You have identified that your business activities are eligible for the Research and Development (R&D) Tax incentive and you have registered the activity with Innovation Australia.
So it’s straight forward to make a claim now, right?
Unfortunately not.
With the ATO focusing on R&D with increased compliance and audit focus, there are important rules that need to be followed to make sure you maximise your claim but that you also meet the legal requirements.
To get it right you need to be certain on what exactly is eligible R&D expenditure and what other requirements there are?
Ensure your R&D Claim includes all eligible expenditure – and avoid spending too much of your valuable resources on expenses you cannot claim
For starters, to claim the R&D tax incentive your total notional deductions must be greater than $20,000 for an income year and consists of amounts incurred on registered core R&D activities and supporting R&D activities. You are required to register your R & D activities every year and only certain kinds of expenditure are allowed:
Salary expense
Salary expense is a major cost of R & D and is eligible to the extent that it has been incurred for employees engaged directly in carrying out an eligible R&D activity.
The following employee payments are eligible to the extent that they are directly incurred on R&D activities.
- salaries
- wages
- allowances
- bonuses
- overtime and penalty rate payments
- expenditure incurred to provide benefits (including fringe benefits) in lieu of paying such employees a cash salary under an eligible salary sacrifice arrangement.
Relevant on costs are only eligible in the proportion that reflects the extent to which your employee was engaged in R&D activities in the year.
- annual, sick and long service leave
- superannuation fund contributions (when paid)
- payroll tax and workers compensation insurance premiums.
Relevant employees may include:
- researchers undertaking the conception and/or creation of new knowledge and products
- employees undertaking technical tasks in support of the R&D activities, such as persons keeping records, preparing charts and graphs, operating equipment and writing computer programs
- supervisors of researchers and technical staff.
- Support staff but only to the extent to which the expenditure was on the R&D activities conducted.
The salaries (and on costs) of your employees whose only connection with R&D activities is clearly indirect – for example, management staff who recruit other company employees for general duties not necessarily related to R&D activities – would not qualify as R&D expenditure.
It is important to remember that if you have incurred salary expenditure to an associate, you are only eligible to claim as a notional R&D deduction at the time that the amount is paid.
Other Eligible R&D expenditure
Administrative costs and overheads that can be attributed as a result of conducting R&D activities and employing R&D staff are also eligible. For example, you may have additional overheads, such as rent, electricity, property rates and taxes, cleaning and insurances that are incurred due to your R&D activities. Again these must be apportioned with the expenses which you can claim as R&D expenditure, limited to the extent they are incurred on R&D activities.
Leased plant and buildings
Rent or lease payments for equipment or buildings used in your R&D activities would constitute R&D expenditure.
They don’t necessarily need be used exclusively in your R&D activities, but if the use is not exclusive, it would need to be apportioned using a basis which produces an allocation of expenditure to R&D activities with a reasonable degree of accuracy.
Accountants’ and Consultants’ fees
Whether expenditure incurred on accountant’s and consultant’s fees are eligible depends upon whether:
- the fee from the accountant or consultant relates to activities associated R&D activities
- the extent to which the expenditure was incurred on those R&D activities.
Generally, most activities such as preparing a registration application for the R&D tax incentive or preparing a tax return to claim the R&D tax incentive are ineligible activities.
Ineligible R&D Expenses
Ineligible expenses are those without sufficient link to the R&D activities, particularly where they would be incurred regardless of the R&D activities occuring.
Expenses that are ineligible include:
- advertising
- audit fees
- bad debts
- company establishment
- costs incurred in preparing taxation returns
- decline in value of a depreciating asset (except under limited circumstances)
- directors’ fees
- distribution and selling expenses
- donations
- employee benefits such as canteen and recreational facilities
- entertainment expenses
- grounds and garden maintenance costs
- insurance premiums on matters unrelated to R&D such as loss of profits and product liability
- interest
- legal expenses not associated with any approved research project eg legal expenses for a patent search before undertaking a research project or taking out a patent after a successful project
- patents and trademarks in marketing a new product or technology, or as a result of R&D activity
- rent paid for premises that are not used in R&D activities
- salaries, associated costs and on-costs of support staff not linked with R&D activities
- tender costs.
Expenses are also ineligible for the following:
- Expenditure that is not at risk – i.e. there is a guaranteed return
- Core technology expenditure
- Expenditure incurred to acquire or construct a building
As mentioned, the ATO have tightened its compliance and audit focus on R&D and it is vital that you keep adequate records to demonstrate to AusIndustry and the ATO that have incurred all eligible expenditure.
Our experts Team at Walsh R&D and Innovation can walk you through the whole R& D process to ensure you understand and maximise your claim (legally) and that you have systems in place to meet the record keeping requirements.
For an obligation free discussion, contact our Princial Consultant Gavin Austin
