The credit is 15% of eligible R&D expenditure, with a minimum of NZ$50,000 a year unless you use an approved research provider and a maximum of NZ$120 million a year. Eligible expenditure is defined by schedule 21B of the Income Tax Act 2007, which lists what is in and what is out rather than relying on a general test. This page walks through the categories, the apportionment rules and the exclusions.
Cost categories that qualify
| Category | What is included | Basis |
|---|---|---|
| Employee costs | Salaries, wages, bonuses, employer superannuation contributions and other remuneration of employees performing R&D activities, for the time spent | Apportioned by time |
| Contractors | Payments to contractors for performing R&D activities on the claimant's behalf in New Zealand | Included, with the contractor unable to claim the same work |
| Approved research providers | Payments to a provider on Inland Revenue's approved list | Included; the NZ$50,000 minimum does not apply |
| Consumables and materials | Goods and materials consumed or transformed in the R&D | Included |
| Depreciation | Depreciation loss on assets used in R&D, to the extent of that use | Apportioned |
| Overheads | Costs such as utilities, rent and administrative support that relate to the R&D, apportioned on a reasonable basis | Apportioned |
| Overseas R&D | Expenditure on R&D performed outside New Zealand that is integral to a New Zealand core activity | Up to 10% of total eligible expenditure |
Staff and time
Employee costs are the largest category in most claims. The eligible amount is the remuneration attributable to time spent performing core and supporting R&D activities, which calls for time records or a documented allocation method. Inland Revenue accepts timesheets, project management records and reasoned estimates supported by evidence, and expects the method to be consistent across the year. Shareholder-employees' remuneration qualifies on the same basis where it is paid as salary; drawings and dividends do not. Costs of staff supporting the R&D indirectly, such as HR or finance, are overheads and are apportioned as such rather than claimed as R&D labour.
Contractors and subcontracted work
Where a contractor performs R&D on your behalf, you claim and the contractor does not, provided you control the work, bear the risk and own or can use the results. The contractor's invoice is eligible in full; there is no percentage haircut as in Canada or the UK. Two rules matter. The work must be performed in New Zealand, or fall within the 10% overseas allowance. And payments to an approved research provider, such as a university or Crown research institute on Inland Revenue's list, carry two advantages: the NZ$50,000 minimum spend does not apply, and the provider's involvement can support the systematic approach.
Where you perform R&D for a customer who owns the results, the customer is the claimant and your costs are not eligible for you. Contracts should therefore say who controls the work, who bears the risk and who owns the results, because those three points decide who claims.
Materials, software and overheads
Consumables and materials used in the R&D are eligible. Where goods produced during R&D are sold, the feedstock rule applies: expenditure on inputs into goods that are sold is eligible only to the extent it exceeds the sale proceeds, which stops the credit subsidising production.
Software, data and cloud used in performing the R&D are eligible as consumables or overheads, apportioned for other use.
Overheads are eligible on an apportioned basis, which is more generous than Ireland and in line with Australia. A documented method, such as floor area for premises costs and headcount for support functions, should be set at the start of the year.
Costs that are excluded
Ineligible expenditure includes interest, the cost of acquiring land or depreciable property (although depreciation on assets used in R&D can qualify), and expenditure on R&D performed for another person.
| Excluded | Treatment |
|---|---|
| Interest and financing costs | Not eligible |
| Acquiring land, buildings and depreciable property | The purchase is not eligible; depreciation on R&D assets is |
| R&D performed for another person for consideration | The other person's R&D |
| Expenditure above NZ$120 million a year | Earns no credit unless a higher cap is approved |
| Overseas R&D above 10% of the total | Excluded |
| Expenditure on excluded activities | Not R&D |
Illustrative example
Illustrative example. Otago Battery Systems Limited, a hypothetical company with a 31 March year end, has these costs for its approved core and supporting activities:
| Cost | Amount | Eligible |
|---|---|---|
| Five engineers, 70% of time on R&D, remuneration and superannuation NZ$750,000 | NZ$750,000 | NZ$525,000 |
| Approved research provider (university) for cell testing | NZ$90,000 | NZ$90,000 |
| Contractor in Australia for a simulation study, integral to the core activity | NZ$80,000 | Capped at 10% of total eligible expenditure |
| Cells and materials consumed in trials | NZ$60,000 | NZ$60,000 |
| Depreciation on test chambers, 100% R&D | NZ$40,000 | NZ$40,000 |
| Rent and power, apportioned by floor area | NZ$150,000 | NZ$45,000 |
| Interest on the equipment loan | NZ$12,000 | Nil |
Eligible expenditure before the overseas item is NZ$760,000. The Australian contractor is capped at 10% of total eligible expenditure; including it, total eligible expenditure is about NZ$840,000 and the overseas item fits within the cap at NZ$80,000. The credit is 15%, about NZ$126,000.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.