Claiming employee salaries and on-costs for R&D

Introduction

Employee salaries and associated on-costs often represent the single largest component of an R&D claim under Australia's R&D Tax Incentive. Getting the apportionment right is not just a matter of mathematics; it requires clear, contemporaneous evidence that links each person's time to registered core or supporting activities. The Australian Taxation Office (ATO) and AusIndustry have jointly set out strict substantiation requirements, and claims that fail to meet them may be reduced or disallowed at review.

This guide walks you through the process step by step. It is general information only, not tax, financial, or legal advice. Every business's circumstances are different, and the rules can change. You should always confirm your position with a registered tax agent who understands the R&D Tax Incentive. GrantsMAX does not lodge or file claims; it prepares an evidence-backed pack that your accountant reviews and lodges, and the business always owns the claim.

Because labour costs are so material, a detailed understanding of what may be eligible, how to track time, and how to substantiate the claim is worth the effort. In the sections that follow, we cover the prerequisites, the core processes, and the most common pitfalls.

Prerequisites

Before you begin apportioning employee salaries to R&D, make sure you have the following in place.

Registered R&D activities. You must have registered your eligible R&D activities with AusIndustry for the relevant income year before you can include associated costs in your tax return. Registration is a legal prerequisite, not a post-hoc step. If you are unsure whether your projects constitute core or supporting R&D activities for the purposes of the program, review the definitions on business.gov.au or engage an advisor. GrantsMAX's eligibility assessment can also help flag areas of risk using your own accounting data.

A clear picture of your R&D workforce. Identify every employee who will spend time on registered activities. This may include engineers, developers, scientists, product designers, lab technicians, and even some supervisors or administrators whose work directly supports the R&D.

A reliable time-recording system. The ATO expects contemporaneous records that capture the hours or percentage of an employee's working time spent on R&D. We will cover this in detail below.

An understanding of eligible on-costs. In addition to base salary or wages, you may be able to include mandatory on-costs such as superannuation guarantee contributions, payroll tax, workers' compensation insurance, and other levies that are directly connected to the employment. We outline the rules in the next step.

Document management. You will need to keep invoices, contracts, and payment records for any external costs, but for employee costs the key documents are timesheets, employment contracts, and payroll registers. GrantsMAX builds an evidence trail across your emails, invoices, and timesheets, tying each cost line to its source.

A registered tax agent. Only a registered agent can review and lodge your R&D claim. Even if you use a tool like GrantsMAX to prepare the pack, the lodgment responsibility rests with you and your agent.

Warning: Starting to claim employee costs without contemporaneous records is one of the most common reasons for claim adjustments or rejections. Do not skip the record-keeping step.

Step 1: Understand which employee costs are eligible

Under the R&D Tax Incentive, you may be able to claim salary and wage costs for employees who perform R&D activities, both core activities (experimental activities whose outcome cannot be determined in advance) and supporting activities (activities that are directly related to core R&D). The ATO's guidance on the R&D Tax Incentive explains that eligible expenditure includes amounts paid to employees for the time they spend on these activities.

Specifically, the following may be eligible:

• Base salary, wages, and leave entitlements for time spent on registered R&D activities.
• Superannuation guarantee contributions made on behalf of those employees.
• Payroll tax where applicable, apportioned to the relevant proportion of salary.
• Workers' compensation insurance premiums that relate to those employees.
• Fringe benefits tax on benefits provided to employees, but only to the extent the benefit relates to R&D work and is not already claimed elsewhere.

The key principle is that the cost must be directly attributable to the performance of R&D activities. Administrative overheads, general management time, and costs that would have been incurred regardless of the R&D are not eligible. The ATO requires that you exclude any portion of salary that is attributable to non-R&D duties.

For example, if a software engineer spends 60 per cent of their time on a registered R&D project and 40 per cent on business-as-usual maintenance, only 60 per cent of their total salary package (including superannuation and other on-costs) may be included in the claim.

Pro tip: Many businesses underestimate the amount of time their staff spend on eligible activities. Use detailed activity logs rather than guesswork. Over-claiming, however, can trigger ATO scrutiny, so accuracy is essential.

A note on contractors: this article focuses on employees, but the rules for contractors differ. External contractor costs may also be eligible, but they are subject to different substantiation rules. We recommend reviewing the ATO's contractor cost guidance separately.

