How you can use recent tax changes to fuel innovation

New Zealand has always punched above its weight when it comes to innovation and two new tax policies are aimed at further helping small businesses to continue to do so.

The new policies are aimed at reducing some of the risk of trying new things in your small business, making it easier to finance new methods and products, and are set to be in effect from the start of the 2020-2021 financial year.

So, if you’ve got a bright idea burning away at the back of your mind, now could be the time to start planning how to put these new incentives to work for you.

Tax credits for R&D

KPMG New Zealand Director, Byran Theunisen, says one of the most attractive incentives for small businesses is a new research and development (R&D) tax credit.

“Businesses will get back 15% of what they spend on qualifying R&D through a reduction in their tax bill,” he says.

To qualify, the R&D effort must be conducted systematically with the purpose of creating new ways and better processes, and services or products. It could be a new healthcare app, an algorithm or an improved method of manufacturing. Businesses must spend at least $50,000 on the R&D in a financial year for it to qualify.

Costs that are eligible for the tax credit include employee wages, depreciation on the R&D assets or the cost of plant used for the venture.

Theunisen says in addition to tax credits, businesses can also access the existing R&D grant funding, and expert and scientific assistance through Callaghan Innovation, including incubators, accelerators and researchers.

Through the combination of Callaghan Innovation and another government agency, New Zealand Trade & Enterprise, there is support for business planning and development, technology and market testing, as well as connections to international markets and capital.

Funding the feasibility ‘black hole’

In September 2019, the government also announced that from the next financial year onward, tax deductions would be available for “feasibility expenditure”.

This is money spent on pursuing a new process or product which does not ultimately lead to a depreciable asset for the business. Traditionally, these costs have not been deductible for tax purposes, making them known as black hole expenditure.

KPMG Tax Partner, Darshana Elwela, says feasibility expenditure is costs incurred to determine the practicality of a new initiative.

“This is where a business is looking to invest in a particular asset, either to construct or acquire a piece of plant and equipment, and there are costs associated with exploring how they do that,” he says.

“It will help businesses to make investments by providing greater certainty over the tax treatment of their project costs.”

Under the new rules, businesses will be able to write off the entire cost of any feasibility expenditure up to $10,000 in the same financial year. For larger sums, the expenditure can be written off over a period of five years.

Kirk Hope, the CEO of small business peak body BusinessNZ, says the current cost of exploring new enterprise is a “significant barrier to innovation”.

“This new tax rule will make it easier for more businesses to innovate and become more productive,” he says.

The type of costs that can be written off under feasibility expenditure include seeking relevant professional or expert advice about a new initiative, market research on a new product or market segment, or engineering surveys and environmental studies for a new building.

For instance, a café that is hoping to open a new location might hire a contractor to survey foot traffic flows in different areas to help it determine which area is the most suitable. Under the new rules that expenditure would be deductible.

Got your own bright idea for innovation? Talk to Prospa about how a small business loan could help turn the idea into reality.

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