Costs paid to people (Salaries and Contractor payments) or outsourced service providers to undertake activities will be the primary costs that are eligible as R&D expenditure. There will also be costs incurred directly as a result of the project (for example materials and equipment) and assets used during the experimentation.

However, people and equipment do not operate in a vacuum, and there are costs associated with them conducting their R&D activities which are incurred as a result of the time spent on those activities, or the space allocated to conducting them, or a rate of consumption. These costs are overheads, and they are (from the ATO’s point of view) often contentious.

We talk about these as ‘Consumption of Resources’ that are required to get the job done as it helps the mindset when considering how much of them should be included. 

Some are straightforward such as software subscriptions for systems that are used exclusively by the development team, so the rate of consumption is the same as the ratio of R&D being conducted by those staff. If there are 5 staff using the software, and only 3 of those are working on the project, and the eligible activities took 2 months to conduct, then the ratio should be (2/12)*(3/5) = 0.1 or 10% of the cost of that subscription.

If everyone has an equal space allocation in the building, but there are 5 further staff that don’t do any R&D, the proportion of rent, rates, and services would be (2/12)*(3/10) = 0.05 or 5% of those costs. However, if the space allocated to the project is different (for example a prototype build that takes up half of the floorspace in a manufacturing area such that it can’t be used for anything else during the full year) then 50% of the applicable costs of that manufacturing area would be eligible. So, it’s important to understand what resources are required to get the job done, and what is consumed as a result of the R&D activities.

Note that proportioning a salary ratio is not accepted as a method. Resources are not consumed proportionately to how much someone is paid, so their effort ratio is key to determining this. We will also ask for other details (start date, finish date and part time arrangements if appropriate) so that we can turn that effort ratio into a consumption ratio.

Even if people aren’t paid a salary, they will incur operational costs and consume resources. As long as those costs are incurred to conduct the eligible activities, they can be considered as eligible expenditure.

This means that when we are looking at the appropriate ratio to apply, we will need to know who (or what) is using the resource and what is the correct proportion of that usage that is related to the eligible R&D activities.

When categorising costs, especially supporting activity costs, consider where they are included in the P&L. For example, a competitor survey of features undertaken as part of an ideation phase recorded into ‘Marketing’ may mean that it gets missed during an assessment of eligible expenditures. The same can happen with workshops and conferences, customer trials run by sales staff etc.

Consider ‘tagging’ expenditures so that it is easy to run a report on costs incurred, the same way that time spent on a project can be reported.