# How does the New Zealand R&D tax credit work? Last updated: 1 June 2026 Country: New Zealand Category: Compliance **Quick answer:** 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. ## Related questions - [What is the company tax rate in New Zealand?](https://accounts-os.com/nz/questions/company-tax-rate-nz) - [Who needs to file an IR3 income tax return in New Zealand?](https://accounts-os.com/nz/questions/ir3-income-tax-return-nz) - [What business expenses can I deduct in New Zealand?](https://accounts-os.com/nz/questions/business-expenses-nz)