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LA 4: When total tax credit more than income tax liability
or “How to use tax credits when they exceed your income tax bill”
You could also call this:

“How unused tax credits are handled and refunded”

When you have tax credits left over after using them, here’s what happens:

If you have a non-refundable tax credit, it goes away. But this doesn’t apply to tax credits for income tax and foreign income tax paid on foreign income. You can still use those credits in certain ways.

If you have a tax credit for a supplementary dividend, you can use it in a specific way described in another part of the law.

If you have a tax credit for an imputation credit, you can use it in ways described in other parts of the law.

If you have a research and development tax credit, the government will first give you a refund up to a certain limit. This limit is called your “refundability cap”. There’s no limit to the refund if you’re a levy body researcher or if the credit is for eligible research and development spending with approved research providers. If there’s still some credit left after the refund, you can carry it forward to use later.

If you have a refundable tax credit, the government will give you a refund in ways described in other parts of the law.

Your refundability cap is calculated using a special formula. This formula takes into account tax payments made by you and other related companies.

For the 2019-20 income year, there might be different rules about refunding research and development tax credits.

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Next up: LA 6: Remaining refundable credits: PAYE, RWT, and certain other items

or “How your remaining tax credits are used or refunded”
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Part L Tax credits and other credits
General rules for tax credits

LA 5Treatment of remaining credits

  1. This section applies to a remaining tax credit referred to in section LA 4(2).

  2. A non-refundable tax credit is extinguished. However, this subsection does not apply to a tax credit for income tax and foreign income tax paid in relation to foreign attributed income used under section LK 4 (Use of remaining credits).

  3. A person uses a tax credit for a supplementary dividend by applying section LP 3 (Use of remaining credits).

  4. A person uses a tax credit for an imputation credit by applying section LE 2, LE 2B, or LE 3 (which relate to the use of remaining tax credits).

  5. A person’s research and development tax credit is used by—

  6. first, the Commissioner refunding the tax credit up to the maximum limit of the person’s refundability cap, by treating it as a refundable tax credit and applying section LA 6(2). There is no maximum limit for refunding the tax credit, if and to the extent to which—
    1. the person is a levy body researcher:
      1. the tax credit is for eligible research and development expenditure on approved research providers:
      2. secondly, applying section LY 8 (Carry forward for remaining research and development tax credits), to the extent to which paragraph (a) does not apply to the tax credit.

        1. The Commissioner refunds a refundable tax credit by applying section LA 6, LA 7, or LA 8.

        2. For the purposes of this section, refundability cap is the amount calculated for the tax year using the following formula:

          own tax + other wholly-owned tax + other controller tax − double-dip allocation.

          Where:

          • In the formula,—

          • own tax is the total amount of PAYE, ESCT, and FBT that the person (person A) pays for the tax year to the extent to which the total amount has not been allocated under paragraph (b) or (c) to another person for the purposes of calculating their refundability cap for the tax year:
            1. other wholly-owned tax is zero or, if person A is a company and is a member of a wholly-owned group of companies, is the amount of PAYE, ESCT, and FBT that the other members pay for the tax year and that is allocated to person A for the purposes of calculating person A’s refundability cap for the tax year:
              1. other controller tax is zero or, if person A is a company, is the total amount of PAYE, ESCT, and FBT that companies that directly or indirectly control person A pay for the tax year and that is allocated to person A for the purposes of calculating their refundability cap for the tax year:
                1. double-dip allocation means the total amount allocated to person A under paragraphs (b) and (c) that has been allocated to a person other than person A for the purposes of calculating the other person’s refundability cap for the tax year.

                  1. Section LZ 14 (Research and development tax credits’ refundability: option for 2019–20 income year) may modify this section for a person’s research and development tax credits for the 2019–20 income year.

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                  Notes
                  • Section LA 5(4): amended (with effect on 1 July 2010), on , by section 85 of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
                  • Section LA 5(4B) heading: inserted, on , by section 9(1) (and see section 3 for application) of the Taxation (Research and Development Tax Credits) Act 2019 (2019 No 15).
                  • Section LA 5(4B): replaced (with effect on 1 April 2019), on , by section 15(1) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5(5B) heading: inserted (with effect on 1 April 2019), on , by section 15(2) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5(5B): inserted (with effect on 1 April 2019), on , by section 15(2) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5(5C) heading: inserted (with effect on 1 April 2019), on , by section 15(2) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5(5C): inserted (with effect on 1 April 2019), on , by section 15(2) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5(5D) heading: inserted (with effect on 1 April 2019), on , by section 15(2) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5(5D): inserted (with effect on 1 April 2019), on , by section 15(2) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms approved research provider: inserted (with effect on 1 April 2019), on , by section 15(3)(a) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms associated person: repealed (with effect on 1 April 2019), on , by section 15(3)(b) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms eligible research and development expenditure: inserted (with effect on 1 April 2019), on , by section 15(3)(a) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms ESCT: inserted (with effect on 1 April 2019), on , by section 15(3)(a) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms exempt income: repealed (with effect on 1 April 2019), on , by section 15(3)(b) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms FBT: inserted (with effect on 1 April 2019), on , by section 15(3)(a) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms levy body researcher: inserted (with effect on 1 April 2019), on , by section 15(3)(a) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms listed company: repealed (with effect on 1 April 2019), on , by section 15(3)(b) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms PAYE: inserted (with effect on 1 April 2019), on , by section 15(3)(a) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms refundability cap: inserted (with effect on 1 April 2019), on , by section 15(3)(a) (and see section 15(4) for application) of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (2020 No 8).
                  • Section LA 5 list of defined terms research and development tax credit: inserted, on , by section 9(2) (and see section 3 for application) of the Taxation (Research and Development Tax Credits) Act 2019 (2019 No 15).