Be proactive about your R&D Tax Incentive
The classic mistake made by companies trying to access the R&D Tax Incentive (R&DTI) program is treating it as an afterthought. This includes thinking about it only after the end of the financial year when they remember to discuss their R&D with their R&D Tax Incentive consultant. By that time, it is too late to correct any shortcomings in their documentation for the year they are claiming.
To maximise the benefit you gain from the R&DTI; you need to build it into your R&D planning and execution. Structure your R&D to take full advantage of the R&D Tax Incentive. This article explains what is meant by that.
This guidance is derived from looking at what AusIndustry is expecting from you for your R&D Tax Incentive application (see Compliance readiness guide on record-keeping for the R&D Tax Incentive).
Start early – plan ahead
The best time to decide whether your R&D activity is eligible for the R&D Tax Incentive is before you start that activity. Why? Because the R&DTI requires you to keep records of your R&D activities – both technical records (for AusIndustry) and financial records (for the ATO).
So, book a meeting with your R&D Tax Incentive consultant early in the financial year to prepare for the year ahead. Your consultant will guide you in terms of what you can reasonably include in your R&D Tax Incentive application.
They can also give you guidance on what information you will need later to substantiate your R&D claim if AusIndustry or the ATO review your application.
Your consultant should also offer some good advice on how to structure your R&D to get the most out of the R&D Tax Incentive. The key thing is keeping separate records for your claimed R&D.
Your R&D Tax Incentive consultant will not always be there when you need them, so you need to be briefed on what to look for and how to manage eligible R&D activities as you undertake them.
If you think that an R&D activity could be eligible for the R&DTI, then you can ensure that you capture the correct information at the time. Remember – you cannot re-create this documentation after the end of the financial year in question. Even creating the documentation later within the same financial year is inadvisable, as people forget the details of what they did soon afterwards. It also weakens your case with AusIndustry in terms of showing that your R&D was a planned activity.
The key points are:
- How to know when you are dealing with an eligible R&D activity – the technical gap
- How to manage that R&D activity – the hypothesis, the experiment, the results, the conclusions
- What recordkeeping you will need for that R&D activity – technical documentation and timekeeping
Worrying about these things after the event at very least will limit what you can claim, and may prevent you from claiming any of your R&D.
Evaluating eligible R&D activities
Your R&D may be a mixture of tasks that are claimable under the R&DTI and tasks that are not. The definition of R&D under the R&D Tax Incentive is based on the principles of scientific research and is not a natural ‘fit’ with what many think of as ‘R&D’. Sometimes, this is in the interpretation (which is why you need a specialist R&D Tax Incentive consultant), but many tasks are just not eligible, no matter how you look at them. You must have a clear separation so that you can maintain the required records for the R&D tasks that you intend to claim.
If you are pretty sure that an R&D activity may be claimable under the R&DTI, you can capture just the information you need with the lowest impact on your day to day operations. The volume of technical and financial information you need to collect doesn’t need to be voluminous. Still, it does need to be part of the daily routine so that it is done consistently – another good reason for deciding upfront.
Structure your R&D to best leverage the R&D Tax Incentive
Separating the eligible R&D activities also allows you to separate the costs associated with those activities, which will be important when preparing your R&D Tax Schedule for the ATO.
The major cost component of most R&D activities is staff time. AusIndustry and the ATO will expect you to have evidence of how much of your staff’s time is devoted to the claimed R&D activities versus other activities. This is obviously much easier if the eligible R&D activities are treated as separate tasks for time reporting purposes.
Tracking other costs for eligible R&D activities is also much easier if this is directly supported by the accounting system being used. For example, materials needed for experiments can be ‘quarantined’ from normal production expenses. This may be not easy to do retrospectively.
Technical documentation for eligible R&D tasks can also be kept together if you know upfront that certain activities will be claimed under the R&DTI. This also makes it easier to ensure that you don’t miss documenting some aspect of that work. Checklists can be developed to ensure that you don’t miss something.
The information that you collect will be useful for two purposes:
- To explain to your R&D Tax Incentive consultant what you did so that they can prepare your R&DTI application.
- To substantiate your claimed R&D in a subsequent AusIndustry or ATO review.
Having all your technical data together for each eligible R&D activity will make your life much easier when preparing for your R&D Tax Incentive application. Core R&D activities described in your R&DTI application must be largely focused on eligible R&D. This is much easier if you keep your records for these activities separate from the start.
If you are later subjected to an AusIndustry review, responding to that review will also be much more efficient. This is important as you have only 30 days normally to respond to an AusIndustry review.
Note that AusIndustry will be assuming that you have gone through a formal self-assessment process before you submit your R&D Tax Incentive application to ensure compliance of your application. So, AusIndustry will expect that you have already organized your supporting evidence.