Home > Publications > 2021 > Special report on the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 > Research and development

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Special report on the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021

 

April 2021

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Research and development

• Amendment to definition of eligible R&D expenditure
• Exclusions in relation to miners
• Amendment to tangible depreciable property exclusion
• Other amendments to the schedule of excluded expenditure
• Criteria and methodologies application due date change
• More time to consider requests to increase R&D claims

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Amendment to definition of eligible R&D expenditure

(Section LY 5 of the Income Tax Act 2007)

This amendment modifies section LY 5 of the Income Tax Act 2007, which contains the rules regarding what expenditure is eligible for the R&D tax credit, to clarify that expenditure must be closely connected with conducting an R&D activity to be eligible for the R&D tax credit.

Background

Section LY 5(1), as previously written, defined R&D expenditure as being eligible to the extent to which it was:

• incurred on an eligible R&D activity in the relevant income year
• described in schedule 21B, part A (which lists the categories of expenditure that are eligible for R&D tax credits), and
• not described in schedule 21B, part B (which lists the categories of expenditure that are ineligible for R&D tax credits).

These tests did not specify how closely the expenditure had to be connected to an R&D activity to be eligible. To ensure that expenditure claimed has sufficient nexus with the eligible R&D being conducted, the amendment clarifies that expenditure is only eligible if it is directly related to, required for, and integral to the R&D taking place.

Application date

This amendment applies from the beginning of the R&D tax credit regime, which is the 2019–20 income year. The amendment is a simple clarification that expenditure must be directly connected with R&D to be eligible and is not intended as a change in policy, or to change the way the law currently operates. It should therefore not affect R&D tax credit claims already filed and should provide future claimants with more explicit legislative direction regarding what expenditure may be eligible for the credit.

Key features

The amendment adds new tests to the definition of eligible R&D expenditure for the R&D tax incentive, as prescribed in section LY 5 of the Income Tax Act 2007, to clarify that only expenditure directly connected with an eligible R&D activity is eligible. The amendment does this by adding in the following requirements, so that expenditure is only eligible if it is:

• directly related to conducting an R&D activity
• required for conducting an R&D activity, and
• integral to conducting an R&D activity.

The existing requirement that expenditure must be listed in schedule 21B, part A and not in schedule 21B, part B also applies.

All section references are to the Income Tax Act 2007 unless otherwise stated.

Detailed analysis

The amendment to section LY 5(1)(a) inserts a requirement that expenditure must be directly related to, required for, and integral to an eligible R&D activity to be eligible for the credit. These are in addition to the existing requirements in the section that expenditure must be listed in schedule 21B, part A and not described by schedule 21B, part B.

Directly relates to (new section LY 5(1)(a)(i))

The “directly relates to” requirement clarifies that expenditure must have a direct connection to an R&D activity to be eligible. A person must make a reasonable assessment of whether their expenditure has a sufficiently close connection to R&D to be eligible. If a person’s expenditure relates to an R&D activity, but also relates to another purpose, the person must apportion the expenditure accordingly.

This requirement is intended to ensure that expenditure that is too remote from the R&D activity to which it relates is not eligible for the credit. Requiring expenditure to directly relate to an R&D activity clarifies the policy intent, which is that only expenditure that closely relates to an R&D activity should be eligible.

Required for and integral to (new section LY 5(1)(a)(ii) and (iii))

The “required for” requirement clarifies that expenditure is only eligible to the degree it is necessary to support an R&D activity. The “integral to” requirement clarifies that expenditure must be essential to an R&D activity to be eligible. That is, the activity could not be performed or completed without the expenditure.

Similarities with supporting activity limb

These two requirements are taken from the definition of supporting R&D activity in section LY 2(3)(a). A supporting R&D activity is an activity that contributes to and is necessary for a core R&D activity (a core R&D activity is one that resolves scientific or technological uncertainty, via a systematic method, in order to produce new knowledge or things). The policy intent is that supporting activities must be very closely connected to a core activity in order to be eligible, and the tests required by the supporting R&D activity definition are designed to necessitate this close connection.

