How does the New Zealand R&D tax credit work?
New Zealand businesses can claim a 15% tax credit on eligible R&D expenditure. The minimum annual threshold is NZD 50,000 in eligible R&D spend. The credit reduces your income tax payable. Eligible activities must be systematic, experimental, and aimed at creating new knowledge.
Detailed Explanation
## R&D Tax Credit in New Zealand
### Overview
New Zealand's Research and Development (R&D) tax credit was introduced from the 2019-20 income year. It provides a 15% non-refundable tax credit on eligible R&D expenditure, claimed annually in the income tax return. For businesses in a tax-paying position, the credit directly reduces income tax payable. For businesses in a tax loss position, limited cash-out options exist for eligible start-ups.
### Minimum Expenditure Threshold
To qualify for the R&D tax credit, a business must incur at least NZD 50,000 in eligible R&D expenditure in the income year. There is no maximum eligible expenditure cap, but the credit cannot exceed the company's income tax liability (the credit cannot create a tax refund for most businesses).
### Eligible R&D Activities
Eligible R&D activities must be systematic, investigative, and experimental in a field of science or technology, with the purpose of acquiring new knowledge or creating new products, processes, or services. Three criteria must be met:
1. Novel
the work must seek to advance knowledge beyond what is already publicly known. Simply applying existing knowledge in new contexts is not eligible.
2. Experimental
activities must involve testing hypotheses and outcomes must be genuinely uncertain. Development work where the outcome is known in advance is not eligible.
3. Systematic
work must be planned and conducted according to a defined process, with records kept of procedures, hypotheses, and results.
Eligible activities include: software development involving novel AI algorithms or technical uncertainties; new physical product development with genuine technical risk; agricultural research; medical device development; industrial process innovation; and material science research.
Not eligible
market research, quality control testing of existing products, routine data collection, social sciences research, and software development that merely uses existing tools without novel technical work.
### Eligible Expenditure
Salary and wages
staff who spend time on eligible R&D. Contemporaneous timesheet records are required. Only claim for hours genuinely spent on eligible R&D.
Contracted R&D
payments to external providers who conduct R&D on your behalf. Up to 100% of contracted R&D with NZ-based providers is eligible. For overseas contracted R&D, only 10% of total eligible expenditure can come from overseas contractors.
Materials and consumables
materials used up or destroyed in the R&D process (reagents, prototypes, test materials). Capital equipment is not directly eligible but the depreciation on equipment used in R&D is eligible.
Overhead costs
a portion of overhead costs (rent, power, IT) directly attributable to R&D activities using a reasonable apportionment method.
Ineligible costs
financing costs, land, core technology licensing fees (not created by the claimant), and commercialisation costs (marketing, sales, legal work to protect IP).
### Cashing Out the Credit (Limited Refundability)
For most businesses, the 15% credit is non-refundable. However, certain eligible businesses can cash out part of the credit: businesses less than 2 years old or with less than NZD 1 million in total taxable income in the prior year can apply to cash out up to NZD 255,000 of the credit (representing 15% on NZD 1.7 million of eligible spend). The cash-out is treated as a payment of PAYE on behalf of R&D employees.
### Applying for the R&D Tax Credit
The credit is claimed in the company's income tax return (IR4), supported by a supplementary return (IR10) detailing eligible activities and expenditure, R&D activity records, and invoices/salary records. For businesses spending over NZD 2 million on R&D annually, advance approval from Callaghan Innovation is required. Below NZD 2 million, approval is not needed in advance.
### Callaghan Innovation Grants
Callaghan Innovation (callaghaninnovation.govt.nz) provides separate R&D grants and co-funding programmes. These are not the same as the R&D tax credit. Callaghan funding received reduces the expenditure base for the R&D tax credit — you cannot claim the credit on the portion of R&D costs covered by a Callaghan grant (no double-dipping).
