Chapter 4 - Research and development expenditure
4.1 The tax rules for research and development (R&D) expenditure under section DB 26 determine when it is deductible for taxation purposes with reference to the accounting standards in FRS-13. Tax deductions for R&D expenditure are allowed for taxation purposes if they are recognised expenses under paragraphs 5.1 or 5.2 of FRS-13, and under paragraph 5.4 of FRS-13 for capital development costs that exceed the recoverable amount. The same standards of deductibility apply, for taxation purposes, to R&D expenditure that has been written off as immaterial under FRS-13.
4.2 Small R&D expenditure ($10,000 or less) is also deductible if the amount is not material for financial reporting purposes, and the taxpayer has recognised the amount as an expense for financial reporting purposes.
Implications of IFRS
4.3 With the adoption of IFRS, FRS-13 is superseded by NZ IAS 38, an accounting standard on intangibles which also governs the accounting treatment for R&D expenditure. NZ IAS 38 provides that expenditure on R&D is recognised as an expense when it is incurred unless the criteria for recognition of development expenditure as an intangible asset are satisfied. Although these criteria, which are listed in paragraph 57 of NZ IAS 38, are worded differently from those in paragraph 5.3 of FRS-13, the new standards are largely consistent with the old standards.
4.4 As the core standards governing the accounting treatment of R&D expenditure under NZ IAS 38 are substantially the same as those under FRS-13, we suggest amending the relevant legislation to clarify that the relevant standards in NZ IAS 38 will determine the tax treatment of R&D expenditure for taxation purposes.
Cost in excess of recoverable amount and immaterial amount
4.5 When an intangible asset arising from the development phase qualifies for recognition under NZ IAS 38 it is measured initially at cost. As such, capital development costs in excess of recoverable amounts that could be written off under paragraph 5.4 of FRS-13 are no longer available under NZ IAS 38. References to paragraph 5.4 of FRS-13 should therefore be removed from section DB 26 of the Act.
4.6 References to the materiality standards in paragraph 2.3 of FRS-13 also need to be removed because it is no longer applicable under NZ IAS 38. Under IFRS, the materiality standards, which are in NZ IAS 1, apply only to disclosures and presentation of items in the financial reports. However, it may be necessary to retain the existing provision in the Act without a specific reference to accounting standards, to ensure that R&D expenditure that has been written off for financial reporting purposes as immaterial is still subjected to the appropriate standards in NZ IAS 38 before it will be allowed as a deduction for taxation purposes.
Summary of suggested changes
- The core standards governing the accounting treatment of R&D expenditure under NZ IAS 38 are substantially the same as those under FRS-13 and should continue to be appropriate for taxation purposes.
- Minor legislative amendments will be necessary to adjust the references to FRS-13 and to remove references to paragraphs 5.4 and 2.3 of FRS-13 because those standards are no longer applicable under IFRS. However, it may be necessary to ensure that immaterial R&D expenditure that has been written off for financial reporting purposes is subjected to the appropriate standards in NZ IAS 38 before they are allowed as a deduction for taxation purposes.