The policy intent for R&D expenditure is likewise that it must be closely connected with an eligible R&D activity to be eligible for the credit. Replicating part of the supporting R&D activity tests for the definition of eligible R&D expenditure clarifies that there must be a close connection between expenditure and an R&D activity for the expenditure to be eligible. This ensures the legislation matches the policy intent.

"Only or main purpose” test not included

Not all of the supporting activity tests are included in the amended eligible expenditure definition in section LY 5. In particular, the “only or main purpose” requirement has not been included, as this test would go beyond the policy intent by requiring that expenditure be incurred only or mainly for the purpose of supporting an R&D activity to be eligible.

For example, a business does R&D in a lab, which forms part of a larger complex that also includes non-R&D facilities. The R&D portion of the total complex is twenty five percent. The policy intent is that twenty five percent of the rent be eligible for the credit; however, an “only or main purpose” test may completely exclude the rent. Therefore, the “only or main purpose” has not been included in the amendment.

Businesses not obligated to minimise expenditure

As with the supporting R&D activity tests, the new “required for” and “integral to” expenditure tests do not obligate a business to adopt the cheapest possible approach to its R&D. For instance, one business may want the highest possible quality for materials and equipment used in R&D, while another may be satisfied with a lower standard. In both cases the expenditure required for and integral to the R&D activity is eligible.

Similarly, businesses may go about their research in different ways. Expenditure that is required for an approach that a business has chosen is not disqualified simply because another business might have chosen a cheaper option.

Existing requirements in section LY 5(1)(a) and (b) still apply

Schedule 21B, part A

To be eligible, expenditure must be described in schedule 21B, part A, which provides a list of expenditure that may be eligible for the R&D tax credit (section LY 5(1)(a)). This requirement is not affected by the new amendment and continues to apply as before.

Schedule 21B, part B

If expenditure is described in schedule 21B, part B, it is not eligible for the R&D tax credit (section LY 5(1)(b)). This requirement is also not affected by the new amendment and continues to apply as before.

“To the extent” test still applies

The amendment removes the “to the extent” test (which ensures that expenditure is only eligible to the extent to which it is incurred on an R&D activity) from LY 5(1)(a). However, the test still applies to R&D expenditure because it is explicitly referred to in each of the clauses in schedule 21B, part A. Each of the clauses in this schedule stipulates that expenditure in that category is only eligible to the extent to which this expenditure relates to performing an R&D activity.

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Exclusions in relation to miners

(Schedule 21, parts A and B, and schedule 21B, part B of the Income Tax Act 2007)

This amendment clarifies the treatment of capital assets used in the petroleum and mineral mining industries for the purposes of the tax credit regime and aligns it with the existing treatment of depreciable assets used in other industries.

Background

The intent is that the upfront cost of capital assets is not generally eligible for the R&D tax credit. This is achieved through a number of expenditure exclusions in schedule 21B part B of the Act (which lists categories of ineligible expenditure) that target various types of expenditure on depreciable property.

Most industries use the depreciation rules when amortising their assets for tax purposes, and their assets are therefore caught by the exclusions, as intended. However, assets used in the petroleum and mineral mining industries have their own tax treatments, set out in subparts DT and DU (respectively) of the Act. As these tax treatments are not technically depreciation, assets used in the mining industry are therefore not considered depreciable and are thus not covered by the existing expenditure exclusions in schedule 21B part B that relate to depreciable property. A taxpayer can thus claim the full upfront cost of these assets for the credit, contrary to the policy intent.

To ensure that the upfront costs of assets used in the mining industry are not inappropriately eligible for the credit, the amendment adds a new clause to schedule 21B part B that specifically excludes the cost of these assets from being eligible.

Key features

The amendment adds a new expenditure exclusion that excludes assets used in the petroleum and mineral mining industries, using language which aligns with the petroleum and mining tax regimes that already exist in the Income Tax Act 2007 (“the Act”). It achieves this by excluding expenditure or loss by a “petroleum miner” or “mineral miner” (as defined in section YA 1 of the Act). The new exclusion includes exceptions for labour costs that contribute to core R&D and for prototypes (parallel to the treatment of tangible depreciable property).

