Both New Zealand and Australia’s R&D incentive programs go by the same name (R&D Tax Incentive or RDTI); however, the Australian program is more financially attractive. But the good news for New Zealand businesses is that they can claim for R&D costs incurred in Australia when satisfying certain requirements.
If you’re a New Zealand business looking to make your R&D spend go further, then the 43.5% cash rebate for R&D costs incurred in Australia (when the Australian subsidiary company is in a tax loss position) is a very attractive proposition compared to the 15% tax credit offered by New Zealand’s RDTI.
In addition, recent changes to the Australian R&D Tax Offste rates (starting from 01 July 2021) are very encouraging news for New Zealand based companies doing R&D in Australia. Aiming to remain an attractive option for foreign investment in R&D, the federal government has set the refundable R&D tax offset at 18.5 percentage points above the claimant’s company tax rate. For larger companies or company groups (those with aggregated annual turnover of $20 million or more), the Government will introduce a two-tiered intensity system to boost the benefit of the RDTI, provide greater certainty for R&D investment and rewarding those companies that commit a greater proportion of their business expenditure to R&D.
At Fullstack, we often receive inquiries from New Zealand and other foreign businesses wanting to know about the R&D possibilities in Australia. If you’re a New Zealand business looking at setting up an R&D base in Australia, let’s take a look at what you need to know, what the benefits are, and how we can help.
As per the legislation relevant for a New Zealand or other foreign business (355-35(1) of ITAA 1997), you are classified as an R&D entity and, therefore, able to take advantage of the RDTI, if: you are incorporated under foreign law but an Australian resident for income purposes; or incorporated under foreign law and a resident of a country with which Australia has a double tax agreement (which New Zealand does).
If you are an eligible company and have a turnover of less than $20 million and you are in a tax loss position, you will receive a refundable tax offset (currently 43.5% for most companies), which allows the benefit to be paid as a cash refund (to the extent that you have available tax losses). If you are in a tax paying position the benefit will instead come in the form of paying less tax (18.5% of your eligible R&D expenditure). All other eligible companies will receive a non-refundable tax offset to help reduce the tax they pay.
The example below shows one of the ways in which a New Zealand company might benefit from the RDTI through an Australia subsidiary. The example assumes that the New Zealand Company (Company NZ) and the Australian Company (Company A) (as well as any other companies that the two companies are connected with) have a collective aggregated turnover of less than AU$20 million. The Australian Company is in a Tax Loss position.
Company NZ, a food manufacturing company incorporated in New Zealand, establishes an Australian subsidiary. The subsidiary, Company A, is an Australian company wholly owned by Company NZ and qualifies as an R&D entity.
Under an agreement between the two parties, Company A agrees to undertake R&D activities at its Sydney factory solely for the benefit of Company NZ, which it does so by spending $500,000 on eligible R&D activities during FY 2022.The consideration is at “arm’s length” (as per definition in the legislation). Company NZ is legally entitled to all intellectual property arising from the R&D activities, due to it being a foreign resident incorporated under foreign law and a resident of New Zealand — a country with which Australia has a double tax agreement. Company NZ is also connected with Company A, as Company NZ controls Company A.
The R&D activities are being conducted solely for Company NZ; therefore, Company A will be able to claim a $217,500 cash refund as part of the R&D tax incentive (43.5% of the $500,000 R&D expenditure being the company tax rate – 25% – plus the R&D premium – 18.5%), provided all other requirements for claiming the R&D tax incentive are also satisfied.
Where to start if you’re a New Zealand business interested in pursuing R&D in Australia?
If you’re a New Zealand business interested in pursuing R&D in Australia, we can help you with the following steps:
- – Establishment of branch and representative offices if you’re a New Zealand (or other foreign) company;
- – Registration for the RDTI and ensuring that your R&D activities are compliant and have all the necessary documentation to prove what you’ve done, so that you’re well prepared in the case of an audit; and
- – Maximizing the fiscal benefits obtained from the RDTI.