Salaries, wages, income or pay – whichever title takes your preference, the question remains the same. Are salaries eligible when claiming the Research and Development (R&D) Tax Incentive?
In short, the R&D tax incentive is designed to encourage firms to conduct research and development and is accessed via your company income tax return. It operates by enabling you to gain a credit on your tax payable, or, if your turnover is less than $20 million per year and you are in tax loss, to access up to 43.5% of your eligible R&D expenditure as a tax refund. However, determining eligibility of both R&D activities and R&D expenditure is often where clients begin to get confused.
It might surprise some that salaries (including management and support staff) are an example of R&D Expenditure. However, it is vital to understand that Directors fees are not eligible under the R&D Tax Incentive. As described above, the R&D Tax Incentive can reimburse up to 43.5% of eligible R&D costs. Therefore, if staff are spending most of their time undertaking R&D then an annual salary should definitely be considered.
Fundamentally, 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.
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. The associated superannuation guarantee levy associated to any salaries paid should also be paid to evade any penalties to your company.
As can be seen above, there are many rules regarding what is considered eligible expenditure. Thus, a company may wish to seek specialist advice to help identity their R&D eligible activities and expenditure. The benefits by way of a tax refund or reduced tax payable are a very valuable incentive to innovate in your business, please do not hesitate to contact AusGrant today if you would like to learn more about the generous R&D tax incentive.
