R&D tax incentive – Timesheets

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Why do we need timesheets for the R&D tax incentive?

Timesheets are essential for the R&D tax incentive because they provide a verifiable record of the hours dedicated to R&D activities, ensuring that claims are accurate, substantiated, and in compliance with the ATO’s requirements for eligible expenditure.  
 
 

What is a timesheet?

A timesheet is a record or document used to track and log the number of hours worked by an employee, often used for payroll, billing, or tracking specific project progress. 
 
 

Would you do a logbook for a car?

Timesheets are to the R&D tax incentive what logbooks are to the Fringe Benefits Tax (FBT) on a car. Just as individuals claim the FBT on a car by maintaining a logbook, typically for a period of three months, to demonstrate their business use percentage, companies should maintain timesheets for their R&D activities.

However, there’s an even greater emphasis on accuracy and detail in the context of R&D. While the FBT on a car might result in claims of a few thousand dollars annually, R&D claims can soar into the hundreds of thousands, or even more. Given the significant amounts at stake, it’s crucial to have robust evidence backing up these claims. Timesheets serve as this vital piece of evidence, ensuring that every dollar claimed is accurate, justifiable, and in line with the ATO’s guidelines. Simply put, they provide the foundation upon which sizable R&D tax incentive claims are built.

Wondering if your timesheet documentation meets the mark? 

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What does the ATO say about timesheets?

While the ATO does not explicitly mandate the use of timesheets or job cards for R&D tax incentive, their guidance places a clear emphasis on their value:

“The most accurate and effective method of allocating time is to maintain timesheets or job cards. If you don’t use these methods, it may be more difficult to show that the allocation of time is accurate. It is your responsibility to make sure you keep sufficient records to support your claims.”

The ATO highlight that timesheets and job cards are the most accurate and effective method for you to allocate time towards R&D.

Without such detailed tools, you may encounter challenges in demonstrating the accuracy of your time allocation. It’s up to you to ensure your record-keeping is robust enough to support your claims.

The ATO also understands the realities you might face. In situations where you have a large team, maintaining individual timesheets for everyone can be a daunting task. Similarly, if you or your employees are solely focused on eligible R&D tasks or are involved in long-term projects primarily dedicated to R&D, a diary logging activities might suffice.

In essence, the ATO’s message is crystal clear: precision is key.

Whether you choose to use detailed timesheets, summary sheets, or activity diaries, it’s crucial that your records are reliable, accurate, and truly representative of the R&D efforts you’re undertaking.

 

What Do the ATO Ask for when they audit you

While the ATO may not explicitly mandate the use of timesheets, it’s crucial to anticipate their expectations during an audit. When diving into the details of your R&D tax incentive claims, guess what’s often on top of their list? Detailed records. Even if not strictly required, in the event of an audit, the ATO will likely request comprehensive documentation that substantiates your R&D activities and associated expenditures.

It’s a classic case of “better safe than sorry.”

By maintaining detailed timesheets, job cards, or activity logs, you’re not only ensuring compliance but also positioning yourself with a robust defence should the ATO seek deeper insights into your R&D claims. In essence, while they might not dictate a specific record-keeping format, what the ATO does value is clarity, accuracy, and evidence that can withstand scrutiny.

 

What else does the ATO recommend on timesheets?

The ATO provides guidance that illuminates the intricacies of apportionment and emphasises the importance of meticulous record-keeping. Let’s break down some of their advice:

  • Project Hours and Expenditure: Even if you’re relying on project hours as a metric for other types of expenses, the ATO suggests that timesheets may still be essential. Even if timesheets aren’t central to justifying the salary component of your R&D claim, they can provide a more substantial foundation for other expenditure types.
  • Varied Work Hours: For employees with non-standard work hours, there’s an added layer of complexity. It’s necessary to determine the exact amount of time dedicated to non-R&D tasks. Furthermore, to understand the cost implications of employing an individual for R&D activities, you’ll need to calculate their hourly rate.
  • Allocation to ‘Other’ Expenditures: If only a part of an employee’s time goes towards R&D under the umbrella of ‘other’ expenditures, detailed timesheets can be invaluable. Even if it’s deemed impractical to have such exhaustive records for every employee, the ATO still expects you to find and employ a reasonable apportionment method, ensuring it accurately reflects their involvement in R&D.
  • Salary Amounts for Associates: When dealing with R&D salaries linked to associates, there’s a need for precision. You are required to calculate the amount at an arm’s length basis, ensuring that only the amounts paid during the financial year are considered for a notional R&D deduction.
  • Choosing an Apportionment Method: Flexibility in choosing an apportionment method comes with responsibility. If you adopt a particular method to gauge your claim, be prepared to defend its reasonability. This might entail keeping supplementary records that underpin your choice.

