The Cost of Time When Claiming the R&D Tax Incentive: Salaries

February 18th, 2016

entrepreneur-593378_960_720One of the areas that many R&D Tax Incentive claimants miss out on in the initial stages of undertaking eligible R&D activities is valuing the time spent on core activities. If you are not paying salaries this year as you are trying to keep costs low whilst you commence your R&D start-up business, you may want to think again.

To elaborate, salaries – including that of management and support staff – are an example of R&D Expenditure. However, it is important to note that Directors fees are not eligible under the R&D Tax Incentive. The R&D Tax Incentive reimburses up to 43.5% of eligible R&D costs, thus if staff are spending most of their time doing R&D then an annual salary should definitely be considered. It is best to pay a salary before the 30th of June in order to accurately value the contribution to R&D in a company, which is evidenced by payment of the PAYG tax payable in mid-July. In addition, the associated superannuation guarantee levy associated to any salaries paid should also be paid to evade any penalties to your company.

Essentially, salaries as a type of R&D expenditure includes expenditure to the extent that it is incurred on eligible R&D activities for those of your employees engaged directly in carrying out an eligible R&D activity. The expenditure may consist of:

  • salaries
  • wages
  • allowances
  • bonuses
  • overtime and penalty rate payments
  • annual, sick and long service leave
  • superannuation fund contributions (which are otherwise deductible under section 690-60 of the ITAA 1997)
  • payroll tax and workers compensation insurance premiums.

The 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.

Moreover, you may experience a number of administrative costs and overheads as a consequence of conducting R&D activities and hiring R&D staff. For instance, you may have overheads, such as rent, light and power, property rates and taxes, cleaning and certain types of insurance, to the extent they are expenditure incurred on eligible R&D activities. However, the expenses which you can claim as R&D expenditure are limited to the magnitude they are incurred on R&D activities.

Ultimately, the benefits by way of a tax refund or reduced tax payable are a very valuable incentive to innovate in your business. As can be seen above, there are many rules pertaining to what can and cannot be considered as eligible expenses under the scheme. Thus,  a company may wish to seek external assistance to help identity their R&D eligible activities and expenditure. Many accountants are not acquainted with the ins-and-outs of the R&D Tax, thus you may wish to consider a consultant that specialises in the area. Swanson Reed is a registered tax agent specialising in the R&D Tax Incentive – contact us today to discuss your eligibility and learn more about how the R&D Tax Incentive may benefit your business.