The 2014 Budget has introduced new measures improving the “black hole” tax treatment of R&D expenditure in New Zealand.
As well as introducing new measures to enable companies to “cash-out” research and development (R&D) tax losses (read more), the 2014 Budget has introduced new measures dealing with the “black hole” tax treatment of some R&D expenditure.
Black hole expenditure is business expenditure that is not immediately deductible for tax purposes, and does not form part of the cost of a depreciable asset. Accordingly, it cannot be depreciated over time.
The new measures are focussed on addressing black hole R&D expenditure, whether the R&D is successful or unsuccessful, with a view to removing the current fiscal disincentives to businesses investing in R&D in New Zealand.
The new measures will mainly take effect from the 2015/16 income year and the following will then be depreciable:
- capital expenditure relating to an invention that is the subject of a patent or patent application;
- capital expenditure relating to a plant variety that is the subject of plant variety rights;
- capital expenditure relating to registered designs (and applications for registered designs). The capital expenditure incurred in creating the design can be included as part of the depreciable costs of a registered design/application where a design application has been made (and an immediate tax deduction will be available if the application does not proceed to grant);
- capital expenditure relating to copyright in an artistic work that has been applied industrially. The capital expenditure in creating the work can be included as part of the depreciable costs of the copyright, for industrially applied works; and
- capital expenditure relating to successful software development.
Importantly, a one-off tax deduction can be made for capital expenditure where an intellectual property asset is written off for accounting purposes (although integrity measures apply, for example if the asset is subsequently sold).
The new measures recognise that intellectual property assets should be treated like other assets and be depreciated over time, and we expect that, when they come into force, they will encourage companies to undertake more R&D investment in New Zealand.
Under the current regime, capital expenditure incurred after an intellectual property asset is recognised may never become tax deductible. By contrast, the new measures allow any capital expenditure to be depreciated where the R&D results in an intellectual property asset, and to be deducted where the intellectual property asset does not result in an intellectual property asset.
In addition, because the new measures allow New Zealand companies to deduct the legal and administrative costs of applying for patent and design registrations (even if these are ultimately unsuccessful), there is an incentive to apply to formally register intellectual property rights. In turn, that strengthens the position of New Zealand companies in the international market.
The measures provide welcome incentives for innovation in New Zealand.