R&D Tax Incentive Expenditure: What's In & What's Out?
Authors: Shaun van Dijk, Siobhan Malone
The R&D Tax Incentive (RDTI) program is a popular, broad-based funding program that covers a diverse range of industries and experimental work. It allows companies to offset certain costs incurred on eligible research and development activities each year. However, not all expenditure can be claimed, and there are a range of expenses that are excluded from being eligible R&D expenditure under the program.
Salaries & Wages
Companies accessing the RDTI are entitled to claim salary and wages expenses (including allowances, bonuses, overtime, penalty rates, leave, superannuation, and other on-costs) for their employees who have been involved in undertaking the registered R&D activities. These employees must be relevant to the conception and creation of new knowledge, or contributing to the technical tasks and activities directly related to the R&D (e.g. recordkeeping, documentation preparation, equipment operation, etc.).
Importantly, the time spent on these tasks needs to be clearly identified to ensure that no non-R&D time/activities are captured. To ensure a company’s RDTI claim remains compliant and defensible, the ATO is becoming increasingly insistent on the need for clear, contemporaneous (and ideally formal) time-tracking evidence for R&D personnel to demonstrate which employees worked on R&D activities, and to distinguish the time spent and contributions made to the R&D activities as compared with other non-R&D or business as usual activities.
Through this method of identifying relevant salaries and wages expenses, it may be possible for the time of support staff to also be claimed – for example, supervisors, administrative and management staff. However, time and salary expenses can only be included if the business can provide adequate evidence to demonstrate the nexus between these individuals and their specific contributions to the registered R&D activities.
Contractors & Consultants
Costs associated with contractors and consultants engaged for R&D activities for labour hire or the provision of services can be claimed, and if one of these is a Research Service Provider registered with DISR to conduct R&D on your behalf, it is possible to claim the RDTI if less than $20,000 was spent on R&D. The nature of the contracted work will determine the ability to claim the associated costs. For example, expenditure on a consultant to run data analysis for a trial can be claimable, but not expenditure spend on a consultant to prepare your R&D claim for submission.
Overheads
Operating costs and overheads incurred in conducting the R&D activities and employing R&D staff to carry out the activities may also be claimed as part of the RDTI claim. For example, this might include items such as rent, light and power, cleaning expenses, certain types of insurance, office supplies, consumables, software expenses, subscriptions, and potentially training and recruitment of relevant staff.
However, not all overhead costs are considered eligible R&D expenditure amounts, even if there may be some nexus to the R&D activities. For example, administrative and operating costs that typically cannot be claimed include accounting and legal fees, advertising, bank fees, employee benefits (and FBT), grounds maintenance, director’s fees, donations, entertainment, etc.
Whilst generally ineligible, legal costs in relation to patents may be claimable for R&D if appropriately registered. For more information, see our article on whether you can claim your patent costs.
Ineligible Expenses
Several categories of expenditure are explicitly not able to be included in an RDTI claim even if it forms part of your R&D project and activities. These include:
Interest expenses
Expenditure that is not at risk - i.e. expenses where a company is not bearing the financial risk as it received, or expected to receive, compensation for the costs it incurred
Costs to acquire a technology or IP that is further developed through the R&D activities (termed ‘core technology’ expenditure)
Capital costs – i.e. the costs to acquire a tangible depreciating asset
Expenditure incurred to acquire or construct, extend or alter/improve a building (or part of a building)
Costs on overseas R&D activities where these are not covered by an Advance Overseas Finding.
Other Considerations
Other items to consider when assessing the expenses you can claim via the RDTI include:
The decline in value of assets used to conduct R&D activities can be claimed if they follow the Division 40 (ITAA 1997) tax treatment, and are not in relation to buildings acquired or constructed, and have not been deducted via the Instant Asset Write-off provisions.
Expenditure can be claimed on R&D expenditure that was incurred in relation to a grant, or as feedstock. However, a clawback calculation is required to determine the additional assessable income to clawback the incentive component of the R&D offset being claimed.
Contributions to a Cooperative Research Centres (CRC) project, as part of a registered R&D activity, are claimable and are not subject to any grant clawback calculations.
If the R&D expenditure claimed, whether it is salaries of key employees or overhead costs, is a payment to an associate, these costs need to have been physically paid by the end of the relevant financial year. Otherwise, additional calculations are required to ensure the correct benefit is claimed in the correct year.
For advice on what costs are eligible R&D expenditure in your specific circumstances, please contact our experts.