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  • Methods of apportionment

    Preferably, your accounting and record keeping processes should enable the tracking of expenditure to your R&D activities on a 'real time' basis, so apportionment methodologies are only used in limited situations. However, we recognise that this is not always practical for companies, especially smaller companies where R&D activities only make up a small portion of the company's activities.

    The appropriate basis of apportionment needs to be determined for each expenditure type based on all of the following:

    • the type of R&D activities you are conducting
    • how you are conducting your R&D activities
    • the type of expenditure you have incurred.

    If the expenditure is incurred over a period of use (for example, utilities such as electricity, decline in value of R&D assets), an apportionment based on the time spent by employees on R&D activities over total company employee hours may be more appropriate than a dollar value of R&D salary over total company salary. A dollar value can inflate or deflate an amount you can claim, because employees within a company are unlikely to be renumerated consistently. A dollar value is unlikely to be representative of time spent.

    Expenses such as rates, land taxes, rent and lease costs which are mainly for the area used for R&D activities, may be best apportioned on a basis that reflects the area of use. How many staff and time spent is irrelevant for determining the extent to which this type of expenditure has been incurred on your R&D activities and would therefore not represent a reasonable basis of apportionment.

    The apportionment basis of R&D salaries over total company salaries, for expenditure, will only be considered reasonable under the R&D tax incentive where the expenditure is based on how much an employee earns (for example, payments of super, worker's compensation and payroll taxes) and if these amounts can not be separately determined by reference to a company's accounts.

    Using the decline in value costs for assets used in R&D activities as a proportion of total company decline in value, to apportion all expenditure (including expenses unrelated to the use of the R&D asset), is not an appropriate apportionment methodology.

    Choosing the correct apportionment method

    When working out your basis of apportionment for each expenditure type, you can ask yourself if the apportionment method best reflects the extent to which the expenditure has been incurred on my R&D activities.

    If the answer is yes and you can explain why it is the best method of apportionment for this type of expenditure, then it is likely that you have chosen a reasonable basis of apportionment.

    If you are unable to answer yes to this question, you should not use this basis of apportionment.

    If you are still unsure and would like certainty from us, we can provide you with a private binding ruling. For more information about the individual advice we offer, refer to Getting help.

    Examples of acceptable records

    The following list shows some of the types of records kept for tax or business purposes generally, that may help you to substantiate your R&D claim:

    • project plans and design specifications
    • contracts between yourself and people conducting work for you
    • contracts between yourself and a third party for which you have agreed to develop a product
    • progress reports
    • sales and purchase tax invoices
    • receipts
    • bank statements
    • diaries
    • expenditure journals and cash books
    • R&D working papers
    • financial statements
    • apportionment based log books
    • credit card statements
    • bank deposit books and cheque butts
    • bank account statements employee records such as copies of tax file number declarations, wage books, time sheets and super records
    • motor vehicle expenses, including logbooks
    • debtors and creditors lists
    • records of depreciating assets
    • stocktake records
    • records of any private use in relation to assets or other purchases
    • timesheets.

    Note: This is not a complete list.

    Compliance and monitoring

    We work together with AusIndustry to undertake complementary risk assessment and compliance work. AusIndustry's compliance work focuses on the eligibility of R&D activities and our compliance work focuses on the R&D tax offsets allowable for those activities.

    It is your responsibility to show us that the basis for calculating your notional R&D deduction produces, as far as practicable, accurate claims consistent with the law and its interpretation. You must substantiate a claim for R&D expenditure by reference to reliable source documents.

    If you make incorrect claims you may incur penalties. For more information about our compliance and monitoring, refer to:

    See also:

    More information

    For information on registration, eligibility of R&D activities and findings, contact AusIndustry

    • Visit the ‘Contact Us’ page on the business.gov.au website for details on how to contact AusIndustry via phone (13 28 46), email or web chat.

    For information on eligible entities and amounts you can claim, contact the ATO:

      Last modified: 28 Feb 2017QC 26104