R&D tax credits and imputation accounts (sections OB 4(3)(eb), OB 7C, OK 2(3)(cb), OK 4B, OP 5(2)(bb), OP 7(3)(fb) and OP 11B
Research and development tax credits in relation to imputation credit accounts or a Maori authority credit account – how to claim the credit and examples.
In other jurisdictions, such as Australia, tax credits to companies are "clawed back" when paid out as dividends. The New Zealand credit has been designed to reduce such "clawback".
If an entity has an imputation credit account or a Maori authority credit account, an R&D tax credit will lead to a credit to that account. A refund of R&D tax credit (including a transfer of surplus credit) will lead to a debit. The net result is that the entity receives an imputation credit for the income tax liability satisfied byway of the credit.
The credit is equal to the amount of the R&D tax credit (sections OB 7C, OK 4B and OP 11B), and the debit is equal to the amount of the refund (or transfer). The credit arises on the day the relevant income tax return is received by Inland Revenue.
Examples: Tax credit leads to credits and debits to imputation credit account
- Company A receives a tax credit of $10,000 for expenditure incurred in its 2008-09 income year, reducing its tax-to-pay to $100,000. Company A's income tax return for the 2008-09 year is received by Inland Revenue on 1 June 2009. On 1 June 2009, there is a credit to A's imputation credit account of $10,000.
- Company B receives a tax credit of $10,000 for expenditure incurred in its 2008-09 income year, pushing it from tax-to-pay of $5,000 to a tax refund of $5,000. Company B's income tax return for the 2008-09 year is received by Inland Revenue on 1 March 2010. B receives a cash refund of $5,000, being the amount of the surplus refundable tax credit, on 1 April 2010. On 1 March 2010, there is a credit to B's imputation credit account of $10,000. On 1 April 2010, there is a debit to B's imputation credit account of $5,000.
To prevent more than one imputation credit arising because of an R&D tax credit, there is no credit for income tax paid by an R&D tax credit (sections OB 4(3)(eb), OK 2(3)(cb) and OP 7(3)(fb)). In addition, where a consolidated imputation group has a credit to its imputation credit account for an R&D tax credit, the same credit does not arise in the accounts of any of the members of the group (section OP 5(2)(bb)).
Claiming the credit
Businesses will claim the tax credit in an income tax return. The claimant will work out the liability for tax in the normal way, and then subtract the amount of the credit. If the amount of the credit exceeds the tax liability the balance is used to reduce other tax liabilities, or is refundable in cash.
The credit will reduce residual income tax, which will reduce provisional tax liability, allowing taxpayers to receive the benefit of the credit closer to the time the related eligible expenditure is incurred. This reduction will be immediate for people who estimate provisional tax, but delayed for people who use the "uplift" method for calculating provisional tax.
To be eligible for the credit, the claimant must provide - in addition to the income tax return - a detailed statement of R&D activities and expenditure, containing essential information for administrative purposes, by a due date.
Example: Claiming the tax credit
In 2010, Company A has assessable income of $200,000 and allowable deductions of $170,000, $100,000 of which is eligible expenditure on R&D. A claims an R&D tax credit of $15,000 and files a detailed statement by the due date.
|Tax liability (@ 30%)||$9,000|
|R&D tax credit||$15,000|
|Tax to pay||$0|
|Refund of surplus credit||$6,000|
|Credit to imputation||$15,000 (on date credit account return is received)|
|Debit to imputation||$6,000 (on date credit account refund is paid)|
Requirement for a detailed supporting statement (section LH 2(1)(d) of the Income Tax Act 2007; sections 68D and 68E of the Tax Administration Act 1994
A business claiming a tax credit in an income tax return is required to file electronically a detailed supporting statement. The detailed statement contains essential information to be used for audit, forecasting, statistical and evaluation purposes.
If a business is a member of an internal software development group, the detailed statement must be filed by a nominated member of the group on behalf of all group members.
A partnership may elect to file the detailed statement, in relation to the partnership's R&D activities, on behalf of all the partners, for convenience.17 A partnership which elects to file a statement on behalf of all the partners, and does internal software development, is not an internal software development group merely because it makes this election. Alternatively, if the partnership does not make this election, partners must separately file their own detailed statements, including their share of the partnership's eligible expenses and tax credit.
The statement must be filed by the due date. If a statement is filed late, there will be no tax credit for the year and there could be use-of-money-interest and penalties to pay.18
Because businesses and their agents need sufficient time to prepare the statement, the statement is never required to be filed before the due date for the associated income tax return.
The due date for the detailed statement for an individual is 30 days after the due date for the business's income tax return (including any extensions of time). The due date for an internal software development group is 30 days after the latest income tax return due date of any of the group's members. The due date for a partnership which elects to file a statement for all the members of the partnership is 30 days after the latest income tax return due date of any of the partners.
Example: Due date for filing a detailed statement
A's income year runs from 1 April to 31 March. B and C have income years which run from 1 November to 31 October. A, B and C are members of an internal software development group and have amounts eligible for a tax credit. B and C have a tax agent who is granted an extension of time, until 31 March 2020, to file B and C's 2018-19 income tax returns. A's internal accountant files its income tax return.
A must file its 2018-19 income tax return by 7 July 2019. B and C have until 31 March 2020. The group's detailed statement must therefore be furnished by 30 April 2020
It is possible that a business will be required to file (or have filed on its behalf by a group or partnership) more than one detailed statement for an income year.
Special rules for 2008-09 and 2009-10 years
In the early years of the R&D tax credit, it is recognised that some businesses will still be coming to grips with the requirements of the new rules. Some additional flexibility has been provided for businesses which do not initially file a claim for an R&D tax credit, enabling them in some cases to file their detailed statements at a later date.
In the 2008-09 and 2009-10 years, if a business has not claimed an amount of R&D tax credit in the relevant income tax return, the due date for the detailed statement for an individual is two years after the due date for the income tax return. If none of the members of an internal software development group have claimed an amount of R&D tax credit in the relevant income tax returns, the due date for the group's detailed statement is two years after the latest due date for filing an income tax return for any of the group members. If none of the partners in a partnership electing to file a detailed statement on behalf of all partners has claimed an amount of R&D tax credit in the relevant income tax returns, the due date for the partnership's detailed statement is two years after the latest due date for filing an income tax statement of any of the partners.
If a business (or any member of an internal software development group or any partner) has claimed an amount of R&D tax credit in the relevant income tax return, the special rules for 2008-09 and 2009-10 do not apply. A detailed statement must be filed by the normal due dates.
Provisional tax (section YA 1 of the Income Tax Act 2007; section 3(1) of the Tax Administration Act 1994 - definition of residual income tax)
The R&D tax credit reduces residual income tax. Taxpayers therefore have the option of reducing their provisional tax payments in anticipation of an R&D credit at the end of the year.
Example: Estimating provisional tax, including a tax credit
Company A expects to have a tax liability of $100,000 for the 2008-09 income year (before credits). A also expects to receive a credit of $40,000, so estimates its residual income tax to be $60,000. A furnishes this estimate to Inland Revenue and thereby elects to use the estimated provisional tax method. On each provisional tax instalment date, A pays provisional tax payments of $20,000.
18 There may be an exception in one situation: when a group return is filed on time but is incorrect because of a simple oversight, the Commissioner has discretion to grant an extension of time to file a corrected version. This exception was created to avoid the situation in which a group accidentally omits a member from its group return, causing the other members of the group to lose entitlement to their credits. It is not intended that the exception would be used in other situations.