To ensure the exclusion covers the same range of industries as the existing activity exclusion on prospecting for, exploring for, or drilling for, minerals, petroleum, natural gas, or geothermal energy, miners of “minerals” (as defined in section YA 1 of the Act) and geothermal energy are explicitly covered by the exclusion. As its intent is covered by the new exclusion, the amendments also repeal the existing activity exclusion.

Application date

The amendment applies from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

Detailed analysis

The amendment adds a new clause, clause 3B, to schedule 21B part B of the Act, which lists categories of excluded expenditure for the R&D tax credit. Clause 3B excludes expenditure or loss incurred by a petroleum miner, mineral miner, or a person who would be a mineral miner of geothermal energy and “minerals” (in the broader sense defined in section YA 1 of the Act).

Assets used in petroleum and mineral mining have their own tax regimes in the Act (subparts DT and DU). These regimes centre on the terms “petroleum miner” and “mineral miner,” as defined in the Act. These terms are linked to a number of expenditure-related defined terms, such as “mining development expenditure” and “petroleum development expenditure,” which provide for the alternative tax treatment of assets created and used by miners when undertaking mining activities. Anchoring the clause to the definitions of a petroleum miner or mineral miner thus excludes all expenditure that falls within these expenditure-related terms.

The petroleum and mineral miner definitions, and the expenditure-related terms that depend on them, only affect a taxpayer in their capacity as a miner. Any R&D activities performed by a business involved in mining that meet the other legislative requirements could therefore potentially be claimed for the credit, so long as it is not performed by the business in their capacity as a miner. This is in line with the policy intent, which is to exclude the cost of assets used in the mining industries from the tax credit while still allowing a credit for R&D performed in these industries.

As its intent and function is similar to existing exclusions on tangible depreciable property, clause 3B contains similar exceptions for labour costs that contribute to core R&D and for prototypes only used in R&D (refer to Amendment to tangible depreciable property exclusion, for a detailed analysis of how these exceptions work). This brings the treatment of expenditure on assets in the mining industries fully into line with the treatment of expenditure on depreciable tangible property in other industries.

The mining regimes in the Act include terminology that covers the intent of clause 5 of schedule 21 parts A and B (which excludes “prospecting for, exploring for, or drilling for, minerals, petroleum, natural gas, or geothermal energy” as an eligible activity). The amendments accordingly repeal clause 5 of schedule 21 parts A and B.

However, the term “mineral miner” and the terms associated with it in the Act (for example, “mining prospecting expenditure,” “mining exploration expenditure”) refer only to “listed industrial minerals,” rather than minerals in the broader sense. The definition of “listed industrial minerals” in the Act does not cover some minerals intended to be covered by the exclusion, such as coal. Geothermal energy, which is also covered by the present exclusion, would not be covered. To achieve the policy intent, clause 3B also deems miners of “minerals” (as defined in the Act) and geothermal energy to be “miners”.

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Amendment to tangible depreciable property exclusion

(Schedule 21B, part B of the Income Tax Act 2007)

Schedule 21B, part B, clause 3 renders expenditure or loss that contributes to the cost of tangible depreciable property ineligible for the credit, other than expenditure or loss on developing prototypes. An amendment to clause 3 ensures the exception for expenditure or loss on prototypes is working as intended, while also allowing expenditure or loss in relation to labour on core R&D activities to be eligible (regardless of whether the property is a prototype).

Background

Schedule 21B, part B, clause 3 excludes expenditure or loss that contributes to the cost of tangible depreciable property. An exception exists for expenditure that contributes to the cost of property intended for use solely in performing an R&D activity. This prototype exception is intended to capture expenditure required to produce items created by and solely used in core R&D activities, such as prototypes. Expenditure on tangible depreciable property that meets this test is still eligible for the tax credit.

This amendment changes the exclusion in two ways. The first change amends the prototype exception. The second allows certain labour costs to be eligible, even if they contribute to the cost of tangible depreciable property.

Prototype exception

The policy intent of the prototype exception is to allow expenditure or loss on items of tangible depreciable property created through R&D and used solely in R&D throughout their lifetime to be eligible. However, as previously worded, the exception may have included a greater range of expenditure than was intended.

