The ATO has expressed a special interest in reviewing the R&D Tax Incentive claims around…
R&D Tax Incentive Substantiation & Record Keeping
It’s important to ensure the right documents are maintained for R&D Tax Incentive substantiation. Cover the R&D evidence essentials for your situation.
Given the government’s green light to increase audit activity with the R&D Tax Incentive its more important than ever to ensure all bases are covered in regards to R&D Tax Incentive substantiation.
The best safeguard is to undergo regular R&D Tax Incentive record keeping with supporting evidence (e.g. reports, records, timesheets) to substantiate that the R&D activities were performed and that there was a nexus between the activities, expenditure and the qualifying requirements of the R&D legislation.
- An essential aspect to self-assessing eligibility of activities for claiming the R&D Tax Incentive is that a claimant is capable of demonstrating with evidence there 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’).
We refer here to the ‘unknown outcome’ and the ‘new knowledge’ aspects of self-assessing eligibility as the ‘primary R&D qualifiers’.
In practical terms the ‘primary R&D qualifiers’ would exist prior to conducting the experimental activities. So, it is best that these ‘qualifiers’ are determined and the relevant research documented before their associated experimental activities are commenced.
In the self-assessment process, there must be a clear connection between the ‘primary R&D qualifiers’ and the experimental activities. It is the compound nature of this nexus that is vital to demonstrating eligibility. This nexus should be clearly established by the project manager and understood by your R&D tax adviser.
Many claimants carry on activities, which by their nature would qualify as R&D activities. However, some claimants fail to fully document their assessment of the ‘primary R&D qualifiers’ – particularly firms engaged in agile software development. Thus they often miss out on demonstrating to AusIndustry an essential part of the self-assessment process.
Documenting ‘Primary R&D Qualifiers’ - ‘Unknown Outcome’ and the ‘Purpose of Generating New Knowledge’
R&D legislation does not prescribe the sorts of supporting evidence that should be maintained by an R&D Tax Incentive claimant. Clearly though, such evidence must be gathered.
Retrospective maintenance of evidence by claimants is so often the cause of failed AusIndustry audits. This is particularly a problem if decisions are recorded well after they occur. Understandably and unfortunately, if subject to a regulatory audit three years after an event, it is problematic for a project manager working on an ‘agile’ software development to recall the often hundreds of decisions made about the ‘primary R&D qualifiers’.
Pro-active maintenance of evidence is the key. Best practice record-keeping in documenting the ‘primary R&D qualifiers’ is to document the ‘primary R&D qualifiers’ as they are determined.
Your R&D tax adviser will explain the types of evidence and how that evidence may be structured to best document your self-assessment of the ‘primary R&D qualifiers’.
However, it is the responsibility of a project manager to create your evidence. Again, your tax adviser can help your project manager structure the evidence that needs to be created.
A best practice tax adviser will work with your project manager throughout the conduct of your project. The adviser will check that evidence about the ‘primary R&D qualifiers’ is maintained contemporaneously and is relevant to the experimental activities.
Documenting Experimental Activities
A key practice with R&D Tax Incentive record keeping is to note the main steps of your experimental activities. Such records should demonstrate there is a clear and logical nexus between the experimental activities and the ‘primary R&D qualifiers’.
Please note that the requirements for documenting ‘supporting R&D activities’ (‘directly related activities’) are similar to that of documenting your experimental activities. The key difference is that for directly related activities documentation should demonstrate a direct relationship with the experimental activities. There are other differences, but for the current purposes, they are not described here.
Most often, supporting evidence for experimental activities is in the form of contemporaneous documents. For example, documents generated as the experiments were being conducted. Contemporaneous documentation that is dated, signed, and specific to the work performed is the best supporting evidence that you can provide.
Supporting evidence should include documentation that supports an informed decision was made about the eligibility for claiming the R&D tax incentive. Your Fullstack R&D Tax Consultant can assist you further in this regard alongside specialist R&D documentation support software such as Synnch.
R&D Tax Incentive Record Keeping for expenditure
R&D tax incentive claimants are required to maintain records that support the expenditures claimed for each project. Such records should demonstrate there is an informed approach to determining what parts of an organisation’s overall expenditure is relevant to the self-assessed R&D activities for each project.
- Types of documentation includes:
- Method used to apportion labour and overhead expenditures.
- Time sheets for the salary or wages paid to employees.
- Contracts and agreements with third parties.
- Documents that support the use of assets during the R&D activities.
Legitimise your R&D Claim
Documents maintained for R&D Tax Incentive substantiation should align to the time period of the R&D activities. Regulators do not view favourably R&D claims that are unbound by time for no demonstrable reason.
It is best to ensure all those people responsible for initiating R&D evidence in support of a claim have a buy in. Ensure they are aware of the importance of the information they are required to produce and that it is maintained on a regular basis.
Make managers aware of the financial benefits that they may be contributing towards your organisations wealth. Make them aware of the financial risks for a poorly documented R&D activity claim.
How regularly documentation should be raised will depend mainly on how often new ideas are being introduced and tested in an R&D project. Again, working closely with your R&D tax advisor will help determine the regularity of producing documentation.
Getting R&D activities documented in advance
Best practice claimants establish R&D Tax Incentive substantiation with specific documentation in support of their projects. These are commonly a high level ‘corporate R&D approval document’. Usually authored and supported by a project manager, such documents are approved at a corporate level in advance of a project.
The corporate R&D approval document ideally sets out the ‘primary R&D qualifiers’ and a broad description of the planned R&D activities. The great news is that a pro-active document virtually establishes eligibility for the R&D tax incentive before any activities have started.
The document should be reviewed by corporate as significant changes to the planned activities arise, and at least annually. In the event of an audit by AusIndustry, this document will prove an invaluable tool for demonstrating eligibility.
We have unsurpassed insights into AusIndustry’s expectations for claimants wanting to substantiate their R&D activities are eligibility. Experience in working for and with claimants engaged with large R&D tax advisory firms, we understand with these firms they regularly fail an AusIndustry audit because of poor or non-existent documentation.
If you are looking for advice about how best to document your existing R&D project activities please contact our R&D Tax Incentive consultants or read more on our R&D Tax Incentive overview.