The R&D Tax incentive program is designed to help Australian companies offset the cost of undertaking their R&D activities and provide much needed cash flow. It’s a complex, self-assessed program in which it’s the responsibility of the taxpayer to provide evidence of meeting the eligibility criteria. It’s also heavily audited by the regulators-AusIndustry and the ATO.
The benefit, of between 38.5% to 43.5% of a company’s eligible R&D expenditure, is a generous offset and requires companies to put some effort into the process to protect their claims. It’s not enough to just do the R&D activities as without proof and record keeping, the activities do not meet the legislative requirement. This has been affirmed by a number of recent Administrative Appeals Tribunal cases.
The tips outlined below are not fail-safe, but if you want to make ‘Audit Ready’ claims which can withstand scrutiny by the ATO or AusIndustry you should try to incorporate as many of these principles as possible into the process of determining eligibility and collating information for your R&D claim.
1. Work out your hypothesis and start with a plan
To be eligible to claim the tax offset for your R&D activities, you first need to assess your activities for eligibility. One of the key eligibility requirements is that the “outcomes of the R&D activities are unknown and only able to be determined through a systematic progression of work”. While not prescribed, a company should set up a project ‘plan’ of sorts at the outset. Key to this plan is to identify a hypothesis and proposed method/s to prove or disprove your hypothesis.
In industry, the term hypothesis is rarely used but this program also aims to encourage companies to think strategically and proactively about their R&D and methods at the start of the project.
It is the function of the project leader to clearly articulate the objective of R&D activities and planned systematic progression of work. These activities and their results must be recorded throughout the project. Your hypothesis and plan should reflect the question/s you are trying to answer, provide measurable objectives, and identify the unknown information or new knowledge you are trying to establish.
2. Assign an R&D Champion/Single Point of Contact (SPOC)
In any R&D activity you may have many people involved in different aspects of the project activities, from technical to financial, marketing to CEO. To manage the R&D tax incentive process and keep control of documentation requirements, you need a single point of contact to take charge of the compliance process.
The Champion is the R&D project coordinator whose role is to track the R&D activities and expenditure, and to collate all the relevant information to enable the company to put together a well-supported, compliant R&D Tax Incentive claim.
The Champion doesn’t have to be the technical nor financial expert; they need to be proactive, understand what records are needed and who can provide them. Their role is to collate all the documentation in one place so that in the case of an audit, the information can be easily and efficiently provided. Champions may be technical leads, from the finance team, or organised administrators.
Key to the role is that a company develops processes to identify potential R&D activities at the outset and assign an R&D champion (for each project or as a whole) at the start of the R&D process.
3. Work within your existing documentation processes
The program is self-assessed through your company’s tax return but as with all tax matters, the onus is on the taxpayer to substantiate the R&D tax claim. Documentation you already produce as part of your business processes may be sufficient to satisfy the requirement of substantiating the R&D activities and expenditures. If not, identify the areas in which you may not be compliant and develop documentation processes.
Depending on your activities, the documentation may include:
At the conclusion of the activities, it is important for companies to document how the activities met or didn’t meet the hypothesis set at the beginning of the R&D activities.
Financial tracking of costs for both core and supporting R&D activities also needs to be undertaken separately and the nexus to the R&D activities should be clear.
4. Engage a specialist R&D Tax Consultant
The R&D tax program is a complex program applied across industries and company sizes. There is no ‘one size fits all’ approach but specialist R&D Tax consultants like FB Rice can help you all steps of the way to establish processes to track your projects and to ensure your claim is maximised and fully supported. Specialist R&D Tax Agents can also help you:
5. Get the timing right
Make sure you lodge in a timely manner to maximise the time value of your money. Lodgement of the R&D Tax Incentive can be made up to ten months after the end of financial year. For companies with a year end of 30 June 2016, the lodgement deadline is 30 April 2017.
The sooner your register your claim and lodge your tax returns the sooner you can access your refund. Even before the end of financial year, companies should consider whether all documentation is in place and costs paid and not just accrued.
The take away message is your company needs to set up your R&D activities at the outset and document them along the way for a maximised and substantiated R&D tax incentive claim.
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