How to support your R&D Tax claim: An overview of the legislative and regulatory environment
A quick look back on R&D Tax Incentive Administrative Appeals Tribunal cases
There are still few cases that have been decided through the Administrative Appeals Tribunal (AAT) in relation to the R&D Tax Incentive program since its inception in 2011. The two main entities that have brought actions are Innovation Australia and the Australian Taxation Office. These cases each involved the legislative requirement that companies maintain contemporaneous documentation of their experimental activities and associated costs in order to claim the R&D Tax Incentive offset. In view of these decisions, we set out the key points to remember in claiming the R&D Tax Incentive.
How does the R&D Tax Incentive work?
The R&D Tax Incentive program operates on a self-assessment basis, with registrations due on or before the 30 April 2017 in respect of the financial year ended 30 June 2016.
Claimants are responsible for determining whether their R&D activities and associated expenditure meet the eligibility criteria, and maintaining records to support the claim. Eligibility assessments of R&D expenditure and registration lodgement can be made easier with the assistance of an R&D Tax Incentive specialist.
The benefit of the program is generous in that it allows for either a 38.5% or 43.5% tax offset against the R&D expenditure depending on company turnover. As with any self-assessed tax claims, it is the responsibility of the tax payer to provide proof of their claim.
What recent AAT decisions tell us
While the legislation does not prescribe the type of documentation required to support an R&D claim, recent cases suggest the AAT is not afraid to hold ineligible claims where there has been insufficient evidence supporting R&D tax claims.
Such was the case in four cases with the AAT where each case had successful outcomes for AusIndustry and the ATO:
- Docklands Science Park Pty Ltd v Innovation Australia (2015) AATA 973
- NaughtsnCrosses Pty Ltd v Innovation Australia (2012) AATA 743
- RACV Sales and Marketing Pty Ltd v Innovation Australia (2012) AATA 386, and
- Ozone Manufacturing Pty Ltd v Commissioner of Taxation (2013) AATA 420.
In these cases, a lack of contemporaneous evidence that an activity was conducted to meet the eligibility criteria, meant the activities were not eligible. These decisions are a reminder that companies must not only provide evidence that R&D activities were carried out, but that the associated expenditure claimed can be justified.
How much and what type of documentation is required?
In relation to R&D supporting documentation, ‘more is better’. Companies need to keep detailed documentation at the start, during and at the conclusion of each of the activities, describing the process of each activity as it develops.
Documentation might be in the form of project plans at the outset, measurements taken during the activities, meeting minutes discussing outcomes, reports and photos and needs to be maintained at all stages of the activities. The documentation required will vary from activity to activity, requiring a tailored process to track activities and expenditure as R&D occurs.
Innovation Australia, through AusIndustry, has released more guidelines in relation to eligibility and record keeping requirements. However, the application of these guidelines across industry and applied to lodged R&D activities is yet to be assessed through public rulings.
What to look out for in 2017?
While there is still no judicial consideration of the definition of either core or supporting R&D activities, we can look forward to public rulings providing greater clarity as to which R&D activities comply with the definitions. This in turn will assist companies to consider the sort of documentation that might be relevant in supporting their R&D claims.