The ATO’s guidance reinforces one clear message: When venturing into the world of R&D tax incentives, your best ally is a comprehensive and transparent record-keeping system. While there might be flexibility in the approach, the end goal remains unambiguous: clarity, accuracy, and evidence of genuine R&D endeavours.

Want to ensure your R&D claim process is watertight?

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Worked Example: Different Levels of Timesheets for R&D Documentation

To better understand the varying levels of timesheet detail and their implications, let’s consider a fictitious employee named Alice, who works at an innovative tech startup.

Level 1: Guesstimate

Alice thinks back over the past week and roughly estimates she spent about 70% of her work time on R&D tasks. She doesn’t have a breakdown of tasks or specific hours but feels confident in her rough estimate.

Example:

  • Alice’s log: “Approximately 70% on R&D.”

Level 2: Basic Calculation (Inadequate)

After a particularly busy week, Alice reflects on her daily activities. She recalls spending about 7 hours each day over a 4-day workweek on R&D tasks. This roughly calculates to 28 hours of her 40-hour week, or 70% of her time.

Example:

  • Alice’s log: “7 hours/day for 4 days on R&D.”

Level 3: General Weekly Timesheet (Inadequate)

At the end of the week, Alice fills in her timesheet, noting 28 hours in total dedicated to “R&D”. However, she hasn’t detailed what specific R&D tasks were undertaken during those hours.

Example:

Alice’s timesheet:

  • Monday: 7 hours – R&D
  • Tuesday: 7 hours – R&D
  • Wednesday: 7 hours – R&D
  • Thursday: 7 hours – R&D

Level 4: Detailed Weekly Timesheet (Adequate)

Alice decides to be more meticulous about her timesheet. She not only records the hours spent on R&D but breaks down the specific activities and projects she worked on. This provides a clear picture of her tasks and their alignment with R&D efforts.

Example:

  • Alice’s timesheet:
    • Monday:
      • 2 hours – Prototype testing
      • 3 hours – Software code refinement for Project X
      • 2 hours – Team brainstorming for new R&D project
    • Tuesday:
      • 3 hours – Analysis of test results for Project Y
      • 4 hours – Research on latest tech trends
    • Wednesday:
      • 4 hours – Designing a new experiment
      • 3 hours – Collaborative coding session
    • Thursday:
      • 5 hours – Field testing the new prototype
      • 2 hours – Documentation of findings

As seen in Alice’s examples, the depth and clarity of documentation increase from Level 1 to Level 4. While Level 1, 2, and 3 might be considered adequate if paired with robust substantiation, Level 4 offers the most transparent and comprehensive insight into an employee’s R&D activities.

 

Worked Example: Different Levels of Substantiation for R&D Documentation

Alice’s journey continues at the tech startup, and as she progresses, she realises the importance of substantiating her R&D activities. Here’s how her evidence gathering evolves:

Level 1: No Evidence (Poor)

Alice simply provides a verbal report of her hours spent on R&D without any tangible evidence to back it up.

Example:

  • Alice’s claim: “I spent about 40 hours on R&D this month.”

Level 2: Miscellaneous Evidence (Good)

Wanting to offer more clarity, Alice attaches various pieces of evidence to her timesheet, from software development logs to a few pertinent emails.

Example:

  • Alice’s report attachments:
    • Software logs from Project X.
    • Photos from the recent prototype testing.
    • Emails detailing her R&D activities.

Level 3: Daily Detailed Logs (Excellent)

Alice goes a step further by introducing screen capture technology to chronicle her day-to-day activities. Alongside, she maintains detailed software logs for each day she works on R&D.

Example:

  • Alice’s report attachments:
    • Screen capture videos from her coding sessions.
    • Detailed software logs, itemising her tasks each day.

Level 4: Quarterly Time Audit (Excellent)

Alice commits to a rigorous week-long time audit every quarter. For this, she schedules “meetings” on her calendar, each denoting a specific R&D task, then saves her calendar as a PDF at the end of the week.

Example:

  • Alice’s report attachments:
    • PDF of her calendar from the audit week, showing detailed R&D tasks.
    • Notes and summaries from each R&D session.

Level 5: Comprehensive Documentation (Bonus)

Alice assembles a portfolio that not only highlights her R&D activities but also her role and qualifications. It includes her job description, a summary of her specific R&D tasks, and her résumé showcasing her qualifications and years of relevant experience.

Example:

  • Alice’s report attachments:
    • Detailed job description with R&D-specific roles.
    • Her résumé highlighting her qualifications and relevant R&D experience.

In each level, the depth and clarity of Alice’s documentation increase, offering a more robust and transparent view of her involvement in R&D activities.

 

Ready to deep dive into the intricacies of R&D timesheet compliance?

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What about timesheets for contractors?

