Are you accidentally sabotaging your own Tax Incentive application?
Tech Abstract would not suggest that you would deliberately undermine your own application, but are you making mistakes in your R&D Tax Incentive application that do unintentionally undermine your application?
There are two parts to an R&D Tax Incentive application:
- The technical application to AusIndustry.
- The Taxation Schedule submitted to the Australian Taxation Office (the ATO)
Whilst mistakes can (and sometimes are) be made in the ATO Tax Schedule, the requirements here are well-known by the accountancy firms who dominate the tax incentive industry. Hence, this article is more concerned with the technical application to AusIndustry, which is where the vast bulk of problems occur.
The unfortunate reality is that the importance of the AusIndustry application is often not appreciated by the claimant, and is often not handled with the necessary care by their R&D tax incentive consultant. The first issue also compounds the second issue and permits mistakes by consultants to flourish.
The good news is that these mistakes can be avoided with the appropriate management of the R&D tax incentive application process, but you do need a good R&D Tax Incentive consultant and you do need to support the work done by that consultant. See What does a Tax Incentive Consultant do?
A diligent client will pick up misunderstandings made by their consultant, but conversely, a good consultant will also insist that the client provide adequate support for the preparation of their AusIndustry submission. If both parties do their part, then the process is much less painful and ultimately far more effective.
Where are the mistakes in your Tax Incentive application?
Mistakes can be broadly classified into the following areas:
- Incorrect scope of the R&D activities claimed
- Poor explanation of the claimed R&D activities in the AusIndustry application
- Incorrect financial information in the AusIndustry application
- Incorrect demarcation between core R&D activities and supporting R&D activities
Scope of R&D Activities
Claimants (unless they are really diligent) will often not get the scope of their claimed R&D correct. The core reason is often related to the distinction between what the client thinks is eligible R&D and what the R&D Tax Incentive legislation defines as eligible R&D.
The RDTI definition of R&D seems unnatural (and wrong) to many claimants, so they often (wrongly) use their own judgement. This is one reason why using a specialist R&D Tax Incentive service is wise.
Poor description of claimed R&D activities
The reasons for this vary depending upon whether the claimant wrote their own description of their R&D activities or engaged an R&D Tax Incentive consultant to write it.
Claimants who write their own technical description for the AusIndustry application can fall into a number of traps. Typically, the target audience (the AusIndustry assessor) is often misunderstood by the claimant – level of knowledge, the required focus (compliance, not understanding) what the assessor needs to know (how the R&D complies).
If the technical description was written by a consultant, then the poor technical explanation in the application could be due to one of two reasons:
- A lack of good information provided by the client on the R&D activities
- A lack of technical skills on the part of the consultant which would allow them to understand and summarise the client information in the AusIndustry application. See R&D Consultant Understand Your R&D?
Incorrect financial information
There is certain financial information that must be included in the submission to AusIndustry, separate from what is subsequently provided to the ATO. This information will normally come from the claimants’ accountant, even if the AusIndustry application is being prepared by a consultant. A competent R&D Tax Incentive consultant will however confirm this information with the accountant, so mistakes in this information should be unlikely.
Incorrect demarcation between core R&D activities and supporting R&D activities
Core R&D activities are related directly to the experimentation for the claimed R&D, whereas supporting R&D activities are related to peripheral activities that are needed in order for the core R&D activities to be performed (e.g. setting on a test framework).
Both can be claimed but they must be described separately in the RDTI application to AusIndustry. An R&D Tax Incentive consultant will be able to make the correct demarcation. A claimant doing it themselves will often make a mistake with this.
What you can do to avoid mistakes in your Tax Incentive application
It may seem from the above explanation that it is too difficult to produce a high-quality (understandable) and compliant RDTI submission to AusIndustry.
However, consistently achieving well-written and compliant AusIndustry applications is not difficult – assuming the required experience and expertise is available.
Find a diligent and competent tax incentive consultant with solid technical skills and STEM (Science, Technology, Engineering and Math) qualifications. Such a consultant can help ensure that none of the problems noted above arise. The consultant will:
- Ensure that you have provided sufficient technical explanation to allow a compliant and coherent application to be drafted.
- Ensure that the scope of the claimed R&D activities covers everything you are entitled to, and nothing that you are not.
- Ensure that the technical explanation in the application is understandable to a lay person in AusIndustry and demonstrates compliance.
- Confirms that the financial information is correct for the claimed R&D
- Ensures that the core and supporting R&D activities are handled correctly.
A good R&D Tax Incentive consultant will know when they don’t have enough of an understanding of the claimed R&D, and will ask for additional information or clarification – this is why the technical skills and STEM qualifications are so important.
A poor R&D Tax Incentive consultant may not even realise that their technical explanation in the AusIndustry application doesn’t make sense, or may not even care.
You can help by providing the consultant with a good (high-level) technical summary of the R&D you want to claim. Again, a good R&D Tax Incentive consultant will ask you enough probing questions to check that you haven’t missed anything, and that they haven’t misunderstood your technical explanation.