Step 2: Link employee time to registered R&D activities

The second step is to establish a clear, defendable link between each employee's time and the registered activities. This requires you to:

1. Map your registered activities to roles. For each registered activity, identify which roles within your organisation contribute to it. A single employee may contribute to multiple activities, and that is fine as long as you can show the split.
2. Define "R&D time" precisely. Decide what constitutes R&D time versus non-R&D time. For core activities, this might be the time spent conducting experiments, building prototypes, or testing hypotheses. For supporting activities, it could be time spent on literature reviews, data analysis, or project management that is integral to the R&D. The ATO's guide to R&D activity eligibility provides examples.
3. Train your employees. Staff need to understand what to record and why. Provide them with clear definitions and examples of eligible activities versus ineligible ones. This training should be documented.
4. Review allocations regularly. At least quarterly, review the allocation against project progress. If an activity's scope has shifted, update the records and, if necessary, register a new activity with AusIndustry.

GrantsMAX for R&D-active startups, GrantsMAX for technology companies, and GrantsMAX for manufacturers illustrate how different sectors often have diverse R&D roles. Across software, manufacturing, or clean energy, the principle remains the same: only time that directly advances the experimental activity counts.

Step 3: Keep contemporaneous timesheets and records

The ATO places a heavy emphasis on contemporaneous records, that is, records made at or near the time the work is performed. Timesheets are the most common form of evidence, but they must meet certain standards to be acceptable.

Characteristics of robust timesheets:

• Specificity: Each entry should describe the R&D activity undertaken, not just "R&D". For example, "Prototype testing for Project Alpha-iteration 3" is far better than "R&D work".
• Time in hours or minutes: The ATO prefers records that show actual hours spent rather than a retrospective percentage estimate.
• Regular completion: Ideally, timesheets are filled out daily or weekly. Monthly catch-ups are far less persuasive.
• Approval: Have a supervisor or project manager review and approve timesheets to add an extra layer of verification.
• Electronic timestamp: Digital timesheet systems automatically log when an entry was created or modified, which reinforces contemporaneity.

The ATO has made it clear in its guidance and public rulings that estimated or reconstructed records created after the end of the income year are not acceptable as primary evidence. If you do not have contemporaneous records, you risk having the entire employee cost claim disallowed.

GrantsMAX's secure read-only connectors can pull data from your Microsoft 365 or Google Workspace, which may include calendar entries and email trails that support the timesheet records. While these are not timesheets per se, they can form part of a broader evidence picture.

Warning: A common shortcut is to ask employees at year-end to guess their R&D percentage. The ATO routinely challenges such estimates. Contemporaneous records are a must.

Step 4: Apportion salaries and on-costs systematically

Once you have reliable time data, the next task is to calculate the apportionment of each employee's total salary package between R&D and non-R&D activities.

The most transparent method is the actual hours method:

• Take the total number of hours worked by the employee in the income year (including leave).
• Calculate the number of hours spent on R&D from the timesheets.
• Compute the ratio of R&D hours to total hours.
• Apply that ratio to the employee's total salary, wages, superannuation, payroll tax, workers' compensation, and other on-costs.

If timesheets record hours on a weekly or monthly basis, you can aggregate them across the income year.

An alternative method, which the ATO may accept in some circumstances, is the fixed percentage method. Under this method, an employee may be assigned a consistent percentage of R&D time, for example 70 per cent, based on documented role descriptions and regular reviews. However, this method still requires some form of periodic verification, and the percentage must be supportable by evidence such as project plans, meeting minutes, or milestones. The ATO typically scrutinises fixed percentages more closely because they can mask fluctuations in actual effort.

For on-costs, the general rule is to apply the same apportionment ratio as for base salary unless a particular on-cost has a different direct link. For example, workers' compensation premiums may be based on actual wages, so the R&D portion can be calculated similarly. Superannuation guarantee contributions are directly tied to salary, so the same percentage applies.

GrantsMAX's AI Application Pack Drafting can pull salary data from your Xero, MYOB, or QuickBooks and help structure this apportionment according to the timesheet data you supply. But remember: the software prepares the draft; your accountant must verify and finalise the numbers.

Pro tip: If an employee works on multiple eligible R&D activities, you do not need to track time at the activity level unless the apportionment is significantly different across activities. However, having that granularity can strengthen your claim if reviewed.

Step 5: Assemble substantiation and evidence

A successful claim is not just about having the numbers; it is about having the evidence to back them up if the ATO or AusIndustry reviews your claim. The audit-ready pack should include:

• A narrative for each registered activity: Explain what the activity is, why it is experimental, and how employee time contributed. GrantsMAX drafts these narratives for you.
• A cost breakdown table: For each employee, show the total salary, R&D percentage, and calculated eligible amount.
• Supporting evidence index: A list that ties each cost item to its source document: timesheets, payroll reports, employment contracts, superannuation statements, etc. The Audit-Ready Evidence Trail feature indexes these sources.
• Activity records and registration: Your AusIndustry registration number and any correspondence.
• Approval documents: Timesheets signed by managers, project plans, meeting minutes.

Keep these records for at least five years from the lodgment date, as required by law.

