When applying to register for the R&D Tax Incentive, you must keep records that demonstrate your activities meet the eligibility criteria for the program as defined in the legislation.
If you intend to register and claim the R&D Tax Incentive, you must keep adequate records to demonstrate to the Australian Taxation Office (ATO) and AusIndustry that you did carry out eligible research and development (R&D) activities and that you did incur eligible expenditure. Your records must be sufficient to verify:
the nature of the R&D activities
the amount of expenditure incurred on R&D activities
the relationship of the expenditure to the activities.
Keeping records about R&D activities
The R&D Tax Incentive program operates on a self-assessment basis. You are responsible for ensuring that your registered research and development (R&D) activities meet the program’s eligibility criteria. A formal R&D plan is not mandatory under the R&D Tax Incentive. However, as part of a compliance review AusIndustry may ask you to provide records that show that your company’s R&D activities were carried out and were eligible. Your company’s records must be sufficient to show that the claimed R&D activities took place and that they met all aspects of the legislative definition for either ‘core R&D activities’ or ‘supporting R&D activities’. As you self-assess your company’s eligibility for the program, you should ask yourself: Do my company’s activities meet all aspects of the legislative definition for either core R&D activities or supporting R&D activities? Have I retained, and can I access, sufficient records to show that the activities meet all aspects of the legislative definition for either core R&D activities or supporting R&D activities?
Which records should I keep?
In deciding what records are required in order to demonstrate the eligibility of R&D activities, you should consider each aspect of the definitions of core and supporting R&D activity. You should then consider which records are appropriate to demonstrate that your company’s activities meet these definitions. Records you need to keep will vary depending on the nature of your business and the R&D activities you are conducting. Examples of evidence you may use to demonstrate your eligibility under the program include:
design of experiments
project planning documents
project records and laboratory notebooks
records of trial runs
progress reports and minutes of project meetings
test protocols, test results, analysis of test results and conclusions
photographs and videos
samples, prototypes, scrap and other artefacts
records of resources allocated to the project (e.g. asset usage logs)
staff time sheets
This list of supporting documentation is not exhaustive, and is not a checklist to determine eligibility of R&D activities. The list is provided in order to show the wide variety of records that may assist in demonstrating the existence and eligibility of R&D activities.
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Core R&D activities
Records of core R&D activities should document:
the state of knowledge or technology that existed when the R&D was undertaken
the new knowledge or information concerning the creation of new or improved materials, products, devices, processes or services that was sought through the R&D
that the knowledge or information was not publicly available.
For example, this might include:
patent or other searches
scientific or technological reviews and articles.
the proposed hypothesis (that is, the idea, theory or possible solution) being tested
the systematic progression of work to test the hypothesis based on the principles of established science, that is, the ‘scientific method’ that was employed
documents detailing the experiments undertaken, the experiments’ results, the analysis of the results, and the subsequent changes implemented to the experiments
Regular progress reports against the planned milestones are important records. They provide evidence of your R&D project’s progression and record decision points. Any material changes to the purpose of your R&D project, or the hypothesis being investigated, should be documented. Where use is made of a production line for R&D, you will need to document the proportion and period of use of the production line for the R&D purposes.
Supporting R&D activities
Your company must retain records that demonstrate that its supporting R&D activities were performed, and were eligible. Depending on the nature of the activity, this will either mean demonstrating that the supporting R&D activity was directly related to core R&D activities, or was for the dominant purpose of supporting core R&D activities. Records about a ‘directly related’ relationship need to establish that the relationship between the supporting R&D activity and core R&D activities existed and was sufficiently direct, close and immediate. Records about supporting R&D activities that produce, or are directly related to producing goods or services, need to demonstrate how you determined that the dominant purpose of these activities were to support core R&D activities. Supporting R&D activities and their target core R&D activities do not necessarily occur in the same income year. Supporting R&D activities may begin before the core R&D activities since they are required in order for the targeted core to take place. Records in support of an application may therefore cover multiple years in which either the supporting R&D activities or related core R&D activities were conducted or are planned.
Maintenance of records
A number of years may elapse between the time when an activity is done and the conduct of any compliance reviews. Unless good records are available, your company may not be able to recall, explain and demonstrate the activities it has conducted in the detail necessary to establish its claims to R&D activities. Documentation of claimed activities is vital insurance against staff turnover and could add value to the sale price of your products, intellectual property, or business as buyers conducting their due diligence are likely to be interested in these documents. All companies should have a system in place to backup their electronic files. This is a simple, relatively cheap insurance policy for a company. For a company conducting R&D activities to lose all records of their work, the cost to the company may be far more than the ability to substantiate their claims under the R&D Tax Incentive program. Hardcopy documents (including all notes) should be kept in an easily accessible, logical system. Several copies should be made of crucial documents and precautions taken against the risk of fire or other destruction.
If a company has no contemporaneous records that an activity has been conducted and met all of the eligibility criteria, then that activity is not eligible for the R&D Tax Incentive.