Types of eligible expenditure or depreciation loss

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Eligible expenditure

To be eligible for the R&D tax credit, R&D related expenditure must fall into one of the following categories:

• employee remuneration (salaries and other remuneration of employees doing eligible R&D)
• employee training, recruitment, relocation and travel incurred directly as a result of eligible R&D
• depreciation of tangible assets used in conducting eligible R&D
• the cost of materials incorporated into prototypes
• overheads
  • certain overheads relating to administration, human resources, repairs and maintenance, cleaning and security
  • rates, utilities, insurance and leasing of buildings, plant and equipment
• items consumed in eligible R&D
• net cost of items processed or transformed in eligible R&D activities, and
• contract payments to an entity or person for eligible R&D services performed on behalf of the claimant.

Details of the rules surrounding deductibility, including deferral of deductions and prepayments, can be found in deductibility of expenditure.

Record keeping

You must retain sufficient documentation to support expenditure claimed for the R&D tax credit.

Where you have apportioned expenditure, records should clearly show how you have done this.

Find out more about keeping records to support your claim.

Employee remuneration

The following remuneration may be eligible for the credit, if it is to an employee conducting SIE or support R&D activities:

• salary or wages
• allowances
• bonuses
• commissions
• extra salary
• overtime
• fringe benefits
• holiday pay
• long-service pay
• ACC employer levy.

Superannuation contributions, fringe benefit tax, specified superannuation contribution withholding tax and insurances paid on behalf of these employees are also eligible.

If an employee works part-time on eligible R&D, the tax credit only applies to the remuneration for the portion of the employee's time that was spent on the eligible R&D.

Remuneration payments to an employee who is also a shareholder are eligible for the tax credit on the same basis that applies to ordinary employees.

Employee's duties

Whether an employee is doing eligible R&D is based on their actual duties, rather than on their job title.

Record keeping

Where your employee undertakes other activities in addition to work on eligible R&D, you must be able to demonstrate you have used an appropriate method to apportion the employee's time.

Appropriate methods might be based on the dates when eligible activities were undertaken, or on records such as timesheets, job cards, or other time recording data.

If you can provide supporting evidence that work patterns were consistent over a period, apportionment might be based on information derived from a sample period.

Find out more about keeping records to support your claim.

Employee training, recruitment, relocation and travel

Training, recruitment, relocation and travel can be eligible expenditure for the R&D tax credit, provided the costs were incurred as a direct result of eligible R&D activities.

If an employee is not dedicated to eligible R&D activities but they are being recruited, relocated or trained for work which includes eligible R&D, apportionment of these costs is appropriate. If the decision to recruit, relocate or train is entirely for activities which are not eligible, no part of the costs may be claimed for the tax credit.

Depreciation loss

Tangible property

Annual depreciation loss on tangible property used in doing eligible R&D is eligible. Find out more about what expenditure is excluded from a claim?

Depreciation loss attracts the tax credit in two circumstances:

• for "facilitative" assets that are used in the R&D process but that are not the object of the R&D (for example a building the eligible R&D is conducted in, or test equipment used to analyse results, such as a spectrograph)
• for certain "end result" assets that are the object of the R&D, that are used in the R&D process (for example prototypes used for testing) and that are also to be used in the business's other activities.

Find out more about capital expenditure on depreciable assets that are the object of R&D.

End-result tangible assets

The R&D tax credit may be claimed for depreciation on depreciable tangible assets:

• developed as the object of the R&D activities
• which are also to be used in other areas of the business, other than eligible R&D
• while they are being used in the eligible R&D process (for example in an experiment).

For depreciation loss to be claimable the construction itself must be either an SIE activity (a sufficiently innovative construction technique), or a support activity (wholly or mainly for the purpose of, required for, or integral to the SIE activity).

If the expenditure incurred in the development of the end-result was eligible for the credit as it was incurred, then the tax credit does not apply to depreciation of an end-result asset.

Exception - end-result tangible assets written off

There is a general rule that an R&D tax credit cannot be claimed on a depreciation loss that arises if an asset is either sold for less than its tax book value, or if it is written off.

A limited exception may apply if the asset is a failure and is written off. In this case, the tax credit can be claimed for the balance of the costs, provided the conditions in schedule 21, part A, clause 2 and schedule 21, part B, clause 2 are met.

In particular, the asset must be wholly or mainly used in eligible R&D activities and not be used after the R&D activities' end. Development expenditure must not have been eligible for the tax credit.

Find out more about disposal of assets.

No claw-back or loss on sale

To minimise compliance costs, there is no claw-back of credits on disposal of assets for more than their tax book value. When the asset is sold to an associate, the price above the vendor's adjusted tax value does not attract the tax credit in the hands of the associated purchaser.

Generally, any loss on sale or write-off of depreciable property also does not attract the tax credit. There is an exception in relation to certain end-result assets that are failures and written off. Find out more about the exclusion in relation to loss on sale or write-off of depreciable assets.

Pooled property

The R&D tax credit does not apply to depreciable assets in a tax depreciation pool unless the pool consists solely of assets used wholly in conducting the eligible R&D.

