Listed research providers (section LH 15)
2007 research and development related legislation (s LH 15) sets out the requirements to be listed as a research provider and the administrative rules for listing.
Section LH 15 sets out the requirements to be listed with the Commissioner as a research provider and the administrative rules for listing. Payments to an unassociated listed research provider are not subject to the minimum threshold of $20,000 of eligible expenditure each year. However, the payment must be for eligible expenditure (as calculated under section LH 4).
If a provider is delisted, payments under an arrangement entered into when the provider was still listed are not subject to the minimum threshold. (See discussion above on section LH 2(3) and (4).)
To be listed, a person must give notice to the Commissioner that it has the capability to perform contracted R&D, has R&D facilities in New Zealand and undertakes to meet the continuing requirements set out in subsection (3).
The continuing requirements are that the provider will charge fees on commercial terms, be available to undertake work on behalf of unrelated parties, and will maintain records to show that it satisfies the requirements to be listed and to show the amounts derived and incurred in carrying out R&D on behalf of others.
Inland Revenue will check the first two requirements and list the research provider if it is satisfied they are met. Listing does not constitute an endorsement of the provider. It means the research provider has satisfied Inland Revenue it has the capability to undertake R&D for others and has facilities in New Zealand. The list will be publicly available on the Inland Revenue website from 1 April 2008.
The provider is listed until it seeks to be removed from the list or is delisted by the Commissioner. Either party must give notice to the other and subsections (6) and (7) set out the dates on which the delisting takes effect.
The Commissioner may refuse to list a person who has been delisted in the past if the Commissioner considers that the person does not meet the start-up requirements or will not meet the continuing requirements on listed research providers.
No challenge is available to the Commissioner's decision to delist a provider.
Industry research co-operatives (section LH 16)
Industry research co-operatives fall into two categories. They can be organisations, generally in the primary sector, that collect levies from those in an industry and apply them to various purposes, including R&D.
Outside the primary sector, they may be co-operatives set up within an industry that receive contributions for various activities, including R&D.
These organisations are unlikely to be in business, but the R&D they either conduct or commission on behalf of businesses in the relevant industry is eligible for the credit. Those in business in the industry and making payments to the co-operative will not be eligible for the credit in relation to those levies or contributions. Industry research co-operatives are therefore not required to be in business. (See discussion above on section LH 1(1)(b).) The exemption does not flow through to entities controlled by the co-operative.
The co-operative must be undertaking or commissioning R&D mainly on behalf of its members, who:
- must be New Zealand businesses (either as residents or through a fixed establishment in New Zealand);
- would meet the requirements in section LH 2 if they carried out or commissioned the R&D and if the minimum threshold did not apply; and
- contribute to the financing of the R&D activity.
Also, the R&D activities must relate to the businesses of those who make contributions or pay levies. (See discussion above on section LH 2(2)(a)(ii).)
Expenditure of an industry research co-operative that is sourced from funds contributed by a person who is not eligible is not eligible expenditure of the co-operative. This is to prevent co-operatives being used to circumvent the requirements for eligibility. (See discussion above on ineligible expenditure Schedule 21, Part B, clause 16.)
Depreciation base for tax-exempt entities (section LH 14
R&D tax credits are potentially available to most entities undertaking an R&D activity, including charities and not-for-profit entities which have only exempt income.
The normal rules for calculating depreciation loss are ineffective for entities which generate only exempt income from an asset. Section LH 14 provides rules to calculate a notional amount of depreciation loss these entities can claim a credit for.
When an entity conducting or commissioning R&D has not previously been allowed a deduction for an amount of depreciation loss for an asset because it derives only exempt income, it is treated as acquiring the asset on the first day of the 2008-09 income year for market value, or on the actual date of acquisition at cost, whichever is the later.
These entities are then considered, solely for the purposes of calculating the amount of depreciation loss for the purposes of the credit, to have had deductions for depreciation in every year since acquisition. This does not allow the entity to actually claim a deduction for depreciation loss, but does lead to the correct amount of depreciation loss to use in calculating the amount of R&D tax credit.
Example (Depreciation base for tax-exempt entities (section LH 14)
A, a charitable society, undertakes R&D in 2010-11. A Digital Serial Analyser, purchased new in 2007, is mainly used in the R&D activity and the resulting depreciation loss would be deductible if A derived assessable income. A’s income year runs from 1 April to 31 March, and an independent valuation of the analyser on 1 April 2008 puts its market value at $35,000.
For the purposes of calculating the depreciation loss which is eligible for the credit in 2010-11, A assumes the analyser was purchased on 1 April for $35,000. The applicable depreciation rate for the analyser is 26.4 percent (diminishing value rate for an oscilloscope with 20 percent loading).
A is treated as being allowed a deduction for depreciation loss in each of the 2008-09, 2009-10, and 2010-11 income years, being the completed income years following deemed acquisition. Therefore, the assumed amounts of depreciation loss and adjusted tax values (ATV) in each year are:
|Income year||ATV at beginning of year||Depreciation loss|
|2008-09||Cost = $35,000||26.4% x $35,000 = $9,240|
|2009-10||$35,000 - $9,240 = $25,760||26.4% x $25,760 = $6,800|
|2010-11||$25,760 - $6,800 = $18,960||26.4% x $18,960 = $5,005|
In the 2010-11 income year, A can claim a tax credit for $5,005 of eligible depreciation loss.
If the Digital Serial Analyser, instead of being purchased new in 2007, was previously used in New Zealand, the applicable depreciation rate for the analyser would be 22 percent (diminishing value rate for an oscilloscope without 20 percent loading).