The amendment brings the legislation in line with the intent by requiring, in addition to the requirement that the property must only be used in performing R&D, that the property must only be intended for use in performing R&D in the future, and that creating the property must involve a core R&D activity.

Labour cost carve-in

The amendment also allows labour-related expenditure or loss on an item of tangible depreciable property to be eligible for the tax credit, regardless of whether it meets the above tests, to the extent to which it relates to performing core R&D activity. This means that a business can claim expenditure on employees or on contracted labour that contributes to the cost of an item of tangible depreciable property for the tax credit, even where the item of property is not intended as a prototype, to the extent that the employees or contractors are performing a core R&D activity. Usually this means an identifiable separate activity incidental to the creation of a larger item of tangible depreciable property.

This is consistent with the existing inclusion for labour costs for R&D undertaken in commercial production environments and recognises that it should be easier to identify whether labour costs directly relate to R&D compared with non-labour costs, such as electricity costs. The amendment allows more genuine R&D costs to be eligible while still ensuring any fiscal risk posed by R&D projects involving significant tangible depreciable assets is minimised.

Key features

This amendment makes two changes to the existing exclusion on expenditure or loss that contributes to the cost of tangible depreciable property (schedule 21B, part B, clause 3 of the Income Tax Act 2007).

First, it clarifies the scope of the exception for expenditure that contributes to the cost of property intended for use as a prototype (“prototype exception”), by adding further requirements that:

• the property must only be intended for use in performing R&D in the future, and
• creating the property must involve a core R&D activity.

This ensures that the provision operates consistently with the policy intent, which is for expenditure on tangible depreciable property to be ineligible unless it is on a prototype (property that is developed through R&D and is only used in R&D).

Second, it allows expenditure/loss on labour in relation to core R&D to be eligible for the credit, despite the exclusion for costs that contribute to tangible depreciable property (“labour cost carve-in”).

Application date

The amendment applies from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

Detailed analysis

Clarifying the prototype exception

The amendment adds further tests into the clause that ensure the prototype exception is better targeted towards the concept of a prototype. In addition to the requirement that an item of property is only used in R&D, these tests require that the property’s sole intended future use is in performing R&D, and that the creation of the item involves a core R&D activity:

• Sole intended future use is in performing R&D means that a person’s intent must be that the item of property will only ever be used in performing R&D activities, and never be used for any other purpose.
• Creation involves a core R&D activity means that, for expenditure or loss on an item of property to be eligible, the expenditure or loss must also be incurred on performing a core R&D activity (that is, the creation of the item involves resolving a scientific or technological uncertainty via a systematic method).

For expenditure or loss on an item of tangible depreciable property to be eligible, all three tests must be met.

New exception for labour costs on core R&D activity

The amendment also allows expenditure or loss on an item of tangible depreciable property to be eligible for the tax credit, regardless of whether it meets the above tests, to the extent to which it relates to labour costs on core R&D activity. Labour expenditure can be claimed regardless of whether it relates to employees or to contracted labour.

Expenditure or loss on labour for an item of tangible depreciable property is ineligible to the extent to which the costs do not relate to performing a core R&D activity (unless the item of property meets the tests required by the prototype exception).

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Other amendments to the schedule of excluded expenditure

(Schedule 21B, part B of the Income Tax Act 2007)

The Act makes a number of other amendments to schedule 21B, part B of the Income Tax Act 2007 clarifying what expenditure is excluded from the R&D tax credit.

Key features

The Act makes several additions or changes to the categories of expenditure ineligible for the R&D tax credit set out in schedule 21B, part B. These are:

• Amending the exclusion on expenditure to acquire depreciable property (clause 2) to clarify that “acquiring” depreciable property, for the purposes of the exclusion, does not include making depreciable property.
• Amending the exclusions on expenditure to acquire depreciable property (clause 2) and on expenditure that contributes to the cost of depreciable tangible property (clause 3) to exclude expenditure or loss on property which would have been depreciable in the absence of an election to treat it as non-depreciable under section EE 8 of the Income Tax Act 2007.
• Changing the word “purchase” in the existing exclusion on expenditure to purchase land (clause 10) to “acquire”.
• Changing the exclusion on professional fees incurred in determining a person’s entitlement to the tax credit (clause 13) to also cover in-house expenditure incurred in determining a person’s entitlement.
• Inserting new clause 13B, which excludes expenditure or loss incurred in performing corporate governance activities.
• Inserting new clause 20B, which excludes expenditure or loss incurred in decommissioning.
• Inserting new clause 20C, which excludes expenditure or loss incurred in remediating land.
• Changing the exclusion on expenditure or loss supported by or related to a government grant (clause 21) to allow amounts not directly supported by other forms of government funding to be claimed for the credit.

