Introduction to New Zealand’s R&D Tax Measures
New Zealand’s commitment to fostering a high-value, knowledge-based economy is supported by the Research and Development Tax Incentive (RDTI). This policy is designed to encourage businesses to undertake R&D that may otherwise not occur by reducing the associated cost.
The New Zealand RDTI regime provides a 15% tax credit for qualifying expenditure on eligible R&D activities. This translates to a benefit of 15 cents for every dollar spent on eligible R&D. A company must spend a minimum of $50,000 on eligible R&D in a given year to be able to claim the credit.
The tax credit can be used to reduce a company’s income tax liability. For businesses in a tax loss position, the RDTI offers a crucial refundability component, allowing them to receive a cash payment. The amount of the refundable credit is capped, generally linked to the company’s payroll tax liabilities (PAYE and ESCT). This feature is particularly beneficial for startups and R&D-intensive firms that may not be profitable in their early years.
Because the tax credit is not treated as taxable income, and the underlying expenditure remains fully deductible for tax purposes, the effective benefit for a company paying tax at the 28% corporate rate is substantial.
To access these benefits, a company’s activities must first meet the statutory definition of R&D. The framework distinguishes between:
- Core R&D Activities: These must follow a systematic approach and have the purpose of resolving scientific or technological uncertainty.
- Supporting R&D Activities: These are activities that are necessary for, and directly related to, the core R&D activities. They do not need to meet the core criteria themselves but must have a direct link to a core activity.
Once activities are deemed eligible, the associated costs must fall under the definition of Qualifying Expenditure. This includes the cost of labour (salaries and wages for employees directly involved in R&D), depreciation on assets used in R&D, cost of materials, and an allocation of overheads.
The central challenge for taxpayers in New Zealand lies in preparing robust documentation that satisfies two distinct government agencies. Callaghan Innovation requires detailed technical narratives to prove that the activities meet the scientific eligibility criteria. Inland Revenue requires meticulous financial records to verify the expenditure claimed. Taxpayers must proactively construct a coherent and evidence-backed file based on the principles and examples provided in official RDTI guidance. This report provides a practical framework for building such a file.
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A Detailed Analysis of the Qualifying R&D Rules
The eligibility of any RDTI claim in New Zealand hinges on whether the project contains a qualifying “core R&D activity.” Failure to substantiate the core activity will render any associated supporting activities ineligible.
The Purpose of Creating New Knowledge or Products/Processes
The R&D must be undertaken for the purpose of acquiring new knowledge or creating new or improved processes, services, or goods. This establishes the commercial and innovative intent behind the scientific work.
Resolving Scientific or Technological Uncertainty
This is the most critical pillar. A core R&D activity must have the purpose of resolving an uncertainty about whether something is scientifically or technologically possible or how it can be achieved. This uncertainty exists when the knowledge required is not publicly available or readily deducible by a competent professional in the field. It is not enough that the project is new to the business; the uncertainty must be new to the industry at large.
A Systematic Approach
A core R&D activity must be conducted in a way that is systematic, investigative, and experimental. This means the project proceeds from hypothesis to experiment, observation, and evaluation, leading to logical conclusions. It must be clear that the work is planned, structured, and follows the scientific method, rather than being a series of ad-hoc trials.
Specifically Excluded Activities
To provide clarity, the legislation specifically excludes certain activities from being core R&D activities. These include:
- Routine testing and maintenance.
- Research in the social sciences, arts, or humanities.
- Market research, sales, or promotional activities.Management studies or efficiency surveys.
- Commercial, legal, and administrative aspects of patenting or licensing.
- Prospecting for minerals, oil, or natural gas.
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The Dual-Agency Focus on Substantiation
New Zealand’s RDTI regime is unique in its dual-agency administration, which requires a two-pronged approach to documentation.
