R&D Tax: Documenting Best Practice Claims

EOFY reminders

Documentation should be produced and maintained to assist with the initial claim and may have to be provided in the event of an audit or review.

A common misconception of the R&D Tax Incentive program is that registration of activities and/or receipt of the refund means that your R&D has been ‘approved’ or the Government has confirmed that your activities/expenditure are eligible.

As the program is a self-assessment, this is not the case. After having received a refund or adjustment to the tax position, a company may have to provide additional technical or financial information to AusIndustry or the ATO in the event of a review or audit – potentially up to 4 years after you have made a claim.

The Registration Letter received after lodging an R&D Application Form confirms this, stating:

Registration does not determine eligibility of the described core or supporting R&D activities, and is not an indication of compliance with R&D Tax Incentive requirements. Determination of activity eligibility is self-assessed and the responsibility of the R&D entity.

Types of Evidence

When it comes to preparing documentation, it is helpful to think of two general types of evidence: 1) Technical and 2) Financial.

The following are more granular subcategories for the documentation that will help support your claim:

  • Documentation related to the Outcome of the activities
  • Documentation showing how you conducted a Systematic Progression of Work
  • Documentation related to the generation of New Knowledge from the conducting of the activities
  • Documentation for the Supporting R&D Activities: this needs to show that the main purpose of the activity was to support the Core Activity
  • Expenditure / Other

There are no specific kinds of records that are required by the legislation and can be informal business records or specifically created for R&D, including but not limited to:

Emails, minutes, notes, screenshots​, letters or reports from competent professionals or experts, reports of test results and analysis, Gantt charts, records of trial runs, prototypes​, etc.

Experimental and research plans, laboratory notebooks, photographs and videos, process diagrams, progress reports, project plans, records of trial runs​, or code repositories or software versions with comments including weaknesses that were identified and rectified in successive versions​.

Timesheets, contracts, schedules and invoices for any work, or parts of work, undertaken by contractors, as well as details about apportionment methods​ used.

Record-Keeping Tips

An easy-to-remember principle regarding record keeping for the R&D Tax Incentive is this: Evidence, not Explanation! If you are able to provide evidence to AusIndustry or the ATO, this will go a lot further than attempting to provide post-hoc explanations. Creating and keeping evidence contemporaneously (i.e. at the time the activities are conducted) ensures you will be able to navigate compliance activities more easily and simplify the year end claim process.

If you have no evidence, it is pretty easy for the ATO or AusIndustry to deny your claim.

Many companies conducting best practice documentation practices have an internal “R&D champion”, who is responsible for:

  • driving the company’s R&D processes
  • keeping people accountable
  • ensuring staff know why it is important to do certain things (i.e. keep timesheets or time allocation records)
  • and identifying compliance weaknesses and developing strategies to fix them.

It is also important that companies know where these records are kept, especially where the R&D is driven by one person. Avoiding key-person risk (i.e. that the person leaves the company or becomes unavailable) by centralising R&D documents is vital (especially where compliance requests may come long after the R&D Activities are completed). Succession planning will also assist with this.

Supplementing existing record-keeping processes for specific R&D considerations is a good way to implement best practice processes, rather than starting from scratch and creating additional work for busy R&D staff.

If you want to know more about the topic covered in this article, you can watch our Webinar recording on how to document best practice claims for the R&D Tax Incentive.

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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 & online companies.

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