Application date

The amendments apply from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

Detailed analysis

Clarifying that expenditure to make depreciable property can be eligible for the credit (clause 2)

An amendment to clause 2, which excludes expenditure or loss to acquire items of depreciable property, clarifies that this exclusion does not apply to expenditure or loss to make depreciable property. The policy intent is that expenditure on the upfront cost of large capital assets generally be ineligible for the credit. Instead, it is intended that depreciation loss on these assets over time be eligible (to the extent the assets are used in R&D), similar to the tax treatment of these assets.

As R&D can involve the creation of a capital asset, the original intent of clause 2 was to exclude expenditure on acquiring these assets through any means other than making them. It was intended that expenditure on making depreciable property be generally eligible, subject to the other exclusions in schedule 21B part B. However, the Income Tax Act 2007 defines “acquire” to include “make” in relation to depreciable property. Under the previous wording, taxpayers were thus prevented from claiming the tax credit for any costs of making depreciable property, giving the exclusion unintended overreach.

Treatment of items of property where election made under section EE 8 (clauses 2 and 3)

Amendments to clause 2 (which excludes expenditure to acquire depreciable property) and clause 3 (which excludes certain expenditure that contributes to the cost of depreciable tangible property) clarify that these exclusions also apply to expenditure or loss on acquiring an item of property that would have been depreciable in the absence of an election under section EE 8 of the Income Tax Act 2007. The policy intent is that expenditure on the upfront cost of large capital assets generally be ineligible for the credit. Instead, it is intended that depreciation loss on these assets over time be eligible (to the extent the assets are used in R&D), similar to the tax treatment of these assets.

Section EE 8 allows a taxpayer to elect that an item of property be treated as non-depreciable property (where, in the absence of this election, it would otherwise be depreciable property) upon acquisition or, in limited circumstances, a change in use. This could potentially allow taxpayers to bypass the exclusions for the upfront cost of depreciable property and claim the full upfront cost of their property as eligible expenditure, contrary to the policy intent. The amendments ensure the legislation better satisfies the policy intent by aligning the treatment of depreciable property and property that would have been depreciable absent an election under section EE 8.

Changing “purchase” to “acquire” (clause 10)

Clause 10 excludes expenditure to purchase land. It is not appropriate to give an R&D tax credit for land acquired for use in R&D for two reasons. The first is that it is difficult to apportion what cost of the land relates to R&D, given the land could be used for non-R&D purposes later. The second reason is that land generally increases in value and therefore can be sold to recoup the cost.

This amendment broadens the scope of clause 10 so that it excludes expenditure to acquire land, rather than merely to purchase it. This is consistent with the policy intent of the original exclusion, which is intended to exclude expenditure on obtaining land regardless of the method used to obtain it.

Excluding in-house costs on determining tax credit entitlement (clause 13)

Clause 13 excludes professional fees incurred in determining a person’s entitlement, or lack of entitlement, to an R&D tax credit. This exclusion covers fees paid to determine the eligibility of a person, activity, or amount of expenditure, such as amounts paid to an accounting firm to prepare a person’s R&D claim.

The amendment broadens the scope of clause 13 to cover all expenditure or loss incurred in determining a person’s entitlement to the tax credit by replacing the words “professional fees” with “expenditure or loss.” This is intended to exclude in-house expenditure on determining entitlements, as well as the fees currently targeted by the exclusion. These amounts should be ineligible under current legislation because they do not directly relate to R&D (they do not relate to resolving scientific or technological uncertainty), but the amendment to clause 13 provides explicit legislative guidance that these costs are not eligible for the R&D tax credit.

