New Zealand front-loads its scrutiny. Because Inland Revenue approves the activities before the credit is claimed, the eligibility review happens at the application stage, and the later review of the supplementary return is mainly about whether the approved activities were performed and what they cost. Inland Revenue can also revoke an approval that was obtained on incorrect information. This page covers how reviews start, what is asked, how to respond and what follows; the Inland Revenue reviews page looks at current practice in more detail.
How reviews start
At approval. Every general approval application is assessed. Inland Revenue may ask questions, seek technical clarification or request a meeting before deciding, and may approve some activities and decline others. Declined activities can be reconsidered through the disputes process.
After the supplementary return. Inland Revenue selects claims for review on a risk basis, before or after paying the credit. A review begins with a request for information, usually by letter or through myIR.
Revocation. Where an approval was given on information that was incorrect or misleading, or the activities performed differ materially from those approved, Inland Revenue can revoke or vary the approval, which removes the credit for the affected activities.
What is requested
| Stage | Area | Typical requests | What satisfies them |
|---|---|---|---|
| Approval | Core activities | The scientific or technological uncertainty, why it is not deducible by a competent professional, the new knowledge sought, the systematic approach | A clear description with references to the state of knowledge |
| Approval | Supporting activities | Which core activity each is required for and integral to | The activity map |
| Supplementary return | Performance of activities | Evidence the approved activities were carried out as described in the year | Experiment records, logs, progress notes |
| Supplementary return | Expenditure | Time allocations, payroll, contractor and provider invoices, depreciation, overhead apportionment | Timesheets, ledger, contracts |
| Supplementary return | Adjustments | Overseas cap, feedstock, ineligible items, the refundability calculation | Location records, sales records, payroll tax figures |
| Both | Eligibility of the person | Business in New Zealand, control, risk and ownership of results, excluded entity status | Contracts and group structure |
Inland Revenue sets a response period in its request and will extend it on reasonable grounds. It may ask to speak with the technical staff, particularly at the approval stage.
Responding to a review
- Match the records to the approval. Present the evidence activity by activity, using the approved names, and show where the work followed the approved description.
- Explain any drift. Where activities changed, say so and show whether a variation was sought; do not present changed work as the approved work.
- Reconcile the numbers. Time allocations to timesheets, costs to the ledger, the overseas and feedstock adjustments shown.
- Put the technical people forward at the approval stage; put finance forward on the supplementary return.
- Make a voluntary disclosure if an error is found before Inland Revenue finds it; it reduces shortfall penalties substantially.
- Use the disputes process where you disagree with a proposed adjustment, and keep to its timetable, because the response periods in the process are strict.
Outcomes, penalties and appeals
Adjustment. Inland Revenue may accept the supplementary return, reduce the credit or remove it, and may revoke the approval. Credits already refunded are recovered with use of money interest.
Shortfall penalties. Where a tax shortfall arises, penalties depend on the behaviour: 20% for not taking reasonable care, 20% for an unacceptable tax position, 40% for gross carelessness, 100% for an abusive tax position and 150% for evasion, with reductions for voluntary disclosure and previous good behaviour. Inland Revenue has also signalled that it treats RDTI claims for excluded activities and inflated expenditure as shortfall penalty matters.
Disputes. New Zealand's formal disputes process starts with a notice of proposed adjustment (NOPA), issued by Inland Revenue or by the taxpayer, followed by a notice of response within 2 months, a conference, and if unresolved a statement of position and adjudication by Inland Revenue's Disputes Review Unit; the taxpayer can then challenge the assessment in the Taxation Review Authority or the High Court. Decisions to decline or revoke approvals go through the same process.
Illustrative example
Illustrative example. Wellington Medtech Limited, a hypothetical company, has general approval for two core activities and claims NZ$90,000 of credit on NZ$600,000 of eligible expenditure. Inland Revenue reviews the supplementary return and asks for the time allocation and evidence that the second activity, a new sensor calibration method, was performed. The records show the first activity in full, but the second was abandoned in month two and the team moved to a different problem that was never approved. Wellington concedes the second activity's expenditure of NZ$150,000; the credit falls to NZ$67,500, and because the company volunteered the explanation and had reasonable records, no shortfall penalty is imposed beyond the recovery of the excess refund with interest. The following year Wellington varies its approval as soon as its work changes.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.