How to be compliant in the R&D Tax Incentive

From 1 July 2021, the increased benefit under the R&D Tax Incentive, as announced in the Federal Budget, may see more businesses registering their activities and wanting to protect their R&D tax claim. Due to the self-assessed nature of the incentive, these businesses will inevitably ask themselves - what evidence do I need to support my claim? On this point, recent cases before the Administrative Appeals Tribunal (AAT) serve as guidance.

How does the R&D Tax Incentive work?

The R&D Tax Incentive program operates on a self-assessment basis. Registration of the activities can be made up to 10 months after the end of the financial year. For those whose financial year ends in June, the lodgement deadline is 30 April the following year.

Self-assessment in tax means that claimants are responsible for determining whether their R&D activities meet the eligibility criteria, and then calculating the expenditure associated with those activities. Assessments of eligible activities and related expenditure can be facilitated by an R&D Tax Incentive specialist.

The scope of documentation needed to support a claim

Recent AAT cases have again highlighted the need for companies to keep detailed and timely documents in order to substantiate that the registered activities have the characteristics of R&D. These decisions are a reminder that evidence is not only needed to demonstrate that costs are accurately calculated and that the activity was conducted, but that the activities also met the legislative definition of R&D.

In the AAT case of Rix’s Creek, the Tribunal considered the small amount of records showing measurement and analysis in the testing of explosives at a mining site. The lack of documentation resulted in the Tribunal finding that the activity lacked in the systematic and investigative approach prescribed by the legislation.

The Tribunal’s focus on evidence to support the experimental activities to meet legislative criteria continued in Royal Wins. There, the Tribunal emphasised the requirement of R&D entities to proceed from hypothesis to experimentation and then conclusion. An absence of evidence showing the formulation of an initial hypothesis was detrimental to the applicant. Additionally, the Tribunal commented that attempts to construct a hypothesis retrospectively would be insufficient to meet the statutory criteria. Hence, those conducting R&D activities will be reminded of the value in producing documentation throughout the activity, and capable of showing an initial hypothesis to be tested.

Going forward

The increase in benefit under the R&D Tax Incentive brings with it an increased need for businesses to support their claim. Decisions of the AAT serve as a reminder that businesses should implement processes to produce documentation contemporaneously, and with sufficient detail of the experimental process followed.