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Eligible expenditure (Schedule 21, Part A)

2007 legislation covering the research and development tax credit, and eligible expenditure (Schedule 21, Part A). Examples included.

Only the following expenditure is eligible for the credit:

  • salaries and other remuneration of employees conducting R&D;
  • depreciation of tangible assets used in conducting R&D;
  • costs of staff training, recruitment, relocation and travel incurred directly as a result of R&D;
  • the cost of materials incorporated into prototypes;
  • certain overheads that relate to administration, human resources, repairs and maintenance, cleaning and security;
  • rates, utilities, insurance and leasing of buildings, plant and equipment;
  • the cost of items consumed, and the net cost of items processed or transformed in R&D activities; and
  • payments to an entity or person for R&D services performed on behalf of the claimant.

Salary and other remuneration of employees conducting R&D (clause 1)

Salary, wages, allowances, bonuses, commissions, extra salary, overtime, fringe benefits, holiday pay and long-service pay paid to an employee who is conducting SIE or supporting R&D activities are eligible for the credit. Superannuation contributions, fringe benefit tax, specified superannuation contribution withholding tax and insurances paid for such employees are also eligible.

If an employee works part-time on R&D, the credit only applies to remuneration in relation to that portion of the employee's time that is spent on R&D.

Depreciation of tangible property (clause 2))

Annual depreciation on tangible property used in conducting R&D is eligible (depreciation on intangible property is excluded under Part B, clause 15). The credit is available to the extent the property is used in conducting R&D (the excess above this is excluded under Part B, clause 5).

Depreciation attracts the credit in two circumstances:

  • for "facilitative" assets that are used in the R&D process but are not the object of the R&D; and
  • for certain "end-result" assets that are the object of the R&D and are used in the R&D process (for example, for testing, analysis and data recording).
Example: Facilitative assets

ACo has a computer that is used 20 percent of the time on R&D, and 20 percent on other activities. For the remaining 60 percent of the time it is idle (evenings, weekends and holidays). The credit may be claimed in relation to 50 percent of the annual depreciation deduction.

End result assets

Paragraphs (b) and (c) relate to depreciable tangible assets that are developed as the object of the R&D activities and that are to be used in the business other than in the R&D process. Expenditure on developing these assets does not attract the credit when it is incurred. Rather, the credit may be able to be claimed in relation to depreciation on such an asset while it is being used in the R&D process (for example, for testing) provided construction of the asset is an eligible R&D activity. This requires that either the construction itself is a SIE activity (a sufficiently innovative construction technique) or that it is a support activity (mainly for the purpose of, required for and integral to, the SIE activity).



ACo is a utility company experimenting with a new material for underground pipes. It constructs a small area of the network for testing before rolling out the pipes in the region. Assume that the construction of that part of the network is an eligible support activity (that is, it is mainly for the purpose of, is required for and integral to, the SIE R&D). The pipes supply gas to the neighbourhood and will remain in place following the test if they are satisfactory. The salary and materials inputs into construction of the pipe network are not eligible for the credit when they are incurred, but depreciation on the network may be eligible while it is being tested.

Construction of an asset that is mainly for non-R&D commercial purposes is not eligible for the credit at all.

The credit does not apply to depreciation of an end-result asset if the expenditure incurred in its development would be eligible for the credit as it is incurred.

No clawback or loss on sale

To minimise compliance costs, there is no clawback of credits on disposal of assets for more than their tax book value. When an asset is sold to an associate for more than its book value, the price above the vendor's book value does not attract the credit in the hands of the associated purchaser (Part B, clause 6).

Generally, any loss on sale or write-off of depreciable property also does not attract the credit. However, there is an exception in relation to certain end-result assets that are a failure and written off. The exclusion in relation to loss on sale is discussed further below under "ineligible expenditure" (Schedule 21, Part B - clause 2).

Pooled property

The credit does not apply to depreciable assets in a tax depreciation pool unless the pool consists solely of R&D assets used wholly in conducting R&D.

Depreciation of asset by business with tax-exempt income

Special rules are provided in section LH 14 to calculate the amount of depreciation loss in relation to tax-exempt entities.

Employee training, recruitment, relocation and travel (clause 3)

The cost of training, recruitment, relocation and travel of employees is eligible when it is incurred directly as a result of R&D activities.

