Changes to the disputes and reassessment rules
2007 changes to the disputes reassessment rules in relation to the research and development tax credit.
Time limit for notice of proposed adjustment (section 3(1) of the Tax Administration Act 1994 - definition of response period)
Because claimants and their agents will require time to prepare and check their claims for tax credits, the time for reassessing the amount claimed has been extended from the standard four months.
In the case of a notice of proposed adjustment (NOPA) relating solely to an amount of R&D tax credit, the time limits within which the claimant can issue the NOPA are:
- for a business that is neither a member of an internal software development group nor a partner in a partnership electing to apply section 68E of the Tax Administration Act 1994, one year following the date the income tax return is received by Inland Revenue; and
- for a business that is a member of an internal software development group or a partner in a partnership electing to apply section 68E of the Tax Administration Act 1994, from the date the business's income tax return is received by Inland Revenue, up until one year after the due date for the group's detailed statement of R&D activities.
Example: Claimant issues NOPA within the new response period
Company A is in the process of internally auditing its R&D expenditure. On 15 March 2020, A's agent files A's 2018-19 income tax return and files a detailed statement of R&D activities, claiming a $50,000 tax credit. Inland Revenue receives the tax return on 17March. When A completes its audit, A discovers that it was actually entitled to a tax credit of $60,000 and issues a notice of proposed adjustment relating solely to the R&D tax credit.
As long as Inland Revenue receives the notice of proposed adjustment by 16 March 2021, the disputes process will begin and, subject to the outcome of the process, A could receive the additional $10,000 credit. If the notice of proposed adjustment is received after 16 March 2021, the notice will not be effective
Issuing a NOPA solely for an amount of R&D tax credit does not allow the business to reopen any other aspect of the income tax return.
Special rules for 2008-09 and 2009-10 years
In parallel with the extension of time to file a detailed statement, in some cases during the early years of the credit the time periods for issuing a NOPA relating solely to an R&D tax credit are also extended.
For the 2008-09 and 2009-10 income years, the time periods within which a NOPA relating solely to an amount of R&D tax credit may be issued are:
- for a business that is neither a member of an internal software development group nor a partner in a partnership electing to apply section 68E of the Tax Administration Act 1994, two years following the date the income tax return is received by Inland Revenue; and
- for a business that is a member of an internal software development group or a partner in a partnership electing to apply section 68E of the Tax Administration Act 1994, from the date the business's income tax return is received by Inland Revenue, up until two years after the due date for the group's detailed statement of R&D activities.
Time limit for Commissioner's reassessment (sections 108(1B) and 113D of the Tax Administration Act 1994)
Overseas experience suggests that when businesses are given long periods to reconsider their original claims, practitioners have incentives to trawl through past years' accounts and identify R&D expenditure that the business was unaware was R&D. This practice of "grave-digging" is at odds with the intent of the R&D tax credit policy, which is that the credit should provide an incentive to undertake R&D. If credits are being given for R&D which the business was unaware it was undertaking, it is clear that the credit has not provided any incentive.
To prevent "grave-digging", the Commissioner cannot reassess an amount of R&D credit upwards if one year has passed since the end of the tax year in which the original income tax return was filed.
Example: Claimant requests amendment after more than a year
Company A claims a $50,000 credit for R&D undertaken in the 2018-19 year, by filing an income tax return on 6June 2019. The return is filed in the 2019-20 tax year, which ends on 31 March 2020.
On 1 June 2021, A discovers that it was actually entitled to a $60,000 credit for R&D and asks the Commissioner to amend the amount originally self-assessed. However, Inland Revenue cannot amend the amount to $60,000 after 31 March 2021
There is an exception to the new rule. When the claimant has issued a NOPA on its claim for an R&D credit within the response period for doing so, the Commissioner has the normal period to reassess the amount of credit, allowing time for disputes procedures to be completed. In no case, however, may the Commissioner increase the amount of the R&D tax credit by more than the adjustment proposed in the NOPA which arrived within the original response period.
Example: Claimant requests amendment after more than a year, having issued a NOPA
Company A claims a $50,000 credit for R&D undertaken in the 2018-19 year, by filing an income tax return on 6June 2019. The return is filed in the 2019-20 tax year, which ends on 31 March 2020.
On 1 June 2020, A discovers that it was actually entitled to a $60,000 credit for R&D and issues a notice of proposed adjustment. The notice is issued within the response period (one year following the date the tax return was received), so the disputes process begins. The disputes process is concluded on 30 August 2021, and Inland Revenue agrees the credit should be $60,000. Normally, Inland Revenue would be unable to reassess the amount of the credit, since the date for doing so (31 March 2021) has passed. However, because the claimant had issued a NOPA relating to the amount of the R&D tax credit, Inland Revenue will reassess the amount to $60,000.
Example: Claimant requests amendment after more than a year, having issued multiple NOPAs
Company A claims a $50,000 credit for R&D undertaken in the 2018-19 year, by filing an income tax return on 6June 2019. The return is filed in the 2019-20 tax year, which ends on 31 March 2020.
On 1 June 2020, A discovers that it was actually entitled to a $60,000 credit for R&D and issues a notice of proposed adjustment. The notice is issued within the response period (one year following the date the tax return was received), so the disputes process begins.
On 20 August 2020, A issues another NOPA, revising up the credit again to $70,000.
The disputes process relating to the first NOPA is concluded on 30 August 2021, and Inland Revenue agrees the credit should be $60,000. Because the claimant issued a NOPA relating to the amount of the R&D tax credit within the response period, Inland Revenue will reassess the amount to $60,000.
The second NOPA is ineffective because it was issued outside the relevant response period, being the first year after the income tax return was originally filed. Inland Revenue is unable to reassess the tax credit amount above $60,000
Special rules for 2008-09 and 2009-10 years
For R&D tax credits arising in the 2008-09 and 2009-10 years, the Commissioner cannot reassess an amount of R&D credit upwards if two years have passed since the end of the tax year in which the original income tax return was filed. This is in line with the extensions, in some circumstances, for filing detailed statements or issuing a NOPA relating solely to an amount of R&D tax credit.