Expenditure on overseas R&D (section LH 6)
2007 legislation covers the eligibility for tax credits of research and development activities carried out overseas.
Expenditure on R&D activities carried out overseas is not eligible for the tax credit unless it is part of a project based in New Zealand, and meets the definition of overseas eligible expenditure.
Subsection (1) excludes expenditure or an amount of depreciation loss on R&D performed overseas unless it is part of a R&D project. "Research and development project" is defined in subsection 4. (See discussion below.)
Subsection (2) excludes expenditure or an amount of depreciation loss on R&D performed outside New Zealand as part of a R&D project, unless it is overseas eligible expenditure.
A "research and development project" is defined in subsection (4) and means a process:
- consisting of co-ordinated R&D activities controlled by the business;
- having start and finish dates;
- undertaken collectively to achieve a specified objective within constraints of time, cost and other resources;
- for which the business bears the financial risk and effectively owns the results, if any; and
- for which the business incurs on R&D activities performed in New Zealand more than half of the total amount of expenditure and depreciation loss that would be eligible expenditure under section LH 4 in the absence of subsection (2).
For an R&D project to exist, more than half of the expenditure that would be eligible under section LH 4 must be incurred on R&D activities performed in New Zealand. If that is not the case, then the expenditure incurred on activities performed outside New Zealand will not be eligible for the credit. However, the expenditure incurred in New Zealand will still be eligible.
"Overseas eligible expenditure" is defined in subsection(5). The expenditure must be:
- expenditure that would be eligible under section LH 4 (in the absence of a restriction on overseas R&D);
- incurred on R&D performed outside New Zealand in or after the 2008-09 income year; and
- limited to 10 percent of the total eligible expenditure incurred in New Zealand in or after the 2008-09 year as part of the same R&D project.
The 10 percent rule applies over the life of the project. Therefore, eligible expenditure incurred on R&D activities performed overseas can be carried forward until sufficient local eligible expenditure is incurred on the same project. Similarly, the eligible overseas expenditure can be incurred in years subsequent to years in which the eligible local expenditure is incurred.
"New Zealand" is defined in section YA 1.
Example 1
Company A performs eligible R&D activities. The activities are carried out over three years, starting in the 2008-09 income year. Some of the activity is carried out in New Zealand, and some is done in Australia.
In the first year, the company spends $100,000 on eligible expenditure in New Zealand and $15,000 on eligible expenditure in Australia. The company is entitled to claim the tax credit in relation to $110,000 of expenditure. This is made up of $100,000 of local expenditure + $10,000 Australian expenditure. The remaining $5,000 of Australian expenditure has to be carried forward until there is sufficient eligible local expenditure to claim the credit.
In the second year of the project, the company spends $100,000 on eligible expenditure in New Zealand and $2,000 on eligible expenditure in Australia. The company is entitled to claim the tax credit in relation to $107,000 of expenditure, made up of $100,000 local expenditure + $5,000 Australian expenditure carried forward from the previous year + $2,000 Australian expenditure from the current year.
In the third year, the company has no eligible expenditure in New Zealand and $40,000 of eligible expenditure in Australia. The company is entitled to claim the tax credit in relation to $3,000 of expenditure, made up of $3,000 of Australian expenditure, for which sufficient local expenditure was incurred in the previous year and the resulting entitlement carried over to this year.
Example 2
Company B performs R&D activities which are carried out over three years, starting in the 2007-08 income year. Some of the activity is carried out in New Zealand, and some is done in Brazil.
In the 2007-08 year, the company spends $100,000 in New Zealand and $15,000 in Brazil. The company is not entitled to claim the tax credit in relation to any of expenditure because the R&D is done before the credit is in effect.
In the second year, the company spends $100,000 on eligible expenditure in New Zealand and $15,000 on eligible expenditure in Brazil on the same R&D project. The company is entitled to claim the tax credit for $110,000 of expenditure, made up of $100,000 local expenditure + $10,000 Brazilian expenditure.
In the third year, the company spends $20,000 on eligible expenditure in New Zealand and $200,000 on eligible expenditure on the same project in Brazil. The company is entitled to claim the tax credit in relation to the $20,000 of New Zealand expenditure for that year.
However, the project no longer comes within the definition of an R&D project (because more eligible expenditure has being incurred in Brazil than in New Zealand in or after the 2008-09 income year) and therefore the company must revise its tax credit claim for the previous year and pay back the credit for the Brazilian expenditure incurred in that year.