Determinations, record keeping, no exemption, use-of-money interest and penalties and refunds of surplus credits not subject to GST (sections of the Tax Administration Act 1994)

Research and development tax credits in relation to applying for a determination, record keeping, exemptions from filing returns, penalties and more.

Determinations (sections 91AAP and 91C(4) of the Tax Administration Act 1994)

Businesses that are uncertain about their eligibility for the tax credit will be able to apply for a determination of whether:

  • they meet the eligibility criteria in section LH 3 of the Income Tax Act 2007;
  • their expenditure or depreciation loss meets the requirements of the definition of "eligible expenditure" in section LH 4; and
  • their activity meets the requirements of the definition of "research and development activities" in section LH 7.

Businesses will not be able to obtain binding rulings about these matters.

There will be regulations to prescribe how businesses should apply for a determination on these matters. The determinations will be binding on the Commissioner, from the date the determination is signed by the Commissioner, but not binding on the person who applies for the determination.

When there is an amendment to or repeal of the law relevant to the determination, and it would detrimentally affect the business to continue relying on the determination, the determination does not have to be relied on.

Where the applicant has misrepresented or omitted facts relevant to the determination, whether intentionally or not, the determination is no longer binding and cannot be relied upon.

Inland Revenue may withdraw the determination by notice, at which point it can no longer be relied upon. There is an exception, however - when the business is already undertaking an activity in reliance on the determination, and was doing so before the notice of withdrawal, the business can continue to rely on the determination as originally set down for the activity.

A determination may not be disputed or challenged.

The ability to apply for a determination will not be available immediately. The provision allowing for determinations will come into force by Order in Council, no later than 1 April 2010.

Record-keeping (sections 22(2) and 22(7) of the Tax Administration Act 1994)

Claimants must keep sufficient records to support their claim for an R&D tax credit. For a business, general record-keeping requirements are laid out in detail in section 22(1). An entity which does not derive assessable income is expected to keep records of a similar standard to support its claim for a tax credit.

In addition, all entities claiming a tax credit will be expected to keep a wider range of records than specified in section 22(1). For example, non-accounting documents such as project plans or test-reports might be required to provide evidence of a systematic, investigative and experimental approach to an activity.

Listed research providers must keep additional records to show that they meet the requirements of section LH 15(2) and (3) of the Income Tax Act 2007, and to show the amounts derived and incurred by them in performing R&D activities on behalf of other persons.

No exemption from filing an annual return of income (sections 33A(2) and 43A(2) of the Tax Administration Act 1994)

A business that has a tax credit under section LH 2 of the Income Tax Act 2007 must file a return of income for the year the credit relates to. The exemption from filing in section 33A does not apply to a person who claims the tax credit.

A non-active company which has a tax credit under section LH 2 ceases to be a non-active company and must file an income tax return.

Use-of-money interest and penalties (section 141(7C) of the Tax Administration Act 1994)

Use-of-money interest and penalties generally apply to amounts of tax credit as they would apply to other amounts of tax.

However, there is an exception to the normal shortfall penalty rules, applying only to internal software development groups. When the members of an internal software development group reallocate the credits for internal software development undertaken by the group, there will not be a shortfall as long as the reallocations are offsetting. This recognises that group members who file a tax return early might not yet know the internal software development expenditure of other group members.

Example: Reallocation of credits for internal software development (no shortfall)

Company A and Company B, standard balance date companies, are members of an internal software development group from 1 October 2008 to 31 March 2009.

The following expenditure is undertaken:

  • Company A spends $1 million on internal software development in the period from 1 April 2008 to 30 September 2008, and $2 million on internal software development in the period from 1 October 2008 to 31 March 2009. Company A also spends $6 million on other R&D over theyear.
  • Company B spends $0.5 million on internal software development in the period from 1 April 2008 to 30 September 2008, and $1.5 million on internal software development in the period from 1October 2008 to 31 March 2009. Company B also spends $4 million on other R&D over the year.

Company A files its tax return on 1 May 2009, claiming a tax credit for $8,495,890 of R&D expenditure ($1 million of internal software development expenditure before it was part of the group, $1,495,890 of internal software development expenditure afterwards, and $6 million for other R&D expenditure). This gives a total credit of $1,274,383.

Company B files its tax return on 1 July 2009, claiming a tax credit for $4.5 million of R&D (internal software development expenditure of $0.5 million incurred before it was part of the group, and $4 million of other R&D expenditure). This gives a total tax credit of $675,000. Company B would also like to claim for internal software development expenditure incurred while in the group, but is aware that the group's expenditure cap has been reached.

Company B negotiates with Company A. Company A files a notice of proposed adjustment and reduces its claims for tax credits by $90,000 (relating to eligible expenditure on internal software development of $600,000). Company B files a notice of proposed adjustment and increases its claim for tax credits by $90,000. The Commissioner makes both adjustments. Because $90,000 is less than the credits Company A received for internal software development expenditure incurred while in the group, and because Company B is entitled to more than $90,000 of credits for internal development expenditure incurred while in the group, Company A has no tax shortfall

The provision only applies when there is reallocation of credits for internal software development expenditure incurred while in the group. It allows neither reallocation of any credits for expenditure incurred outside the group nor reallocation of any credits for expenditure which is not on internal software development. The business that is allocated a greater amount of credits must also have sufficient eligible expenditure relating to internal software development undertaken while in the group to justify those credits.

Refunds of surplus credits not subject to GST (section 6 of the Goods and Services Tax (Grants and Subsidies Order) 1992)

A refund of surplus tax credits under section LH 2 of the Income Tax Act 2007 is not subject to GST.