Research and Development Tax Incentive Requirements
Besides properly interpreting the requirements of the Research and Development scheme, the most important thing for claiming R&D is evidence to support your R&D claim. In line with the Software-related Activities R&D Tax guide recently published by AusIndustry we will discuss what Ausindustry and the ATO expect in terms of evidence for an R&D claim.
If AusIndustry or the ATO assesses your application for the R&D Tax Incentive, it expects you to maintain relevant documents and be able to disclose them to them should they ask for it. These records provide evidence to substantiate that the company did the R&D, that it met the requirements of the scheme and ensure the correctness of the details you have submitted with your R&D Tax Incentive application. Your methods and procedures for identifying, assessing, and documenting your eligible R&D activities and expenses will be used as part of the proof to back up your claim. The good news is you can keep less formal records including screenshots, instant messaging history and other records exported from task tracking or project management software to help prove your claim.
Ausindustry expects that you can demonstrate that your core and supporting R&D activities satisfy all legal requirements to establish a claim for the R&D Tax Incentive. Records must show more than just the “end product” or the result of the R&D. They must show that what you did, how you did it and how it complies with the program’s standards for the R&D Tax Incentive. Below are some examples of evidence that might help to prove the eligibility of your activities and expenses. Bear in mind that the records you need to keep are different from the claim that you submit in your annual registration. The records must be relevant to the time period during which the activity took place. It is worth noting that you are not required to repeat every piece of information from previous registrations.
The table below outlines the eligibility requirements for claiming core R&D activities and examples of the corresponding evidence you can provide to satisfy these requirements.
Eligibility requirement (Core Activity)
Examples of evidence
It was impossible to predict how the experiments would turn out (i.e. whether the hypothesis was valid or invalid). The determination of an unknown outcome of the R&D was reached following assessment by competent professionals despite their knowledge, networks, and data they might reasonably access.
• literature reviews and academic papers
• conversations with professionals in the field
(emails, minutes, notes, among others)
• screenshots of inquiries submitted on tech forums and blogs
• records that show failed attempts in using existing technology
Only by using a systematic progression of work that progresses from a hypothesis to experimentation, observation and evaluation, and drawing of logical conclusions could the outcome of the activities be predicted. It is crucial to demonstrate that you will run experiments to test your hypothesis. When doing tests or shortly thereafter, you should take notes on the procedures you followed as well as the results.
• records of each phase of your experimental activity, such as the hypothesis, how it was tested, the data from your experiment, how it was evaluated, whether the hypothesis was proven correct or false, and how these results were used to further develop the hypothesis or generate any new hypotheses.
• project plans that describe the systematic progression of the work to be done
• code repositories or software versions with comments highlighting the flaws that were found and fixed in later revisions
• test strategy and approach documents
• tickets that describe the activity progression in project management systems
The goal of doing experiments is to generate new knowledge.
• minutes of board meetings, project meetings, or team meetings where the need for conducting experiments was explained
Expenditure was unquestionably made on an R&D activity that qualified. You can only claim expenses to the degree that they are related to the R&D activities. As a result, you must provide evidence that the costs you are claiming on your tax return were spent on the core and supporting R&D activities that you have reported to AusIndustry. You must use reasonable methods to distinguish between spending on eligible R&D activities and other activities. Your documentation must be adequate to verify the amount of the expenses incurred on R&D activities, the nature of these R&D activities, and the relationship between the expenses and the activities.
You must maintain written agreements that detail the work to be done, who will do the job, and where the work will be done when contractors are handling all or part of the work. If this relates to you, you should also look at the ATO website’s section under “For whom are the R&D activities conducted.”
• working documents that show how the R&D claim was computed, such as:
– material that has been exported from task-tracking or project-management software (to show how much time employees spent on activities that qualify)
– agreements, plans, and bills for all work, or portions of work, performed by contractors
– documentation describing the design and scope of research using purchased components
– how you calculated the amount of time your utilities, excluding capital expenses, were used for R&D activities that qualified
• working documents illustrating the allocation of specific expenditures to each of the registered core and supporting R&D activities, as well as the methodology used to calculate the R&D claim.
The table below outlines the eligibility requirements for claiming supporting R&D activities and examples of the corresponding evidence you can provide to satisfy these requirements.
Eligibility requirement (Supporting Activity)
Examples of evidence
Supporting R&D activities that are directly associated with an eligible core R&D activity.
• technical documentation demonstrating the connection between the supporting R&D activity and one or more core R&D activities, for instance:
– proof that shows that a graphical user interface was required to carry out the experiments in a core R&D activity
– baseline technical research documents
– experiment setup and facilitation
– the creation of prototypes and proof-of-concepts
– user testing and internal testing
Where supporting R&D activities:
• are not considered to be key R&D activities
• generated products or services
• have a direct connection to producing goods or services
Supporting a core R&D activity must be the main goal of a supporting R&D activity – this is called the dominant purpose requirement. When software has been created to enable an experiment in an eligible core R&D activity on a production line, the dominant purpose requirement is frequently present.
Only expenses for goods or services used in eligible R&D activities may be claimed; expenses for goods or services used in commercial production runs may not be claimed. Your supporting documentation should reflect this. The “feedstock adjustment regulations” (which are published on the ATO website) must be taken into account by businesses that sell or use the final product of their eligible R&D, and they must include the relevant feedstock adjustment amount in their income tax returns.
• your proof may be production run sheets and quality control sheets that show which units were used for research and which were intended for sale where manufacturing occurs alongside software-related activities
• where saleable goods are generated during an activity, your records must demonstrate that you produced just enough for the experiments and not enough to indicate a mostly commercial goal
• ATO anticipates you to provide documentation of how the supporting activity supports the core R&D activity and meets the criterion of “dominant purpose”.
• we also recommend that you consult the “Manufacturing Sector Guide for the R&D Tax Incentive” if software development takes place in a manufacturing or production environment.
For further information on record-keeping requirements, Innercode can also provide you with further tailored guidance on record-keeping. Feel free to contact us for any inquiries.