What is R&D? A plain-english guide to what counts, what doesn't and what it means for your business

Business Studio
13 hours ago
4 min read

A practical guide for working through New Zealand's R&D landscape

If you've ever wondered whether the work your team is doing qualifies as R&D, you're not alone. It's one of the most common questions we get from business owners, and the answer isn't always obvious.

The good news? Once you understand the core idea, it's easier to navigate than you'd think.

Download our free R&D guide below to keep as a reference.

So, What Actually Is R&D?

At its simplest, R&D is planned learning through testing. It starts when the answer to

a problem isn't already known, and you need to experiment to find out whether, how, or why something can work.

It's not about whether the project is ambitious or whether it involves technology. It's about whether there's a genuine unknown that you're working to resolve.

A useful way to think about it:

Innovation asks: "Can we make this valuable?"
R&D asks: "Can we solve the unknown, and what do we learn when we test it?"

The Simple R&D Loop

Most R&D activity follows a recognisable pattern:

Problem - A real problem or opportunity worth solving
Unknown - You don't yet know how, why, or whether it can work
Idea - A reasoned approach, method, design, or hypothesis to try
Test and measure - Prototype, experiment, analyse, compare, adapt
Learning - New or improved knowledge, product, service, or process

The output might be success, failure, or a better question. All three can create useful learning, and that learning is what R&D is really about.

The Three Plain-Language Checks

Before deciding whether something qualifies as R&D, run it through these three questions:

What is unknown? Not just commercial risk or preference, but a genuine technical unknown.
How are we testing? The work should be planned, measured, and recorded.
What did we learn? The result should produce reusable knowledge or a better design.

If you can answer all three, you're likely in R&D territory.

What R&D is, and what it isn't

This is where a lot of businesses trip up. Here's a clear breakdown:

Likely R&D

These activities are generally considered R&D when the work is about resolving a genuine unknown:

Testing whether a new method can solve a technical problem
Building prototypes to learn, not just to sell
Running experiments and changing the approach based on results
Creating new or improved knowledge, products, services, software, or processes
Developing new software or manufacturing processes
Creating moulds or tooling to test new concepts
Designing new materials or products where the outcome is uncertain

May Support R&D

These activities can count when they are directly connected to the experiment:

Designing the test plan and keeping records
Collecting data needed for the test
Analysing results and comparing options
Pilot or demo work where it helps resolve the unknown

Usually Not R&D

These are business-as-usual or commercial activities that don't qualify on their own:

Building a product using known methods
Routine testing, quality control, or normal bug fixing
Cosmetic changes, minor adaptations, configuration, or data migration
Market research, pricing, sales, legal, admin, compliance, or production scale-up
Ordinary troubleshooting
Standard commercial production
Activities where the solution is already publicly known

From R&D to Capitalisation: Understanding the Financial Side

Once your R&D work starts producing results, there's an important accounting question to consider: when do costs get expensed versus capitalised?

Under IAS 38, the general rule is that research costs are expensed, and development costs can be capitalised only once specific criteria are met.

The IAS 38.57 Criteria

To move into the capitalisation phase, all six of these criteria must be satisfied:

Technical feasibility of completing the asset
Intention to complete and use or sell it
Ability to use or sell the asset
Probable future economic benefits
Adequate resources to complete the project
Costs can be measured reliably

A Key Point Many Businesses Miss

Reaching MVP (minimum viable product) does not automatically mean capitalisation can begin. A project may continue cycling through further development until all IAS 38.57 criteria are met. Costs expensed before that point stay expensed, they cannot be added back to the capitalised costs later.

What are the New Zealand R&D Incentives?

For New Zealand businesses, there are three main ways R&D expenditure can be treated from a tax perspective:

General Deductions

Applies when total accumulated project spend is less than $50,000 in-house. The expenditure must be incurred in deriving assessable income or in the course of carrying on a business, and is subject to IAS 38. Note that R&D expenditure that is capital in nature but does not create a depreciable asset may be non-deductible "black hole" expenditure.

Tax Incentive

Applies when total accumulated project spend is greater than $50,000 in-house (capped at $120m per year). Key requirements include:

You own the results of your R&D activities
Expenditure must meet the "Eligibility Definition"
The activity must be conducted using a systematic approach
Most claimants must apply for "General Approval" by 30 June
Eligible expenditure greater than $2m has a separate approval process
The tax credit supplementary return is due 30 days after the income tax return
Public transparency publishing occurs two years after claim filing

There is an exception when R&D is performed by an "Approved Researcher."

Tax Loss Cash Out

Available when a company is in a tax loss position. This scheme functions as an interest-free loan from the Government, repaid when the company becomes profitable and pays tax. Key points:

Available to NZ resident companies (some exclusions apply)
Subject to a wage intensity test: 20% of the company's (and group) total labour expenditure must be on R&D-related labour
The credit calculation is the lesser of four amounts
Cashed-out losses are extinguished and cannot be carried forward to offset future income
Subject to early repayment trigger events

Not Sure Where You Sit?

R&D classification can have real tax and accounting implications, so it's worth getting it right. Whether you're just starting to explore what qualifies, working through a General Approval application, or trying to understand how IAS 38 applies to your development costs, we're here to help.

Book a free 30-minute consultation to talk through where your business sits and what options are available to you.

Disclaimer

This article is for informational purposes only and should not replace specific tax advice. For personalised advice please contact us.