Materials incorporated into prototype products and plant (clause 4)

The cost of materials incorporated into a trial model or preliminary version of a product or plant is eligible for the credit.

Overhead costs (clauses 5 and 6, and section LH 8)

Certain listed expenditure on overheads is eligible for the credit. Apportionment is required when overheads are only in part incurred directly for R&D activities.

If the overheads relate to administration of internal business activities, the human resources section of a business, repairs and maintenance, or cleaning and security, then employee remuneration, consumables and payments to contractors for services are eligible.

Rates, utilities (including telecommunications) and insurance and the cost of leasing buildings, plant and equipment are also eligible.

Overheads must be incurred directly for R&D activities. For example, while part of a cleaner's salary will be eligible if he cleans the R&D laboratory, and part of the secretary's salary will be eligible if she supports R&D personnel, the cleaning of the secretary's office is not eligible.

There is a regulatory power to exclude overheads that are too remotely connected with the R&D. The broad intention is that overheads not eligible for the 125 percent concession in Australia will be excluded in New Zealand. Examples include directors' fees, entertainment expenses, and canteen and recreational facilities.

Remuneration of employees performing SIE or support R&D activities are eligible under clause 1, not clause 5. Support activities must be integral to - that is, part of - SIE activities. This would include, for example, the salary of a technician collecting data used in experiments. Human resources personnel, cleaners and security officers generally do not perform activities that would be part of the R&D project so their remuneration will be eligible (if at all) as overheads under clause 5.

This clause does not include depreciation deductions, which may only be claimed under clause 2.


ACo has an R&D division with employees engaged full-time in R&D. The human resources officer spends on average 10 percent of her time attending to issues relating to that division. These are considered to be directly related to R&D activities, so 10 percent of her remuneration is eligible.

ACo employs a cleaner who spends 10 percent of her time cleaning the R&D division. Again, this is considered to be directly related to R&D activities, so 10 percent of her remuneration is eligible. However, the cleaning of the human resource officer's office is not directly related to R&D activities.

Items consumed in R&D activities (clause 7)

Items consumed in the R&D process are eligible for the credit. This would include, for example, laboratory chemicals and stationery.

Net cost of items processed or transformed in R&D process (clause 8)

For items that are processed or transformed during R&D activities, only the net expenditure is eligible - that is, the excess of the cost of the items which are the subject of processing or transformation, over the value of the output. The value of the output is the sale proceeds when the products are sold in an arm's-length transaction and, when they are not, the market value of the products.

The provision applies to the acquisition or production of raw materials or products that are "put through" an R&D process. This will most often be trading stock and would include the catching of fish put through an experimental fish processing plant, milk processed into powder in an experimental drying process, sheep shorn or cows milked in an experimental process and timber acquired and cut using a novel technique.

It encompasses the manufacture or acquisition of a product that does not change during the R&D process or changes in a manner that is not visible.

Payments to a person for R&D services (clause 9)

When part or all of an R&D project is outsourced, a payment to the person or entity conducting the R&D is eligible. The performer of the R&D does not get a credit because it would fail the requirement to control the project, bear the risk and effectively own the results. When the R&D is outsourced to an associate, some of the payment is likely to be ineligible under Part B, clause 3.

The payment must relate only to the R&D conducted by the third party. If the payment is for multiple items (such as R&D services and marketing), costs must be separately identified.

The provision applies to payments for both SIE and supporting activities and covers the costs of engaging independent contractors, agency workers and temporary staff to work on R&D.

To be eligible for the credit, expenditure must be listed in Schedule 21, Part A and not listed in Schedule 21, Part B. The intention is that generally expenditure in Part B is ineligible whether it is incurred by the claimant in doing its R&D inhouse or when the R&D is contracted out to a third party.

For example, if a Crown Research Institute, performing contract R&D for an eligible business, arranges for the work to be subcontracted overseas, the expenditure limit in relation to overseas R&D still applies. The same principle applies to internal software development.

The wording of certain restrictions - for example, section LH 6 (for R&D done overseas) and Part B clause 9 (internal software development) - achieves this already. However, it is not so clear in relation to other clauses in Part B. The government will review this at the earliest opportunity. Businesses should not be able to avoid rules relating to excluded expenditure by outsourcing R&D.