Managing your R&D Tax Incentive risk - checklist

aUDITS ON THE r&d INCENTIVE HAS BEEN STEADILY INCREASING

With ATO and AusIndustry audits on the increase in the R&D Incentive space, claimants and their tax advisors are facing additional rigour and controls. Where an R&D claim is outsourced to a 'specialist' R&D Tax consultant, many claimants are not fully aware of the regulatory conditions and their own obligations.

Whilst the realisation of an immediate refund or tax rebate provides a positive short term result, in the long term companies face the very real risk of having entire claims dismissed and needing to refund the benefit, with interest, and potentially penalties applicable.  

Here is a checklist to sense check that your R&D risk is appropriately managed:

X - USING A REGISTERED R&D TAX PRACTITIONER

If you are using a specialist R&D Tax consultant, make sure they are a registered R&D tax practitioner with the Taxation Practitioners Board (TPB). This is a mandatory requirement with any person not registered in breach of the law and clients left exposed to significant risk. Check the R&D Application for appropriate disclosure and with your consultant.

X - HAVE A COPY OF THE ENGAGEMENT LETTER

An engagement letter should be present between you and your R&D Tax consultant. It is important to understand the scope of services being provided and evidence of using a registered R&D tax practitioner can help to mitigate penalties. 

X - AUDIT ASSISTANCE IS PROVIDED AT NO COST

Ideally, an engagement should provide audit assistance at no cost. As the program is self assessment, specialist R&D Tax consultants should stand by the work they have undertaken. This also incentivises high quality work with a focus on reducing the risk of an audit. 

X - R&D TAX PRACTITIONER HAS DOMAIN SPECIFIC EXPERTISE

Your R&D Tax consultant should understand the nature of the scientific/technical activities undertaken and should document your R&D position, rather than asking you to document this. Insufficient understanding of the scientific/technical activities means activities may not be appropriately identified, or adequately documented, increasing the risk of an audit.

X - SUFFICIENT DETAIL IN THE AUSINDUSTRY R&D REGISTRATION FORM

Sufficient detail in the AusIndustry R&D Registration Form is required to enable an assessor to conclude that R&D activities have been undertaken, minimising audit risk. Have you clearly documented a knowledge gap, and the steps involving a falsifiable hypothesis, testing, results and observations towards developing new knowledge?

X - SUPPORTING DOCUMENTATION IS PRESENT, INCLUDING RECORDS OF EXPERIMENTATION, AND EVIDENCE OF TIME/EFFORT SPENT ON R&D ACTIVITIES

Do you have adequate substantiating documentation that links/evidences the R&D activities claimed and expenditure incurred? This is a key audit focus/risk area. This should be in a centralised location and easily accessible in the event of an audit. Please see our separate blog post on this here.

X - ADEQUATE EXPERTISE IN R&D TAX INCENTIVE SCHEME REQUIREMENTS

Have you been asked about your 'aggregated turnover' (group revenue), which is calculated on a group basis and determines the rate of R&D Tax Offset and refundability? A common mistake is considering the revenue of the claimant entity in isolation.

Are you using a simplified approach to defining R&D activities, making whole of project claims? This is a high risk area that AusIndustry and the ATO are focusing on.

Do you have a number of support R&D activities in the AusIndustry R&D Registration Form? AusIndustry has stated that every project should have at least one. Projects without this will present a high likelihood of audit.

Are you claiming for overseas R&D activities without pre-approval from AusIndustry? Minor or incidental amounts informing the R&D activities (e.g. conference travel) are acceptable, however, claiming for a number of R&D activities which have been conducted overseas is not.

IF YOU ARE CONCERNED THAT YOUR R&D CLAIM OR ASSOCIATED RECORD KEEPING MAY NOT BE UP TO SCRATCH, CONTACT US TODAY FOR A NO OBLIGATION DISCUSSION.

Evidencing your R&D claim

RECORD KEEPING

As the old saying goes, you don't get something for nothing.

Many companies accessing the R&D Tax Incentive often overlook one of the critical aspects of making a claim; record keeping.

So what is adequate record keeping for an R&D claim? What will put you in a strong position whilst minimising internal disruption? 

AusIndustry and the ATO both view record keeping as an important part of any R&D project and also an important part of good business practice. If you register for the R&D Tax Incentive you need to keep records to demonstrate the work you register is eligible for support.

Not having adequate records to evidence the work undertaken and expenses incurred may result in a claim being dismissed and the company required to payback the benefit it has accessed over a number of years.

There are two types of record keeping required for the R&D Tax Incentive:

1. ACTIVITY BASED RECORD KEEPING

Activity based records show that activities were actually carried out, and show how they are eligible core or supporting R&D activities.

The type of records that might be kept for activity based records include:

• Notes from meetings with project and technical staff.

• Business plans and approvals.

• Results of background research and scoping.

• Technical project documents, including the results of testing on the product, idea or service.

• File notations and updated records to track the progress of an R&D activity.

2. EXPENDITURE BASED RECORD KEEPING

Expenditure based records justify expenditure claims for eligible R&D activities.

The type of records that might be kept for expenditure based records include:

• Timesheets to verify the amount of time spent on R&D activities.

• General ledger entries and invoices to verify the amount incurred on R&D activities and that include sufficient detail to link them to the R&D activities.

• Spreadsheet or template that allows for eligible R&D costs to be consolidated into a format that allows for direct input into the ATO R&D Tax Incentive Schedule.

• Financial documents including records of expenditure that include sufficient detail to link them to the R&D activities.

HERE ARE OUR TIPS ON IMPROVING R&D RECORD KEEPING:

• Hold prospective discussions with a specialist R&D Tax advisor to identify the key opportunities for the year ahead.

• Capture staff time spent on the project, key role and tasks at least on a monthly basis. For software development staff, development tracking systems such as GitHub may serve well.

• Ensure any contractor invoices reference the work undertaken as R&D, or supporting R&D.

• Capture significant technical unknowns which will require experimentation, from the outset and throughout the project.

• Capture any failed test outcomes, test procedures, and resulting design changes.

IF YOU ARE CONCERNED THAT YOUR R&D CLAIM RECORD KEEPING MAY NOT BE UP TO SCRATCH, CONTACT US TODAY FOR A NO OBLIGATION DISCUSSION.