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Inland Revenue

Tax Policy

Eligibility issues

Issue: “On-behalf” rules


(68A – Corporate Taxpayers Group)

The “on-behalf” tests should be relaxed so that a claimant does not need to meet all three of the tests. This would better reflect commercial realities.


The tests require claimants to show that they control the R&D activity, bear the financial risk associated with the project, and effectively own the results. Some groups, such as partnerships and unincorporated joint ventures are able to apply the tests as a group.

The submission seeks to relax the rules further, so that the purpose of the test becomes one of deciding which party in a joint arrangement should receive the concession. They point out that current formulation means that some R&D activities carried out in New Zealand are ineligible for the concession.

This issue was debated at the time the tax credit was introduced. Officials do not agree with the submission for two reasons. First, the design of the tests is intended to achieve more than the result sought by the Corporate Taxpayers Group. It aims to provide a high value concession to the party making investment decisions about what R&D is undertaken, to compensate them for creating spillover benefits that are captured by other firms in the local economy.

The absence of any one of the three tests could undermine that objective. For example, if the claimant bore no financial risk, then they are not funding any of the spillover benefits from the activity that are captured by other firms and therefore do not need to be compensated for them. If the firm does not own the results of the activities it is poorly placed to exploit the results. Lastly, if a firm does not control the R&D activity (for example, determining the direction of the work and making decisions to stop unproductive lines of work) it is unlikely that they are the party making decisions about what R&D should be undertaken.

Secondly, given that the credit has been repealed, amending the policy in line with the submission, for the 2008–09 income year the tax credit was in place, which finishes on 31 March 2009 for most taxpayers, would create a retrospective windfall gain, at some cost to the Crown, with no effect on future incentives for R&D.


That the submission be declined.

Issue: Company groups


(34 – Zespri)

It should be possible to apply the business test, the minimum threshold, and the three “on-behalf” tests to wholly owned groups of companies rather than only to individual firms.


To qualify for the tax credit, a claimant must:

  • be in business;
  • incur at least $20,000 of eligible expenditure in the year;
  • control the R&D activity;
  • effectively own the results of the R&D activity; and
  • bear the financial risk associated with the activity.

As pointed out in the submission, this can be problematic for larger firms that separate aspects of their operation for commercial purposes. For example, a firm may locate its R&D division in one subsidiary but hold any resulting intellectual property in another subsidiary to separate risky undertakings from assets.

The submission points out that wholly owned companies, which are essentially one economic unit, would be eligible for the tax credit if they restructured their activities so that one member in the group carried out all the necessary functions. Requiring firms to amalgamate these functions, which previously were carried out in separate subsidiaries within the group, in order to be eligible for the tax credit, is inefficient and it would create unnecessary compliance costs.

Officials largely agree with the submission. The location of the business activity and control of the R&D in a New Zealand-based separate entity within the group would not undermine the objective of maximising spillover benefits for the local economy. Some New Zealand firms have adopted the practice of locating the ownership of intellectual property offshore, for other tax and commercial reasons. The spillover benefits arising at the location of the firm that owns the results of the R&D activity is likely to be the smallest contributor to the overall spillover benefits from the activity. Therefore it is not considered vital to the policy that the subsidiary owning the results should be a New Zealand resident as long as the group owning the subsidiary is based in New Zealand.

An important question is the level of commonality sufficient for firms to be considered part of the same economic entity for the purposes of the tax credit. We consider that the wholly owned grouping (100 percent commonly owned) suggested by the submission would exclude many firms that have small holdings that reflect the participation in the enterprise by innovators and investors. A more appropriate test is that applied to group companies for income tax purposes (with 66 percent or more commonality of ownership).

A central feature of the tax credit is that the incentive should go to the party making the investment decision. Given the level of commonality most appropriate for the amendment is that of group companies (rather than wholly owned groups) we do not consider it is appropriate to extend the amendment to cover the financial risk test. In effect this means that the subsidiary in the group bearing the financial risk of any R&D expenditure is the party that will claim the tax credit for that expenditure. This restriction is also necessary to prevent two members of the group from claiming a credit for R&D expenditure that is deductible to both of them. For example, if one member pays another for the R&D activity, both would meet the deductibility requirement and both would meet the financial risk test (applied to the group as a whole) for essentially the same R&D expense.

Similarly, we do not consider that the minimum threshold should be applied on a group basis. The threshold is relatively low and should be within the reach of large firms for whom these grouping issues arise.


That the submission be accepted in part and that, subject to officials’ comments on the location of the relevant group members, companies be able to satisfy as a group the requirements that the claimant:

  • be in business;
  • control the R&D activity; and
  • effectively own the results of the R&D activity.

That the submission that wholly owned groups should be able to apply the minimum expenditure threshold and the financial risk test as a group be declined.

Issue: Government agencies


(Matter raised by officials)

It should be made clear that all Crown entities, as defined in the Crown Entities Act 2004, are not eligible for the tax credit.


The tax credit rules require a claimant to be in business or to be an industry research co-operative. Some Crown agencies are specifically excluded from eligibility.

Crown agencies that can meet the business test and that are not specifically excluded are eligible for the tax credit. This is contrary to the policy of the tax credit, which aims to incentivise R&D carried out by private sector businesses. The exclusion does not apply to State Owned Enterprises, which remain eligible for the credit.


That the submission be accepted.