It's important to ensure R&D record keeping is in place before making a claim. Cover…
Effective Compliance and Record Keeping for the R&D Tax Incentive Scheme
Effective compliance and record keeping for the Government’s generous R&D Tax Incentive involves ongoing obligations, but there are plenty of benefits.
- The R&D Tax Incentive program operates on a self-assessment basis, meaning claimants are responsible for determining whether their activities and expenditure meet the eligibility criteria, and for maintaining records and evidence to support their claim. Simply put, Core R&D activities are:
- Experimental activities whose outcome could not be known or determined in advance on the basis of current knowledge (‘unknown outcome’); and
- They have the substantial purpose of generating new knowledge (‘new knowledge’).
The ‘unknown outcome’ and the ‘new knowledge’ aspects of self-assessing eligibility are the ‘primary R&D qualifiers’. As part of the ‘new knowledge’ aspect, a hypothesis must be formed to guide the direction of the experiments, from which observations and evaluation can be made and logical conclusions drawn.
Although the R&D legislation does not prescribe the types of supporting evidence that should be maintained by an R&D Tax Incentive claimant, it is clear that such evidence or records must be gathered to, if required, demonstrate to AusIndustry or the ATO that the applicant has conducted eligible R&D activities and reliably calculated the cost of those activities.
Valid records for the purpose of claiming the R&D tax incentive are any records that verify or contribute to calculating the claim and it is imperative that records are maintained detailing the ‘unknown outcomes’, ‘new knowledge’ sought, and hypothesis for the experimental activities. Determining the ‘primary R&D qualifiers’ and documenting them prior to conducting the experimental activities is the best way to ensure your R&D compliance and record keeping is on the right track.
Your records must be in English (or easily translated into English) and you must keep them for five years (in either paper or electronic form) after you make a claim.
The benefits of good R&D Tax Incentive record keeping
Adopting rigorous business systems and processes for your R&D Tax Incentive record keeping will help your company comply with the legislation and assist you in the expenditure calculation to receive the maximum monetary benefit available as per the calculation principles.
Having effective compliance and record keeping will allow you to prepare a robust and detailed R&D Application Form, initially reducing your chance of receiving a review from AusIndusty. Further, if review activity is escalated, the most effective method for dealing with this is to provide the authorities with contemporaneous examples of documentation to support your claims. Smart, up-front planning and record keeping will reduce compliance costs in the long run.
As a general business strategy, detailed planning coupled with knowledge management and robust business systems / processes will enable a company to fully leverage its overall investment in R&D. Spillover benefits include being able to better address grant opportunities that arise, assist preparation of patent documentation, improve knowledge sharing opportunities and be able to more easily access alternative sources of funding such as forward R&D financing.
Comprehensive R&D planning and record keeping enhances the likelihood of successful R&D outcomes due to the appropriate structures being in place to capture and record the work done during the R&D project, from idea generation to commercialisation. It also encourages companies to think strategically about their R&D activities as a critical and ongoing part of their business, and provides a focus and structure to the R&D activities.
Which specific areas do you need records for?
- Adequate records for the R&D Tax Incentive program will show that your business:
- performed eligible R&D activities (Core R&D Activities and Supporting R&D Activities);
- incurred eligible expenditure in relation to these activities; and
- conducted R&D activities and incurred expenditure that met all other legislative requirements under the program
- More specifically, records for substantiating Core R&D Activities should include:
- the state of knowledge or technology that existed when the R&D was undertaken and what new knowledge was being sought through the R&D;
- evidence or documents showing that the knowledge or information was not already publicly available (this could be in the form of literature reviews, patents, scientific articles, trade journals, etc.);
- documents describing the hypothesis for determining the new knowledge, the experiments undertaken to test the hypothesis, the results of the experiments, and the analysis of the results; and
- documents recording any changes to the hypothesis or experiments during the R&D project.
For Supporting R&D Activities, the records kept must generally establish that they were directly related to the Core R&D Activities and, for production activities, that they were undertaken for the dominant purpose of supporting the Core R&D Activities.
Some ideas for good record keeping and areas where you need to be attentive
A key indicator of good record keeping is ensuring contemporaneous documentation is kept. That is, documentation prepared at the time or shortly after the event/s being described occurred.
Contemporaneous documentation is far more likely to include all the relevant facts compared to documents created ad hoc in the event of a review. Over time, unorganized information/documents may get archived, deleted or lost, and people forget things, or may move on and contact is lost.
If you have contracted someone for your R&D work, make sure to have an agreement or system in place whereby the person/s can be relied upon to back up your R&D claims in the event of an AusIndustry review or finding.
While lack of contemporaneous evidence is not in itself reason to dismiss your R&D claim, the absence of such evidence may lead to escalation of review processes, or in the worst-case scenario, a court or tribunal giving less weight to your testimony.
Where possible and efficient to do so, internal knowledge capture processes should be aligned to the R&D requirements. For example, implementing formal test plans which specifically address the requirements and use the language of the legislation.
Another idea could be to implement a short weekly / fortnightly meeting between the R&D team to discuss and formally minute the progress of the activities. This could go a long way to convincing an assessor that you are following a systematic process and the activities are being conducted to generate new knowledge, for example, and you may even be able to claim the cost of these meetings. A win-win!
Whether or not your business’s R&D Tax Incentive compliance and record keeping is up to scratch, Fullstack has the expertise to help you navigate onto the right path. Contact us to ensure you obtain the R&D tax incentive benefits you’re entitled to.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.