Linking each cost line to a specific timesheet or payroll entry may seem painstaking, but it transforms a claim from a lump sum into a transparent, verifiable package. When the ATO sees this discipline, the review process is often smoother.

Step 6: Work with your registered tax agent to lodge

The R&D Tax Incentive is administered jointly by the ATO and AusIndustry, but the final claim is made in your company tax return. A registered tax agent must review the claim before lodgment. The process typically works like this:

1. Preparation: You (or a tool like GrantsMAX) collate all the information and prepare the pack. GrantsMAX's Accountant Review & Lodge Workflow lets you share a ready-to-review pack directly with your accountant.
2. Review: Your tax agent examines the pack, checks that the apportionment aligns with the records, queries any anomalies, and may suggest adjustments.
3. Refinement: Based on the agent's feedback, you might need to provide additional evidence or clarify activity descriptions. The agent then finalises the numbers.
4. Lodgment: The agent lodges the tax return, including the R&D Tax Incentive schedule, with the ATO.
5. Record retention: Keep all records for the statutory period.

Remember, the business always owns the claim, and the registered agent is responsible for the lodgment. Never let a self-styled consultant who is not a registered tax agent lodge your claim; only a registered agent can do so.

GrantsMAX also supports an Annual Refresh for businesses that claim annually. It can carry forward your structure and update the data from your latest accounting records.

If you are an accountant or bookkeeper servicing multiple clients, the Accountant Channel enables white-label preparation across your client base.

Pro tips and common pitfalls

Throughout this guide, we have flagged several warnings. Let us summarise the most critical do's and don'ts.

Do:

• Start timesheets from day one of a registered activity.
• Use specific activity descriptions.
• Keep timesheets electronic, with automatic timestamps.
• Apply the same apportionment ratio to salary and all eligible on-costs unless there is a clear reason not to.
• Engage a registered tax agent early, ideally before the income year ends, so they can advise on record-keeping.

Don't:

• Reconstruct timesheets after the fact.
• Assume admin or general management time is eligible.
• Double count costs: for example, do not claim an employee's salary under both the R&D Tax Incentive and another government grant for the same work.
• Forget to register your activities with AusIndustry before claiming.
• Mix up the rules for employees and contractors.

One area that often trips up claimants is the "substantially all" concept, common in other jurisdictions like the US. In Australia, while there is no equivalent "substantially all" test, you still need to show that the time claimed is directly attributable to R&D. The ATO may question claims where only a small fraction of an employee's time is R&D if the apportionment method is imprecise. Good record-keeping resolves this.

How other countries handle R&D employee costs

While this guide focuses on Australia's R&D Tax Incentive, the principles of apportioning employee salaries and on-costs to R&D are consistent globally. For example, the US Internal Revenue Service defines qualified research expenses (QRE) to include employee wages for qualified services. Similarly, the UK's HMRC outlines what staff costs can be claimed for R&D Corporation Tax relief. In Ireland, Revenue's R&D tax credit guidance stresses the importance of time-tracking systems. Canada's SR&ED program, as explained by CPA Canada, also allows eligible employee salaries and on-costs. US payroll provider ADP notes that employee wages are often the largest component of R&D claims. Tax advisory firm Withum discusses the 'substantially all' rule for apportioning employee time. Bloomberg Tax provides in-depth analysis of Section 41 rules and deductible R&D expenditures. Research by the US National Science Foundation shows that labor costs account for over two-thirds of US business R&D, reinforcing the materiality of getting salary apportionment right.

These international examples demonstrate that robust time records and careful apportionment are universal best practices. However, each jurisdiction has its own legislation and rulings, so your Australian claim must comply with ATO and AusIndustry requirements. Use the overseas examples to benchmark the thoroughness of your systems, not as legal references.

Key takeaways and next steps

Claiming employee salaries and on-costs for R&D is a powerful way to offset the cost of innovation, but it requires discipline. The most critical success factors are:

1. Register early with AusIndustry and document your activities as they evolve.
2. Implement contemporaneous timesheets that record actual hours spent on specific R&D activities.
3. Apply a systematic apportionment that aligns with ATO expectations and retains an audit trail.
4. Engage a registered tax agent early to review your approach and lodge the claim.
5. Keep all records for at least five years, the ATO can review claims several years after lodgment.

GrantsMAX simplifies the preparation side by connecting to your live accounting data, helping map costs, and drafting the narratives and evidence packs that your accountant needs. But the rigorous foundation of good record-keeping ultimately rests with you.

If you are ready to explore what grants and incentives your business may be eligible for, or if you want a smarter way to prepare an R&D claim for your accountant, join the GrantsMAX waitlist today. We are building the agent that makes government funding accessible, without the high fees or opaque processes.