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Record Keeping for the R&D Tax Incentive

Recent headlines about a “crackdown” on R&D tax incentive claims has highlighted the need for companies to take particular care when making R&D claims. It is important for companies to remember, even if using a reputable R&D tax advisor, ultimately it is your claim and you will be responsible to back it up with documentation recorded at the time you undertook the R&D activities.

Documentation of Experimental Activities

Your R&D documentation must show that the knowledge or information was not already publicly available, and it must demonstrate a scientific process that ideally starts with developing provable hypotheses and continues to experimental activities that examine the causal relationships between variables, the results of which lead to logical conclusions about the new knowledge generated.

To successfully navigate an AusIndustry examination, companies must be prepared to demonstrate that they have kept contemporaneous records that establish that a scientific method has been used to generate new knowledge. The Compliance Readiness Guide on the AusIndustry website lists the kinds of acceptable documentation as follows:

  • project planning documents
  • design of experiments
  • project records and laboratory notebooks
  • design documents for system architecture and source code
  • records of trial runs
  • progress reports and minutes of project meetings
  • test protocols, test results, analysis of test results and conclusions
  • photographs and videos
  • samples, prototypes, scrap or other artefacts
  • contracts
  • records of resources allocated to the project, eg. asset usage logs
  • staff time sheets; and
  • tax invoices

Companies must retain copies of their complete technical and financial records associated with their claims for five years after lodgment.

What Does this Mean for My Company?

This documentary requirement sets a high bar, and many industries, notably IT and manufacturing, often don’t keep their records to this level of detail in the normal course of events. Companies undertaking scientific research in the biotechnology and human health space are required to keep this level of documentation for other purposes, including TGA registration, or for use in writing papers for peer-reviewed journals. Manufacturing, IT and other industries typically have their own legislative record-keeping requirements that don’t necessarily match what is described above, but these can be modified to include the kinds of information required by AusIndustry. Of course, it is good business practice to record any activities aimed at developing new or improved products or processes, and in documenting their R&D activities, each company claiming the R&D tax incentive must balance their business needs and requirements with those of AusIndustry.

It is absolutely clear that, as recent events described in the press attest, companies must take these record-keeping requirements seriously. Your risk of being reviewed by either AusIndustry or the Australian Tax Office (ATO) is not insubstantial, and they have the power to look back over 4 years of claim, and if not satisfied, to ask for a refund of tax foregone (or refunded), with penalties up to 75%, if either or both regulators believe your claim is ineligible. This means, in a nutshell, that you must not only be undertaking eligible R&D activities, but you must have contemporaneous records that prove it.

Recent interaction with AusIndustry by the R&D community indicates that work is required of all stakeholders to achieve an understanding of how to document eligible R&D claims in a sensible way that balances the requirements of the regulators with the day-to day realities faced by Australian companies. MJA is active in this pursuit, and we will keep you updated on any intelligence we receive as part of this process.

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