What is Research & Development (R&D)?
When most people hear the term “Research & Development” (“R&D”), they think of scientists in laboratories or large technology companies building futuristic products. In reality, R&D is much broader than that, and many New Zealand businesses are undertaking R&D activities without even realising it.
At its core, R&D is about solving uncertainty through experimentation.
That concept of uncertainty is critical. The fact that something is new to your business, or even new to New Zealand, does not automatically make it R&D. Instead, the question is whether there is scientific or technological uncertainty that a competent professional in the field could not readily resolve using existing publicly available knowledge.
If the answer is already known, or the solution can simply be implemented using existing techniques, it is unlikely to qualify as R&D.
However, if your business is trying to create something new, improve an existing product or process, or overcome technical challenges where the outcome is not already known, there is a good chance you may be undertaking R&D.
What does R&D actually involve?
R&D generally involves activities where a business is attempting to create new knowledge, or new or improved products, processes, or services, by systematically working through technical or scientific uncertainty. This means the answer is not already known or easily obtainable.
Examples can include:
- developing and testing prototypes;
- creating moulds or tooling to test whether a new concept can function commercially;
- designing entirely new materials or products where the outcome is uncertain;
- scaling laboratory concepts; or
- pursuing ambitious or unconventional ideas that have not previously been achieved and where it is unclear whether they are technically possible.
Importantly, R&D is not limited to “successful” projects. In many cases, failed experiments and unsuccessful prototypes are strong indicators that genuine uncertainty existed.
The importance of uncertainty
The key feature of eligible R&D is uncertainty.
For example:
- creating software using standard coding practices is generally not R&D;
- configuring existing systems together is generally not R&D; and
- applying known techniques to achieve a predictable outcome is generally not R&D.
However, where a business is attempting to solve a problem where:
- the solution is not publicly known;
- existing technology cannot readily achieve the outcome; or
- experimentation is required to determine whether something is even possible,
then the activity may qualify as R&D.
What is NOT eligible for R&D tax incentives?
Not every innovative activity qualifies as R&D for tax purposes. The focus is not on whether a business is commercially innovative, but whether genuine scientific or technological uncertainty exists.
Activities that are generally not considered eligible R&D include:
- routine testing or quality control;
- cosmetic or minor product changes;
- ordinary troubleshooting;
- market research;
- standard commercial production activities; or
- work where the solution is already publicly known and can simply be implemented.
In addition, a business may not qualify for the RDTI where it is performing R&D on behalf of someone else and does not own the resulting intellectual property (“IP”) or the results of the R&D.
There are also specific limitations where products generated during the R&D process are sold or commercialised. Under the “feedstock” rules, the amount of eligible R&D expenditure may be reduced where the costs are effectively recouped through the sale of products or outputs generated during the R&D activities.
Common examples of R&D in New Zealand businesses
Many industries undertake R&D, including sectors that would not traditionally view themselves as “technology companies”.
Examples where we have helped our clients claim R&D tax incentives include:
- software companies developing AI-driven platforms or automation tools;
- manufacturers creating new biodegradable or sustainable materials;
- agricultural businesses trialling new farming technologies;
- engineering firms designing new systems or machinery;
- food producers developing new formulations or preservation methods;
- construction businesses solving structural or materials challenges; and
- medical or biotech businesses developing new treatments, devices, or testing methodologies.
New Zealand’s tax credits
New Zealand offers two key tax incentive regimes designed to encourage businesses to invest in innovation and R&D activities. Together, these regimes are intended to support businesses undertaking genuine scientific or technological development.
The Research & Development Tax Incentive (“RDTI”) provides a 15% tax credit for eligible R&D expenditure.
The rules are highly technical and not all expenditure qualifies. Notably, you generally need to have a minimum $50,000 eligible expenditure per year (which can include wages for time spent on eligible R&D projects).
In addition, loss-making companies may qualify for the Research & Development Tax Loss Cash-Out (“RDTLC”) regime, which can provide a cash refund of up to 28% of eligible R&D tax losses.
Importantly, businesses can potentially “double dip” by:
- claiming the 15% RDTI tax credit; and
- also accessing the RDTLC cash-out regime.
However, there are detailed eligibility criteria and clawback rules that can apply in future years.
Final thoughts
R&D is not limited to large multinational companies or laboratories. Many ordinary New Zealand businesses undertake genuine R&D every day as they solve technical problems, improve products, and develop new technologies.
The challenge is often not whether R&D exists, but identifying it properly, documenting it correctly, and ensuring the associated tax treatment is managed appropriately.
If your business is investing significant time and money into innovation, it may be worthwhile reviewing whether some of those activities qualify as R&D for tax purposes.
If your business is investing in innovation, product development, software, engineering, or technical problem-solving, it may be worthwhile reviewing whether some of those activities qualify for New Zealand’s R&D tax incentives. Contact NZ Tax Desk to discuss your situation and assess whether your activities may be eligible.
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Disclaimer
This article is intended for general information purposes only and does not constitute tax, legal or financial advice. The application of New Zealand’s R&D tax incentive rules is highly fact specific. Professional advice should be obtained before taking any action or relying on the information contained in this article.
