One of the areas that many R&D Tax Incentive applicants lose out on in the early stages of a new company undertaking eligible R&D activities is valuing their time spent on undertaking core activity experiments.
I was on a call with a potential new applicant and after getting an idea on what has been spent on materials used in the experiments, the conversation turned to how much time had been spent. In terms of hours, it was a significant investment. When I asked how much much of the time had been actually been paid, the answer was “If I had to charge myself out at commercial rates, it would be a small fortune”. Prompted again as to how much had actually been paid, the answer was “nothing – it is all sweat equity”.
The expenses claimable for time when it comes to employees is generally straight forward. The salary and related costs are multiplied by the percentage of time spent on R&D activites with the percentage calculated on time records kept by the applicant. These figures are quite easy to substantiate.
With payments made to associates, only payments actually paid during the financial year can be claimed. This change was made a couple of years ago to stop the practice of journal entries being created to recognise the time spent by associates with payments being made sometime in the future.
If you are in the situation that you do not currently pay yourself, but are undertaking R&D activities, I would suggest that you meet with your accountant/tax agent prior to the end of the financial year and understand whether firstly, you are an “associate” in terms of the definition and secondly, looking at your tax situation as a whole, you should be paying yourself some sort of remuneration.
There are a number of factors to take into account when making a decision around remuneration. You will need to make sure your tax payments and super contributions are also taken into account. A sometimes overlooked aspect is that if you look for any investment/funding, you may need to prove/justify what salaries have been, are being or will be paid.