End-result intangible assets

Expenditure on seeking to create a depreciable intangible asset as the object of the R&D activities attracts the tax credit when it is incurred. This expenditure would include the cost of labour, materials and depreciation on facilitative assets used in developing the asset.

Materials incorporated into prototypes and plant

The cost of materials incorporated into a trial model or preliminary version of a product or plant is eligible for the tax credit.

Overheads

Overhead expenditure in relation to eligible R&D activity, that takes the form of employee remuneration, consumables and payments to contractors for services, is eligible for the R&D tax credit, but only where the overheads relate to:

• administration of internal business activities
• human resources functions
• repairs and maintenance
• cleaning
• security.

Rates, utilities (including telecommunications), insurance, and the cost of leasing buildings, plant and equipment are also eligible as overheads.

Exclusion

Allowable overheads do not include depreciation deductions, which may only be claimed under the provisions relating to depreciation.

Incurred directly

Overheads must be incurred directly for eligible R&D activities.

For example, while expenditure on cleaning consumables used to clean the R&D facility while the facility is being used for eligible R&D would be eligible expenditure, the expenditure on consumables used while cleaning the HR work area will not be eligible. This is despite the fact that HR spends some of their time supporting the R&D staff.

Remuneration as overhead

Remuneration of employees performing the eligible R&D (SIE activities or support activities) is eligible for the R&D tax credit under the provision applying to remuneration.

Human resources and administration personnel, cleaners, maintenance staff and security officers generally do not perform activities that are either SIE or support activities. Their work is not generally integral to the SIE activities as required in the definition of support activities. Because of this, if their remuneration is eligible, it will be eligible as overheads.

Apportionment

Apportionment is required when overheads are only incurred in part as a result of eligible R&D activities.

Where expenditure or depreciation loss relates to both eligible and ineligible activities, you may only claim for the eligible activities, and you will need to apportion the expenditure.

Record keeping

Claimants must be able to show they have used an appropriate method to apportion costs. Find out more about keeping records to support your claim.

Items consumed by R&D

Items consumed in eligible R&D are eligible for the R&D tax credit. This includes laboratory chemicals and stationery.

Net cost of items processed or transformed by the R&D

For items processed or transformed during eligible R&D activities, only the net expenditure is eligible. The net cost of items is the excess of the cost of the items that are the subject of processing or transformation, over the value of the output.

The value of the output is the sale proceeds when the output is sold in an arm's-length transaction, or if it is not sold, the value is the market value of the output.

Materials

The provision applies to the acquisition or manufacture of raw materials or products that are put through an R&D process. This will often be trading stock and may include:

• fish put through an experimental fish-processing plant
• milk processed into powder in an experimental drying process
• timber cut using a novel technique.

It encompasses the processing of materials or products that do not change during the R&D process, or do change in a manner that is not visible.

Prototypes

This provision is not intended to apply to the initial construction of prototypes, which is dealt with under the capital expenditure or depreciation rules.

Determining market value

The market value of the output should reflect the price that buyers in the open market would be willing to pay for it. This can be obtained by engaging a commercially credible independent professional to value the output.

Contract payments for R&D

When part or all of an R&D project is outsourced, a payment for the R&D to the person or entity performing R&D activities is eligible expenditure, providing it relates to the eligible R&D and is not an excluded expenditure.

This provision applies to payments for both SIE activities and supporting activities, and covers the costs of engaging independent contractors, agency workers and temporary staff to work on R&D.

When the R&D is outsourced to an associate, some of the payment may be ineligible. Find out more about R&D outsourced to an associate.

When work is contracted out, the contractor is generally not eligible for the credit, as they will fail the "on behalf of" test.

Find out if your business is eligible.

Excluded expenditure

Expenditure by a contractor on excluded expenditure, or on expenditure that is subject to limitations, is generally subject to the same exclusions and limitations as if it was made directly by the owner of the R&D.

For example, expenditure overseas by a contractor, or expenditure on internal software development is subject to the same provisions as it would be if the person who commissioned the R&D was doing it themselves. Find out more about the limits on internal software development expenditure and what expenditure is excluded from a claim.

Separation of costs

It is your responsibility to ensure that your claimed expenditure includes only expenditure on eligible activities, and excludes any ineligible expenditure. You may want to consider arrangements with your contractors to identify total eligible expenditure for each eligible project.

Except where they are an associate, a contractor's profit margin is eligible expenditure, and does not need to be disclosed.

R&D outsourced to an associate

If you outsource your eligible R&D to an associated person, you can only claim the tax credit for the lesser of:

• the amount you actually paid to the associate, or
• the eligible expenditure the associate incurred in third party transactions.

This requirement means you cannot claim the tax credit for any of the associate's profit margin, and the associate will need to record categories of expenditure on eligible R&D in the same way as they would if they were doing the R&D on their own behalf.

Find out more

• Deductibility of expenditure
• Using listed research providers
• Industry research co-operatives (IRCs) and their expenditure
• What expenditure is excluded from a claim?

 

Date published: 02 Nov 2009

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