In order to be eligible you must spend 20% or more of your total labour expenditure on R&D.
The formula to calculate your percentage of R&D labour expenditure is:
total R&D labour expenditure ÷ total labour expenditure x 100
Total R&D labour expenditure is defined as the total of:
- salary or wages paid to employees for carrying out R&D
- amounts paid to shareholder-employees as income for carrying out R&D, and
- the costs of R&D carried out by a contractor excluding GST x 0.66 (the multiplier is intended to exclude profit and non-wage cost components of the contract price).
R&D labour expenditure does not include labour on activities excluded from eligibility.
Total labour expenditure is the total of:
- salary or wages paid to employees
- amounts paid to shareholder-employees as income, and
- the costs of research and development carried out by a contractor excluding GST x 0.66.
The total R&D labour expenditure and total labour expenditure can also include:
- attributed fringe benefits
- fringe benefit tax on attributed fringe benefits
- employer superannuation cash contributions, and
- employer superannuation contribution tax (ESCT).
You need to include all of the above in your equation for both total labour expenditure and R&D labour expenditure or none at all.
In cases where an employee divides their time between business-as-usual duties for the company, and the R&D project, the total expenditure on the above listed items for each employee should be the same proportion as their total R&D labour expenditure.
Calculating your eligible R&D wage intensity
Find out how to calculate your eligible R&D labour expenditure and how you meet the wage intensity criteria here:
For the 2015-16 tax year, Company A calculated their total labour expenditure and R&D labour expenditure as:
Total labour expenditure (including R&D labour expenditure):
Contractor R&D excluding GST x 0.66 $49,500
Salary or wages paid $645,000
Amounts paid to shareholder-employees $120,000
Total labour expenditure $814,500
R&D labour expenditure:
Contractor R&D excluding GST x 0.66 $49,500
Salary or wages paid $240,000
Amounts paid to shareholder-employees $50,000
Total R&D labour expenditure $339,500
R&D wage criteria calculation
$339,500 / $814,500 = 0.4168 x 100 = 41.68%
For the 2015-16 tax year, Company A meets the wage intensity criteria as their R&D expenditure is greater than 20% of their total labour expenditure.
Tony receives an annual salary of $49,400 and contributes to KiwiSaver for which the employer pays an employer superannuation cash contribution of 3%. His total labour expenditure for the year will include:
Salary $49,400
Net employer superannuation cash contributions $1,227.20
ESCT $256,80
Tony's total labour expenditure for the year $50,884
Tony spends 60% of his time carrying out R&D. The rest of his time is spent carrying out normal duties for the company. In this case, 60% of his salary, net employer superannuation cash contribution and ESCT would be included as the company's R&D labour expenditure as:
$49,400 x 60% = $29,640
$1,227.20 x 60% = $736.32
$256,80 x 60% = $154.08
Tony's total labour expenditure for the year $30,530.40