawn essentially from the OECD's definition known as the Frascati model. In summary, the research and development project undertaken by the enterprise must seek to resolve scientific, or technological uncertainty, or must involve an appreciable element of novelty. In other words, it must deal with something that's new, or unknown. The activity cannot have been done before. The research must also be conducted in a systematic, investigative and experimental manner. Thus a problem must be defined before commencing, and research must be undertaken in a carefully planned procedural way. The intention behind the research must be to find out new knowledge or new or improved materials, products, devices, processes or services. If the outcome is already known, then it cannot be regarded as research and development. A research and development plan is therefore a wise option for a business to commit to paper, before the business sets out on the research project. The plan needs to document the steps which must be taken to resolve the technical uncertainty which is postulated. Eligible expenditure which can be counted towards the tax credit includes: internal labour, depreciation of research and development assets, overheads, consumables, contractor's charges, payments to research bodies, feedstock (such as materials used for testing of prototype machinery) and travel. Another important element is that the business must retain control over the research and development activity, and must bear the financial risk of the activity. The business must also own the results of the activity or have effective commercial rights to exploit the results. To be eligible, the research and development activity annual expenditure must exceed $20,000 expenditure. The exception to this is expenditure paid to a Listed Research Provider may be less than $20,000 and still be eligible for the tax credit. A list of registered providers is available on the IRD website. Before embarking on the research, the business must take all reasonable steps to document the current state of knowledge about the area it is investigating. Its records must demonstrate that the research has not yet been undertaken or an outcome not yet achieved and show how the business concluded that was the case. The bar from the IRD is set high. The IRD requires significant record keeping to prove expenditure and that the knowledge is not currently available. But if the process results in a significant tax credit, over and above the ability to expense the costs in the first place, then this tax regime should work well for business. NB: the information above is a summary only, and should not be taken as tax advice. For more information, please consult
Published July 2008
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