When it comes to R&D documentation, contractors can sometimes be an area of confusion. Typically, contractors operate at arm’s length, which can lead to a misconception that they’re not bound by the same record-keeping requirements as employees. However, the nuances lie in the relationship between the contractor and the company.

 

Contractors at Arm’s Length

For contractors with no direct association with your company, the R&D documentation relies heavily on the quality and specificity of their invoices. As these contractors are considered independent and their agreements are typically on a commercial basis, timesheets might not be always mandated.

However, a prudent approach would involve detailed invoices from such contractors. These invoices should specify the nature of R&D work, hours committed, and any other relevant information that solidifies the R&D claim.

Associate Contractors: Essentially Employees in Disguise

When contractors have an association with your company – be it familial, financial, or structural – the dynamics change. These associate contractors are essentially seen in the same light as employees when it comes to R&D claims.

For Alice and her tech startup, if they engage an associate contractor, it’s vital they maintain rigorous documentation akin to that of an employee. This means detailed timesheets, clear breakdowns of tasks, and robust substantiation of all R&D activities. In essence, for R&D documentation purposes, these associate contractors should be treated no differently than Alice or her colleagues.

Ready to Navigate the R&D Tax Incentive Maze?

R&D tax incentives are an invaluable opportunity, but navigating the intricacies can be overwhelming. Whether it’s managing employee timesheets, documenting contractor work, or ensuring compliance, the task is colossal.

At Bulletpoint, we’ve walked this path for over a decade. Our specialisation lies in guiding businesses like yours through the maze of the R&D tax incentive. Our client reviews and our success rate stand as a testament to our expertise, with an average rating of 4.8 stars from over 250 Google reviews and a proven track record with over 500 R&D claims successfully lodged.

But more than just our knowledge, it’s our approach that sets us apart. We’re passionate about what we do, and we make sure to cut through the jargon, helping you truly understand R&D in government terms. We’re not just here to assist; we’re here to educate, guide, and ensure your R&D claims are not just compliant, but optimised.

If you’re serious about ensuring your R&D claims stand up to scrutiny and want a partner who’s as invested in your success as you are, look no further.

📞 Give us a call on 1300 658 508 or 📅 book a meeting with Ben Cusack directly here to start your journey with Australia’s highest-rated R&D tax consultant.

Remember, in the intricate world of R&D tax incentives, expertise isn’t a luxury—it’s a necessity. And at Bulletpoint, we offer just that.

 

Uncertain about your contractor timesheet obligations? 

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Frequently Asked Questions

Timesheets offer verifiable proof of hours dedicated to R&D activities, ensuring claims are accurate and comply with ATO’s standards.

It’s a record tracking the hours an employee works on specific R&D activities, aiding in accurate claim submissions.

Much like logbooks validate FBT claims on cars, timesheets validate claims for R&D tax incentives, albeit with a greater need for precision due to the sizable amounts involved.

Although not mandatory, the ATO emphasises timesheets as the “most accurate and effective method” for time allocation towards R&D.

They provide detailed records, crucial for substantiating R&D activities and expenditures during ATO scrutiny.

They shed light on varied work hours, allocation to different expenditure types, and the need for accurate record-keeping.

Detailed weekly timesheets that break down specific R&D activities provide the most transparent insights.

Substantiation, like screen captures or detailed logs, offers evidence of R&D efforts, bolstering the credibility of claims.

Detailed invoices specifying R&D work, hours, and other relevant information are essential, especially if they operate at arm’s length.

Associate contractors, having some affiliation with the company, should maintain documentation akin to that of an employee.

While independent contractors might not always need timesheets, it’s wise to have detailed invoices. Associate contractors should maintain rigorous timesheet documentation.

Timesheets provide a robust defence, offering clarity, accuracy, and evidence that can withstand ATO scrutiny.

They might struggle to demonstrate the accuracy of their time allocation for R&D, leading to potential claim rejections.

While timesheets are recommended, the ATO also mentions the potential use of activity diaries for specific situations.

They should record specific hours dedicated to particular R&D tasks, providing a clear breakdown of activities.

 It’s crucial to focus on detailed record-keeping, ensuring records are reliable, accurate, and representative of the R&D efforts undertaken.

Contemporaneous records, made at the time the activity occurs, provide the most accurate and credible evidence for R&D claims.

The more detailed and clear the substantiation, the more robust and transparent the view of involvement in R&D activities.

While it might be challenging to maintain individual timesheets for large teams, the ATO expects a reliable and representative record-keeping system in place.

Given the intricate requirements and significant amounts involved, expert guidance ensures claims are both compliant and optimised.

Navigating the intricacies of R&D tax incentives can be daunting. If you have more questions or need personalised guidance, don’t hesitate to call us at 1300 658 508 or book a meeting with Ben Cusack for expert assistance.

 

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