What Counts as Eligible R&D Expenditure in New Zealand?

One of the most common questions businesses have when preparing an R&D tax credit claim is: "What costs can I actually include?" This guide breaks down each category of eligible expenditure under New Zealand's RDTI and RDLTC schemes.

The General Rule

Expenditure is eligible if it is directly related to an eligible R&D activity and is incurred during the period covered by your claim. The costs must be real, verifiable, and attributable to qualifying R&D work.

Employee Costs

Employee costs are typically the largest component of an R&D claim, often accounting for 60-80% of total eligible expenditure.

What's included:

Gross salary or wages for time spent on eligible R&D
Employer KiwiSaver contributions (currently 3% minimum)
ACC employer levies
Any other compulsory employer contributions

How to calculate:

For each employee involved in R&D, you need to determine the percentage of their time spent on eligible activities. Only that proportion of their total employment cost is claimable.

Example: A senior developer earns $140,000 (gross) plus $4,200 KiwiSaver (3%) plus $1,400 ACC. Total employment cost: $145,600. If 65% of their time is on eligible R&D: $145,600 x 65% = $94,640 eligible.

Important considerations:

Only time spent on activities that meet the R&D eligibility criteria can be claimed
Leave (annual leave, sick leave) taken during an R&D project can be included proportionally
Bonuses directly linked to R&D outcomes may qualify
Recruitment costs and training costs generally do not qualify (unless the training is specifically required for an R&D activity)

Contractor and Consultant Costs

Payments to external contractors or consultants can qualify if the work they perform meets the R&D eligibility criteria.

What's included:

Payments to individual contractors performing R&D work
Fees to consulting firms for R&D services
Payments to research institutions or universities for R&D work

Key requirements:

The contractor's work must itself constitute eligible R&D
The work must be performed predominantly in New Zealand (90% threshold)
You must be able to demonstrate what the contractor did and why it qualifies
The contractual arrangement should clearly describe the R&D nature of the work

What's not included:

Payments for routine services (IT support, accounting, legal advice)
Fees for market research or business consulting
Contractor costs for non-R&D parts of a broader project

Materials and Consumables

Items that are used up, consumed, or transformed during R&D activities can be claimed.

What's included:

Raw materials for prototypes (metals, plastics, chemicals, electronic components)
Test samples and specimens
Reagents and laboratory supplies
Cloud computing costs for R&D workloads (e.g., machine learning training runs)
Energy costs directly attributable to R&D equipment

What's not included:

Materials that become part of a product you sell (unless the product is a prototype that is destroyed or cannot be sold)
General office supplies
Food and beverages

Example: A biotech company uses $25,000 in chemical reagents for experimental formulations. All of it is consumed during testing and none becomes part of a final product. The full $25,000 is eligible.

Depreciation on R&D Assets

If you own assets (equipment, machinery, software) that are used for R&D, you can claim the depreciation on those assets in proportion to their R&D use.

What's included:

Specialised laboratory equipment
Testing and measurement instruments
Dedicated R&D computing hardware
Purchased software used exclusively or primarily for R&D
Pilot plant or prototype equipment

How to calculate:

Use the standard IRD depreciation rates for the asset type, then multiply by the percentage of R&D use.

Example: A 3D printer costing $30,000 has a depreciation rate of 30% (diminishing value). In year one, depreciation is $9,000. If the printer is used 80% for R&D: $9,000 x 80% = $7,200 eligible.

Important: The asset must be used for eligible R&D activities. General-purpose equipment used incidentally for R&D doesn't qualify unless you can demonstrate and document the R&D usage percentage.

Overheads

Overhead costs that are directly attributable to R&D activities can be included, but this requires careful allocation.

What's included:

Rent for dedicated R&D space (lab, workshop, clean room)
Utilities for R&D facilities (electricity, water, gas)
Insurance on R&D equipment
Software licences used specifically for R&D (development tools, simulation software)

Allocation methods:

If a cost serves both R&D and non-R&D purposes, you need a reasonable basis for allocation. Common methods include:

Floor space allocation (e.g., lab is 30% of total office space, so 30% of rent)
Headcount allocation (e.g., R&D staff are 40% of total staff, so 40% of shared costs)
Usage-based allocation (e.g., cloud platform usage logs showing R&D vs production workloads)

What's not included:

General administrative overheads (management, HR, finance)
Marketing and sales costs
Legal and accounting fees (unless directly related to an R&D project)

Expenditure That Never Qualifies

Some costs are specifically excluded from R&D tax credit claims regardless of context:

Interest and financing costs on loans used to fund R&D
Land and building acquisition costs (though rent may qualify)
Entertainment expenses even if related to R&D meetings
Fines or penalties
Donations to research institutions (these may qualify for donation tax credits instead)
Expenditure already funded by a government grant (to avoid double-dipping)

Practical Tips for Maximising Your Claim

Keep detailed records from the start. Don't wait until year-end to figure out what qualifies. Set up cost centres or project codes in your accounting software to track R&D expenditure throughout the year.

Review your chart of accounts. Map each account to an R&D category early in the year. This makes year-end calculations much faster and more accurate.

Don't forget indirect R&D staff. Project managers, QA testers, and data analysts supporting R&D projects often have eligible time that gets overlooked.

Separate R&D cloud costs. If you use AWS, Azure, or GCP, tag your R&D workloads separately so you can easily identify the R&D portion of your cloud bill.

At Get Tax Credits, our platform connects to your Xero accounting data to automatically categorise accounts and calculate eligible expenditure, reducing the manual effort and improving accuracy.