The credit is 15% of eligible expenditure, but how much of it arrives as cash depends on the refundability rules. The credit is applied first against the year's income tax. The excess is refundable in some cases, and refunds are capped, including by reference to labour-related taxes. Whatever is not refunded is carried forward. For a loss-making business the cap decides the value of the scheme, so it deserves attention before the year starts.
What it is
| Element | Rule |
|---|---|
| Order of use | Credit applied against income tax for the year; excess considered for refund; remainder carried forward |
| Refundable amount | The excess credit, up to a cap |
| Cap | Broadly the business's labour-related taxes for the year: PAYE, employer superannuation contribution tax and fringe benefit tax paid, with group adjustments |
| Who can receive a refund | To receive a refund, a company must meet the corporate eligibility criteria in the Income Tax Act 2007 |
| Carry forward | Unrefunded credit carries forward, subject to shareholder continuity for companies |
| Earlier rule | For the 2019-20 income year refundability was limited to a smaller amount under transitional rules |
| Legal basis | Income Tax Act 2007, subpart LY and subpart MX |
Who it applies to
Every claimant whose credit exceeds the year's income tax. Profitable businesses use the credit against tax and never meet the cap. Loss-making and pre-revenue businesses rely on the refund, and for them the cap is the practical limit: a company with a large R&D spend but a small payroll, for example one that uses contractors or whose founders take little salary, finds its refund limited to its labour-related taxes and the rest carried forward. Companies in wholly owned groups calculate the cap with group adjustments, so payroll in a sister company can help.
The cap is tested each year on that year's figures, so a business whose payroll grows will see more of a carried forward balance refunded in later years, while one that moves to contractors will see less. Groups should look at where payroll sits before deciding which entity performs the R&D.
Companies that do not meet the corporate eligibility criteria do not receive refunds; their credits reduce tax and carry forward. A company should confirm its position against the criteria before relying on the refund in its cash flow planning.
The order of operations matters for businesses that also have other tax credits. The R&D credit is applied against income tax after certain other credits, and the refundable amount is calculated on what remains, so a business with imputation credits or foreign tax credits should model the interaction rather than assume the whole R&D credit will be refunded. Businesses in loss can also elect how to use the credit across group members where the group rules allow.
How it works
- Calculate the credit: 15% of eligible expenditure.
- Apply it against the income tax liability for the year.
- Calculate the cap: labour-related taxes for the year, with group adjustments.
- The refundable amount is the lower of the excess credit and the cap, provided the corporate eligibility criteria are met.
- Carry the rest forward to the next year.
- For companies, check shareholder continuity: a change in ownership can forfeit carried forward credits.
Planning follows from the formula. Paying founders and researchers a salary through PAYE raises the cap; using contractors does not. Timing eligible expenditure and payroll in the same year matters. And a company anticipating an ownership change should use carried forward credits before it.
Worked example
Illustrative example. Two hypothetical loss-making companies, each with NZ$1,000,000 of eligible expenditure and a NZ$150,000 credit, and no income tax to pay.
| Rotorua Geothermal Tech (12 salaried engineers) | Queenstown Apps (3 contractors, founders unpaid) | |
|---|---|---|
| Credit | NZ$150,000 | NZ$150,000 |
| Income tax | Nil | Nil |
| Labour-related taxes (PAYE, ESCT, FBT) | NZ$310,000 | NZ$18,000 |
| Refundable amount | NZ$150,000 (below the cap) | NZ$18,000 (the cap) |
| Carried forward | Nil | NZ$132,000 |
Queenstown Apps carries NZ$132,000 forward. If it hires its contractors as employees the following year, its cap rises and more is refunded; if it sells a majority stake first, shareholder continuity may forfeit the carried forward amount.
Common questions
Is the refund taxable? No. The credit is not income.
We are profitable. Does the cap matter? Only if the credit exceeds the year's tax; otherwise it is simply offset.
Can a parent company's PAYE count? Group adjustments apply for wholly owned groups; check the rules for your structure.
Does the cap use this year's or last year's payroll taxes? The labour-related taxes for the same income year as the credit.
Is a tax loss created as well? No. The credit sits outside the calculation of taxable income; the eligible expenditure remains deductible in the ordinary way, so a loss-making business carries forward both its tax loss and any unrefunded credit.
What happens to carried forward credits on a change of ownership? Companies must meet shareholder continuity requirements or the credits are forfeited.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.