The R&D Tax Incentive program (RDTI) is an immensely valuable programme for Australian companies undertaking R&D. A key benefit is that unlike a grant, the program is self-assessed - companies can assess their own eligibility and apply annually, claiming the tax offset through their tax return. However, the onus is on the tax payer to maintain good governance and compliance under the program to be able to substantiate their claim in the case of a review by either AusIndustry or the ATO.
The RDTI Stakeholder Reference Group (SRG) conducts regular meetings with RDTI tax agents and consultants, together with AusIndustry and the ATO, to discuss any issues or seek clarity in relation to policy and guidance implementation. In the recent RDTI SRG meeting, a number of key areas of concern regarding the RDTI were highlighted where companies are often falling foul of the legislation.
The ATO emphasised that payments to associates are not considered to have been made (and therefore cannot be claimed) when:
It is essential that payments are constructively made to the associates during the relevant financial year in order to be claimed. Associate payments that are not constructively made before 30 June will be carried forward in the claim.
The ATO have indicated official guidance in relation to apportionment methodology may finally be released this year. However, they have highlighted issues that they are seeing where claimants attempt to claim a portion of all of their payments in the P&L. Consequently, the ATO further emphasised that all payments must be related to the R&D activities and the nexus to the R&D activities must be clear.
While it was mentioned that apportionment calculations based on floor space was the preferred method (and not percentage based on wages or number of employees), they have not released official guidance regarding this matter and other apportionment methodology such as R&D time/total time are also an option.
Companies should document the reason and methodology behind their apportionment for their records and be able to provide to the ATO in the case of an audit.
The ATO also mentioned that issues continue to occur regarding record keeping. It is essential that there is contemporaneous evidence relating to R&D completed within the financial year. This is essential if your application undergoes a further review. Record keeping requirements are necessary for both technical and financial aspects of your claim.
AusIndustry provided further guidance on the eligibility of an R&D activity. To be considered an eligible core R&D activity, the activity has to have the purpose of generating new knowledge and have an unknown outcome requiring experimentation. It was highlighted that although RDTI entities typically conduct activities for the purpose of generating new knowledge, this does not necessarily mean that their activities have an outcome that cannot be known or determined in advance.
Evidence of searches prior to the R&D activities commencing in terms of competitor products and literature searches should be retained to evidence the new knowledge.
R&D entities must also ensure that they have established that the outcome being pursued requires experimentation and that a ‘competent professional’ would also need to experiment to arrive at a conclusion.
If you would like to discuss your RDTI claim contact an experienced R&D tax consultant.