Wednesday, 13th November, 2013

NZ Government invites submissions on tax treatment of 'black hole' R&D expenditure

In its May 2013 Budget, the New Zealand Government announced proposed changes to the tax treatment of 'black hole' expenditure.  This is expenditure that businesses can't deduct immediately as an expense or include as part of an asset that can be depreciated over time.

The Government has now released a further consultation document expanding the initial relief it proposed around black hole research and development (R&D) expenditure.  The consultation document can be found here.

Proposals for consultation

Under the latest proposals, the Government proposes allowing depreciation of capitalised expenditure on patents and plant variety rights (PVRs) over the legal life of the asset.  Currently, the only costs that can depreciated are legal and administrative costs associated with the patent or PVR.  This ignores the significant costs associated with developing the invention or plant variety which can fall into a black hole if they're not otherwise deductible.

The Government also proposes:

• clarifying legislation to confirm that capital expenditure incurred in a successful development of software for use in a company's own business is depreciable, and

• allowing an immediate tax deduction for capitalised development expenditure on intangible assets if development of the intangible asset is unsuccessful prior to it earning income for the business.

Submissions

The Government has invited submissions on the proposals to the following address:

Black Hole R&D Expenditure Proposals
C/- Deputy Commissioner, Policy & Strategy
Policy & Strategy
Inland Revenue Department
PO Box 2198
WELLINGTON 6140

or by email to: policy.webmaster@ird.govt.nz.

The closing date for submissions is 17 December 2013.

We encourage New Zealand businesses with an R&D focus to make submissions on the proposals.  Not only could they derive further benefits from their investment in R&D, but changes to the tax treatment of R&D may also stimulate more firms to invest in R&D themselves.

There might also be opportunities to expand the scope of changes proposed.  For example, the consultation paper does not address registered designs.  Currently Schedule 14 of the Income Tax Act 2007 lists the right to use designs as depreciable intangible property but not the registered designs themselves.  There are many successful New Zealand businesses spending significant amounts developing and registering their designs both here and overseas who may benefit from having designs added to Schedule 14.