Callaghan Innovation: The Scientific Gatekeeper
Callaghan Innovation is responsible for assessing the technical merits of the R&D claim. Businesses must submit an R&D supplementary return which details the projects undertaken. Callaghan Innovation reviews this information to confirm that the described activities meet the legal definition of a core R&D activity. Their focus is entirely on the “what” and “how” of the scientific or technological work. Their detailed guidance documents provide the blueprint for the technical narratives that businesses must prepare.
Inland Revenue (IRD): The Financial Gatekeeper
Once Callaghan Innovation approves the R&D as eligible, Inland Revenue (IRD) manages the tax administration. The IRD’s focus is on verifying that the expenditure claimed against the eligible activities is correct and has been calculated according to the rules. This requires robust financial records, including timesheets, invoices, depreciation schedules, and overhead allocation calculations that can be clearly linked to the specific R&D projects approved by Callaghan Innovation.
Insights from New Zealand Case Law
Like many jurisdictions with specific R&D incentive legislation, New Zealand does not have a large body of public court rulings on the RDTI. The system is designed to be administered based on the detailed guidance from Callaghan Innovation and IRD. Disputes are often handled through administrative review processes rather than open court. This reinforces the importance for claimants to build their documentation file strictly in accordance with the official published guidance, as this forms the primary basis for assessment.
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Case Study: Advanced Materials NZ Ltd.
To synthesize the principles discussed, this section presents a practical case study of a hypothetical New Zealand SME, Advanced Materials NZ Ltd. (AMNZ). AMNZ operates in the advanced manufacturing sector and is developing a new, high-strength, biodegradable polymer composite for use in high-performance medical devices.
- Analysis of Activities
- A Practical Documentation Example
- Financial Breakdown & Tax Credit Calculation
AMNZ’s product development lifecycle is assessed to determine which phases qualify as core or supporting R&D activities.
1. Initial Market & Literature Review: AMNZ’s team conducts market research and reviews existing scientific papers to map the current landscape of biodegradable polymers.
- Assessment: Not Eligible. This is routine work and a specifically excluded activity.
2. Economic Feasibility Study: AMNZ’s finance team develops a financial model to project production costs and potential return on investment.
- Assessment: Not Eligible. This is a commercial management activity.
3. Development of New Polymer Composite: AMNZ’s R&D team begins experimenting with novel chemical formulations to achieve target specifications that exceed any commercially available material. The team designs and executes over 50 experimental batches, with many failing. Each failure provides data that informs the design of the nextiteration.
- Assessment: Eligible Core R&D Activity. This work is systematic, experimental, and conducted for the purpose of resolving a clear scientific and technological uncertainty.
4. Process Automation & Integration: To handle the new material’s unique properties, the engineering team must develop novel control software and integrate new sensors into the production line. This presents significant technical challenges.
- Assessment: Eligible Supporting R&D Activity. This activity is not a core scientific investigation itself, but it is directly required to support the core R&D (Activity 3). Without it, the new material cannot be properly tested or produced, making it an eligible supporting activity.
5. Routine Quality Assurance (QA) Testing: The QA team subjects samples from a pilot production run to a series of standard, industry-recognized tests for regulatory compliance.
- Assessment: Not Eligible. This is routine testing, a specifically excluded activity.
6. Commercial Production Run: AMNZ commences the first large-scale manufacturing of the new polymer for sale.
- Assessment: Not Eligible. This activity occurs after the resolution of the R&D problem.
To successfully claim for its eligible activities, AMNZ must create a detailed technical narrative for Callaghan Innovation. Below is a simplified example for the Core R&D Activity.
RDTI Project Form: Core R&D Activity
| Project Title: | Development of a High-Strength, Biodegradable Polymer Composite |
| Project ID: | AMNZ-RD-2025-001 |
| Project Timeline: | 15 January 2025 – 30 November 2025 |
| Field of Science /Technology: | Materials Science, Polymer Chemistry |
1. What scientific or technological advance did your project seek to achieve?
The project sought to create a new class of polymer composite that simultaneously exhibits high tensile strength (>150 MPa) and controlled biodegradability (>90% degradation within 180 days). This combination of properties was not available in existing commercial materials or documented in publicly available research at the project’s outset and would represent a significant technological advance.
