The need for supporting documentation
Supporting documentation – this is always something that most R&D Tax Incentive claimants struggle with. Many don’t understand why it is so important to have it. Supporting documentation is a bit like insurance – you don’t need it until you do. You can submit your R&D Tax Incentive application and (most of the time) receive your refund without having any.
The R&D Tax Incentive is a self-assessment program, so the onus is on the applicant to ensure compliance with R&D Tax Incentive requirements. AusIndustry and the ATO can and do conduct ‘spot checks’ (audits) to assess selected applications compliance (see AusIndustry reviews).
It is not enough that your claimed R&D activities are compliant with R&D Tax Incentive requirements. In a review by AusIndustry or the Australian Taxation Office (ATO), you will be expected to provide contemporaneous documentation that demonstrates compliance.
So if you are audited (reviewed), what documentation do you need, and what are the requirements on this documentation? What do you need to demonstrate with this documentation specifically?
There are two broad areas that you need to document:
- The technical aspects of the R&D activities as claimed in your AusIndustry R&D Tax Incentive application.
- The expenses related to those R&D activities as claimed in your ATO R&D Tax Schedule
In a review, AusIndustry will want to establish that:
- The claimed R&D activities are of a type eligible under the R&D Tax Incentive.
- The claimed R&D activities were conducted according to the requirements of the R&D Tax Incentive.
Due to space limitations, it is difficult to describe claimed R&D Activities in the AusIndustry R&D Tax Incentive application in enough detail for AusIndustry to assess eligibility – this often requires more detail. Sometimes it is helpful to submit addendums with the R&D Tax Incentive application. More typically the applicant would retain this documentation for use in a review if needed.
AusIndustry will also want to ensure that you have ‘ticked all the boxes’ in the R&D Tax Incentive process. Did you follow a logical progression of work? Did you plan your R&D? Essentially, AusIndustry will want to confirm that you used a systematic approach consistent with scientific experimentation principles – see AusIndustry Documentation.
Australian Taxation Office
Expenses claimed under the R&D Tax Incentive must be directly related to claimed R&D activities.
The ATO publishes some general guidance on claiming expenses under the R&D Tax Incentive – see Keeping records and calculating your notional deductions. H0wever, this advice stops short of what you need to know, however, so tax adviser services with expertise in R&D Tax will be required.
Companies must keep financial records for taxation purposes, but they may not have sufficient information to qualify as supporting evidence for the R&D Tax Incentive. In particular, you must be able to distinguish between R&D related expenses and non-R&D expenses.
You must document all financial transactions related to claimed R&D activities and must document how these expenses are related to the claimed R&D activities.
See ATO Documentation.