Exclusion of expenditure on corporate governance activities (new clause 13B)

New clause 13B excludes expenditure or loss on performing corporate governance activities. These costs should already be ineligible under current legislation, but the new exclusion provides certainty and clarity to firms that they cannot claim these costs. These amounts are excluded because they do not directly relate to R&D. They are costs that have to be incurred regardless of whether R&D takes place.

Exclusion of decommissioning expenditure (new clause 20B)

New clause 20B excludes expenditure on decommissioning. This exclusion is intended to cover expenditure involved in doing the following to assets (including land):

• dismantling, demolishing, disposing of, removing, or abandoning an asset
• preventing access to an asset
• converting an asset so that it can be used to conduct a different activity (unless it is being converted for use in R&D), and
• otherwise decommissioning an asset.

The exclusion is intended to apply to assets (including land) such as:

• structures
• plant and machinery, and
• any improvements or alterations to land.

Note that the above lists are not exhaustive.

This expenditure, in and of itself, should largely already be excluded from the credit as it is unlikely to relate to resolving scientific or technological uncertainty. The intent of this exclusion is to clarify that expenditure on decommissioning is not eligible for the credit.

Note that the exclusion only relates to expenditure on the act of decommissioning itself. Expenditure on R&D relating to decommissioning is potentially eligible for the credit, providing it meets the other eligibility criteria, is an identifiable separate activity, and is incidental to the decommissioning activity.

Exclusion of expenditure on remediating land (new clause 20C)

New clause 20C excludes expenditure on remediating land. This exclusion is intended to cover the costs of restoring or remedying a site or area of land ("site"), where a person's activities on the site have resulted in changes to the site. This also includes any monitoring or maintenance activities that relate to restoring/remedying a site.

This expenditure, in and of itself, should largely already be excluded from the credit as it is unlikely to relate to resolving scientific or technological uncertainty. The new clause clarifies this by explicitly excluding expenditure on remediating land from the credit.

Note again that the exclusion only relates to expenditure on the act of remediating land itself. Expenditure on R&D relating to remediation could still be eligible for the credit, providing it meets the other eligibility criteria, is an identifiable separate activity, and is incidental to the decommissioning activity.

Amending the exclusion of expenditure related to a government grant (clause 21)

Clause 21 excludes expenditure or loss that is related to a grant made by the Crown or a local authority. This is a broad exclusion introduced to avoid ‘double-dipping’ by preventing businesses from claiming multiple sources of government funding for expenditure relating to the same R&D activity. An amendment in the Act clarifies the scope of the exclusion to allow more expenditure unsupported by any other funding mechanism to be claimed for the credit, while maintaining the anti-double-dipping provision.

The broader policy intent of the tax credit is to incentivise and support businesses to increase their expenditure on R&D. However, as previously written, the exclusion applied very broadly, so that (for example) expenditure that relates to R&D funded by a Project Grant but is not directly funded by the grant, and beyond the specified co-funding, was excluded from the credit. This expenditure was thus supported by neither the Grant nor the credit, contrary to the intent of the credit.

Under a Project Grant, businesses can receive funding for up to 40% of a project’s estimated cost (and are required to contribute 60% as co-funding). However, the terms of the funding agreement specify that the business must spend any additional funding required to complete the project beyond the required 60% co-funding. This means that any additional expenditure by the business on the project is considered to be incurred in connection with expenditure that has already been subsidised through the grant and was therefore considered ineligible for the RDTI under schedule 21B, part B, clause 21 as previously written.

The amendment narrows the scope of clause 21 so that it does not cover amounts over and above the estimated cost of the project (as specified in the Project Grant contract), allowing these amounts to be claimed for the credit provided they meet the other criteria. It also removes the words “or otherwise related to” from the exclusion, allowing for other amounts that are not directly supported by a government grant to be claimed.

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Criteria and methodologies application due date change

(Section 68CC of the Tax Administration Act 1994)

This amendment brings forward the due date for submitting an application for criteria and methodologies (CAM) approval to six months before the end of a person’s income year.