2. What scientific or technological uncertainty did you seek to resolve?
The central uncertainty was whether the molecular structure of a polymer blend could be engineered to provide high mechanical strength while also being susceptible to rapid hydrolytic and microbial degradation. Specifically, it was unknown:
- How to formulate a blend of PLA, PHA, and novel additives that would achieve the strength target without inhibiting the degradation process.
- How this new formulation would behave under standard processing conditions.
- Whether the final material could withstand medical sterilization without losing its key properties.
A competent professional in this field could not have known the answer to these questions from the outset.
3. Describe the systematic approach you used to resolve the uncertainty.
We undertook a structured experimental program based on the scientific method:
- Hypothesis: We hypothesized that a specific ratio of PLA to PHA, combined with a proprietary additive, could create a strong matrix that would also have engineered weak points for degradation to begin.
- Experimentation: We designed and executed a program of over 50 experimental batches, where variables such as polymer ratios and additive concentrations were systematically altered.
- Testing & Analysis: Each batch was synthesized and then methodically tested for its mechanical (ISO 527) and degradation (ISO 14855) properties.
- Evaluation & Conclusions: Results from failed batches were analyzed to inform the next iteration of experiments. This iterative loop of hypothesis, experiment, and evaluation continued until the uncertainty was resolved and a successful formulation was developed. This entire process was documented in our lab notebooks.
The following table details the costs for the eligible core and supporting R&D activities (III and IV) and calculates the RDTI benefit.
| Cost Category | Description / Breakdown | Eligible R&D Expenditure ($) |
| Staff Costs (Core & Supporting) | Dr. Evans (Lead Scientist, $120k salary, 80% time) | $96,000 |
| Lab Technician 1 ($70k salary, 100% time) | $70,000 | |
| Lab Technician 2 ($70k salary, 100% time) | $70,000 | |
| Process Engineer ($95k salary, 50% time) | $47,500 | |
| Subtotal | $283,500 | |
| Materials | Polymer resins, catalysts, and chemicals for 50+ experimental batches | $75,000 |
| Subtotal | $75,000 | |
| Overheads | Allocated portion of light, heat, and rent for the laboratory space | $42,525 |
| Subtotal | $42,525 | |
| Total Eligible R&D Expenditure | $401,025 | |
| Tax Credit Calculation | ||
| RDTI Tax Credit @ 15% | ($401,025 x 15%) | $60,153.75 |
Calculation Analysis:
- Total Eligible Spend: AMNZ identified $401,025 in eligible R&D expenditure.
- RDTI Tax Credit: The 15% credit provides a direct benefit of $60,153.75. This can be used to offset AMNZ’s income tax liability or be received as a cash refund (subject to the refundability cap). This credit significantly reduces the net cost of AMNZ’s innovation.
Conclusion
The New Zealand R&D Tax Incentive offers a valuable opportunity for businesses to de-risk and accelerate their innovation efforts. However, accessing these benefits requires a disciplined and thorough approach to documentation that satisfies the distinct requirements of two government agencies.
The analysis in this report leads to several key recommendations for New Zealand businesses:
- Embrace the Dual-Agency Model: Understand from the outset that you need to prepare both a compelling technical narrative for Callaghan Innovation and meticulous financial records for IRD.
- Document Contemporaneously: Documentation cannot be an afterthought. Implement processes to capture technical progress, experimental results, and associated costs as they occur.
- Use Official Guidance as Your Bible: The detailed guidance documents from Callaghan Innovation and IRD are not just suggestions; they are the blueprint for a successful claim. Structure your internal documentation to directly answer the questions and criteria outlined in these guides.
Ultimately, a successful RDTI claim rests on a company’s ability to tell a coherent, evidence-backed story of innovation that meets both the scientific and financial standards of the regime. By embedding a culture of diligent documentation, New Zealand businesses can confidently secure the benefits designed to fuel their R&D and drive economic growth.
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