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R&D Timekeeping and Cost Allocation for the R&D Tax Incentive
Salary expenditure often makes up the bulk of a company’s R&D Tax claim, so it is imperative that companies can effectively track time spent on eligible R&D activities. In this article we outline the requirements and provide some guidance regarding different methods of cost allocation.
Whose time is eligible?
Why is R&D timekeeping important? In general, expenditure can be included in the R&D cost calculation where it has been incurred on one or more registered R&D activities. In the case of employees, costs for the time spent working on these activities may be included. This can include time spent by researchers or technical staff working directly on the experimental activities, support staff conducting more straightforward activities that required to facilitate the Core R&D Activities (e.g. record-keeping, setting up experiments, manufacture of prototypes etc.) and even supervisors who are monitoring such employees. These principles also apply to internal or external contractors who may be working on both R&D and non R&D activities on your behalf.
Are timesheets required?
How salary expenditure is allocated to R&D depends on the specific circumstances of the company and there is no specific format required by the ATO in doing so. Allocation of time to R&D is not a one size fits all approach and what is suitable for a start-up will not be suitable for a large multinational corporation. Ideally, a company will keep sufficiently detailed timesheets that are sufficient to determine who, worked on what activities, when and for how long.
So how does R&D timekeeping and cost allocation fit into the picture? As a self-assessment programme, the responsibility is placed on the company to keep records to demonstrate, if required, that their notional R&D deduction represent the actual cost of the R&D activities conducted in a particular year.
Alternative methods of time allocation
In the absence of timesheets, it may be impossible to determine the actual time spent by an employee on registered R&D activities during a particular period. Going through the list of employees at the end of the year and assigning them an arbitrary R&D percentage will likely fail at review or audit and should be avoided. This also applies to ‘conservative’ estimates.
- The ATO does acknowledge that, in some instances, it may not be practical for a company or a particular employee or contractor to keep timesheets. In such a case it is still incumbent on the company to employ some other method (such as a summary sheet produced through examination of a diary) as long as the information is as accurate and reliable as a timesheet. According to the ATO, situations where it may be impractical to keep timesheets might include:
- having a large number of employees making it difficult to retain individual timesheets
- when an employee works exclusively on eligible R&D activities
- when an employee works on long term projects which are mostly eligible R&D activities and the ratio of time between eligible and non-eligible activities is fairly constant – in this case, the employee could maintain a diary of activities.
Even in the above circumstances, care should be taken to examine each individual situation prior to inclusion in the R&D calculation. For example, if an employee who works ‘exclusively on eligible R&D activities’ attended a week-long company conference that was not related to R&D, an appropriate reduction in their R&D hours may be appropriate.
To be safe, anyone who works directly on R&D activities, or on other activities that provide direct support to R&D activities should be involved in R&D timekeeping. This means that you need to keep some records of time spent on such activities. In some limited circumstances, however, it may be appropriate to allocate a particular employee based on some calculation with respect to the R&D effort of another individual or individuals, if it is reasonable to do so. You may have to keep additional records to demonstrate why your allocations have been made on the most reasonable basis.
What can be included in salary expenditure?
As the eligible R&D expenditure calculation is made on an actual cost basis, you must ensure that that actual cost of an employee is reflected correctly. This means using their actual payroll costs as a basis for calculation of an hourly rate, as opposed to an internal costing rate etc. Salary costs may include other costs of employment such as allowances, bonuses, overtime and penalty rate payments, annual, sick and long service leave, superannuation, payroll tax, workers compensation insurance premiums and fringe benefits. For inclusion in R&D expenditure, amounts incurred to an associated entity must be calculated on an arm’s length basis.
Amounts received as part of JobKeeper payments should be taken into account prior to allocation of salary expenditure to R&D as this expenditure will not be ‘at-risk’ and is therefore ineligible under the relevant legislation.
Although the methods and requirements for allocating salary expenditure may seem overly arduous, it is worth noting that, being able to accurately allocate people’s time to R&D may actually increase your claim, lead to efficiencies during your end of year claim preparation and allow better budgeting and forecasting.
Confused about R&D timekeeping and cost allocation requirements? Not sure what the best time-tracking approach is for your business? Talk to one of Fullstack’s expert R&D consultants and set yourself up for success.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.