Background

From the 2020–21 income year, businesses must obtain either general approval or criteria and methodologies (CAM) approval. Under general approval, a business must apply for approval of each of its core and supporting R&D activities. Businesses which expect to spend more than $2m on R&D in a given year can opt out of general approval and into CAM approval. Under CAM approval, a business instead applies for approval of the criteria and methodologies it uses to determine the eligibility of its R&D activities and expenditure.

Under the previous legislation, CAM approval applications were due after the end of the income year. The amendment changes the due date for applying for CAM approvals to six months before the end of the first income year to which a CAM relates (CAM approvals can be obtained for up to three income years). So, for a standard balance date (31 March) claimant in the 2021–22 income year, their year-end would be 31 March 2022, and their CAM approval application would be due on 30 September 2021 under the proposed new due date. This amendment does not require that the CAM approval process be completed by the above due date, only submitted.

This earlier due date ensures businesses have the correct R&D processes and methodologies in place when their R&D is actually occurring (during the relevant income year). This reduces the need for businesses to have to retrospectively amend their processes and methodologies to ensure their R&D claims are correct. In addition, an earlier due date means businesses have more time to seek general approval should their CAM approval application be declined (or only cover part of their R&D). This is important, because without general or CAM approval, a person is not eligible for the R&D tax credit regime from the 2020–21 income year.

The amendment also contains a discretion for the Commissioner to accept and approve applications after the new due date, where the applicant has had a change in their balance date for the first income year to which the CAM relates. This ensures that taxpayers who have a transitional tax year due to a change in their balance date are not rendered unable to apply for CAM approval in a timely manner due to their balance date being brought forward.

The amendment applies prospectively from the 2021–22 income year (from 1 April 2021 for most claimants). This ensures that taxpayers (particularly those with early balance dates) intending to apply for CAM approval for the 2020–21 income year have sufficient time to plan for the new due date.

Application date

The amendment applies from the 2021–22 income year (1 April 2021 for most taxpayers).

Key features

The amendment brings forward the due date for applying for CAM approval applications in section 68CC(3) of the Tax Administration Act 1994, so that applications must be submitted on or before the last day of the 6th month before the end of the first income year to which the CAM applies (30 September for most taxpayers). Applications submitted after that date will not be considered for the relevant income year.

However, the amendment also provides the Commissioner with discretion to accept an application at a later time of her choosing where the applicant has changed the end date of their income year due to a change in their balance date.

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More time to consider requests to increase R&D claims

(Section 108(1E) of the Tax Administration Act 1994)

This amendment provides the Commissioner with more time to consider section 113 requests to increase claims in a taxpayer’s favour. Previously, the legislation imposed a time bar that prevents the Commissioner from considering requests if more than a year has passed since a taxpayer’s income tax return due date for the relevant year.

Background

A person can only file a request to increase their R&D tax credit claim once for each R&D tax credit claim they make (section 113E of the Tax Administration Act 1994), whether through a section 113 request or a notice of proposed adjustment (NOPA). A time bar prevents the Commissioner from increasing a person’s R&D tax credit claim if the person fails to make the request to increase their claim within a year of their income tax return due date (section 108(1E)).

As previously drafted, the legislation required a section 113 request to increase an R&D tax credit claim to be initiated and processed within a year of the relevant taxpayer’s income tax return due date. This is contrary to the policy intent, which is simply that the person must initiate the disputes process within that timeframe. By requiring the request to be processed within that timeframe, the Commissioner may not have enough time to fully consider requests.

An amendment in the Act removes the requirement that the request be fully processed within that timeframe, while still requiring the request be initiated within a year of the relevant taxpayer’s income tax return due date. This makes the time bar which applies to section 113 requests consistent with the rules that apply for NOPAs, which were amended by the Taxation (KiwiSaver, Student Loans and Remedial Matters) Act 2020 in a similar way. The amendment ensures the Commissioner has enough time to consider requests consistent with the policy intent.

Key features

Section 108(1E) of the Tax Administration Act 1994 is amended to allow the Commissioner to adjust a person’s R&D tax credit claim upwards if the person has made a section 113 request within a year of their income tax return due date. Provided a request is initiated within this timeframe, the Commissioner can consider the request.

Application date

The amendment applies from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

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