Source: https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/research-and-development-tax-incentive
Real-World Examples
Software startup claiming R&D credit
A SaaS startup has 3 developers spending 60% of their time on novel AI algorithm development. Combined salaries: NZD 360,000. Eligible salary cost (60%): NZD 216,000. Plus NZD 40,000 materials/NZ contractors. Total eligible: NZD 256,000. R&D tax credit: NZD 256,000 x 15% = NZD 38,400. The company's income tax liability of NZD 45,000 is reduced to NZD 6,600.
Agri-tech company with overseas contractors
A precision agriculture company incurs NZD 400,000 in eligible in-house R&D and NZD 60,000 with an overseas specialised lab. The overseas contract cap is 10% of total eligible spend = NZD 46,000. Only NZD 46,000 of the NZD 60,000 overseas work qualifies. Total eligible: NZD 446,000. Credit: NZD 66,900.
Early-stage startup cashing out
A year-old biotech startup has NZD 180,000 in eligible R&D salary costs, no other income, and a NZD 27,000 credit. In a tax loss position, they apply for a cash-out. The NZD 27,000 is paid as a cash refund tied to the PAYE paid on the R&D employees' salaries during the year.
Common Mistakes to Avoid
- Claiming R&D credit on routine software development such as bug fixes, adding features to existing products using known techniques, or website development — these do not meet the novelty and experimental tests
- Not keeping contemporaneous time records — a post-hoc estimate of time spent on R&D is unlikely to satisfy IRD audit scrutiny; records should be made at the time of the work
- Claiming on Callaghan Innovation grant-funded portions of R&D — grants reduce the eligible cost base and you cannot claim the credit on costs covered by a grant
- Missing the NZD 50,000 minimum threshold — if eligible expenditure falls below NZD 50,000 in the year, you receive no credit regardless of how legitimate the R&D activities are
Frequently Asked Questions
Can a sole trader claim the R&D tax credit?
The R&D tax credit is available to companies and certain other entities, but not to individuals as sole traders or to most trusts. Sole traders conducting significant R&D should consider whether incorporating to access the credit makes commercial sense.
Does R&D have to succeed for the credit to apply?
No. The credit applies to the expenditure on eligible R&D activities regardless of outcome. A failed experiment that genuinely tested an uncertain hypothesis is eligible R&D. The requirement is that the activity was experimental and aimed at creating new knowledge, not that it succeeded.
Can I claim R&D credit on the cost of a patent application?
Legal costs to obtain a patent (patent application fees, attorney costs) are not eligible R&D expenditure — they are commercialisation costs. The underlying R&D that led to the patentable invention may be eligible, but protecting the IP is not.
What records does IRD expect to see on audit?
IRD expects: a description of each eligible R&D activity (what technical uncertainty was being resolved), timesheets showing how staff time was allocated, invoices for all claimed expenditure, and documentation that activities met the novelty, experimental, and systematic tests.
What is the difference between the R&D tax credit and the old R&D tax deduction?
The old rules allowed R&D expenditure to be deducted as a normal business expense with no additional credit. The current regime provides a 15% credit on top of the normal deduction. Under the current rules, a company gets both: the expense deduction (reducing taxable income) and a 15% credit (reducing tax).
Practical Tips
- Implement time tracking software from the start of any R&D project — even simple tools showing hours per project per employee will satisfy IRD's record-keeping requirements far better than year-end estimates.
- Write a brief activity log for each R&D project: what technical problem you are solving, what is uncertain about the outcome, what experiments you ran, and results. This narrative is the core of your R&D activity documentation.
- Check Callaghan Innovation's current offerings before starting a significant R&D project — grant funding can co-fund R&D costs, and their commercial advisers can help assess eligibility for both grants and the tax credit.
- If you are close to the NZD 50,000 minimum threshold, review whether any additional eligible R&D activities can be brought into the year — qualifying projects that were informally tracked may be eligible once properly documented.
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