Just The Facts, Ma’am”: The Bedrock Of A Successful R&D Tax Claim

July 5, 2017 Kris Gale

It’s been some time since we’ve been in contact so it’s nice to talk to you. We’ve all
been patiently waiting for the Federal Government’s response to the ‘Triple F’ Review
of the R&D Tax Incentive (the Incentive). The May Budget has come and gone without
any announcements. It has now been more than a year since the report was delivered
to the Government. As always, we will keep watching that space.

What has been in the public eye in the last week has been some stories regarding the
Incentive in the mainstream press (or the fake news, depending on your point of view)
and they serve as a stark reminder as to what is of paramount importance in securing
your Incentive claims. R&D tax claims have to built on objective contemporaneous
documentation – tangible evidence of what R&D was conducted that was captured at
the time the work was done. As the legendary Jack Webb was thought to have said
when playing Sergeant Joe Friday on Dragnet, “Just the facts. ma’am”. (Interestingly,
if you go to the videotape evidence, Joe never uttered that sentence in any episode.
This just goes to underlining the importance of capturing and curating the appropriate
documents to establish exactly what the facts are.)

One thing needs to be said up front. The Incentive underpins our Australian private
sector’s innovation effort and is a key aspect of maintaining Australia as a competitive
R&D destination. It must be allowed to continue to do so. The concerns ventilated in
the articles discussed here are legitimate and must be addressed but they largely
reflect behaviour at the margins. In our thirty-two years of involvement in the program,
the vast majority of participants and stakeholders have always sought to do the right
thing. Support for these innovators should not be now brought into question because
of the poor behaviour of the few.
Turning to the article of 4 July,

http://www.smh.com.au/national/investigations/millions-rorted-from-government-rd-sch
eme-20170703-gx3b79.html, the report sets out the contention that millions of dollars
have been rorted from the Incentive by people carrying monikers including ”notorious
property spruiker, former bankrupt, disgraced businessman and (gulp) accountant”.
AusIndustry and the ATO needs to pursue inappropriate claims and R&D advisers
doing the wrong thing with alacrity. However, it should be noted that the character of
the people involved in companies accessing the program is not part of the eligibility
criteria. The tax legislation sets out what constitutes eligible R&D activities and
expenditure. Entitlement to the support must always be based on these criteria and
this must be backed up by original contemporaneous documentation.

In last week’s The Australian, business commentator, Robert Gottliebsen, set out the
unfortunate case of a food processing company who had its claims disallowed
because the taxpayer had been poorly advised at first instance and did not retain
much of the documentation associated with the claim years and was unable to access
the documentary support when requested by the ATO on audit:
http://www.theaustralian.com.au/business/opinion/robert-gottliebsen/research-and-dev
elopment-tax-incentives-a-dangerous-hazard-to-small-enterprises/news-story/e5bf0a6
964f4d7ad07d30b1f17af2a0f

This case study reminds us that companies must retain copies of their complete
technical and financial records associated with their claims for five years after
lodgement. It is not acceptable to rely on a third party – an R&D tax agent, an R&D
contractor – to be solely responsible for this matter. Too many things can go wrong.
The importance of documentation was again emphasised in a recent AAT case, Rix’s
Creek Pty Limited; Bloomfield Collieries Pty Limited [2017].

Though the case was concerned with the old R&D Tax Concession provisions, it is
directly relevant to companies currently claiming the Incentive.The decision correctly
states the following at Paragraph 21: “While the creation and provision of
documentation is not a statutory requirement to substantiate the R&D activities, I
agree with the submissions of the respondent that documentary evidence is an
expected feature of an activity that is systematic, investigative and experimental.
Documentation is necessary to record the activity undertaken, its purpose, progress
and, of course, the results of the activities and the evaluation of those results. Without
such documentation, it is near impossible to establish the progression of the activities
undertaken and that the purpose of the activities was to generate new knowledge in
the form of new or improved materials, products, devices, processes or services. It
follows, that without such documentation, the experimental activity would have limited
application or future use.”

What constitutes appropriate documentation is something that needs to be discussed,
debated and better understood by the claiming community. We have been approached
recently by a number of R&D tax agents and their clients for a second opinion on
claims being reviewed by the ATO and AusIndustry. One concern we now have is that
the regulators are imposing an unrealistic expectation around the documentation
practices maintained by innovative companies in that a deficiency in just one or two
aspects of the company under review (when compared to the ideal R&D tax clamant
described on the business.gov.au website) can cause the regulator to completely
disallow claims at first instance. A subsequent MJA Update will attempt to help frame
this discussion as it is becoming clear that work needs to be done to achieve a result
that balances the requirements of the regulators with the day-to day realities faced by
Australian companies.

In summary, taxpayers cannot contract out of the requirement to capture and curate
original contemporaneous documentation. Your claim will not survive risk
assessments, let alone audits. And it cannot be emphasised enough that appropriate
service provision involves so much more than possessing an R&D Tax Agent
certificate. We will also be looking in a future issue at what companies should expect
from an R&D service provider. As we will demonstrate, you need to be able to get
genuine responses when seeking R&D tax advice. Not bluff. Just the facts.
Should you wish to discuss this matter further, please do not hesitate to contact Kris
Gale on 02 9810 7211 or email kris.gale@mjassociates.com.au