Record-Keeping for the R&D Tax Incentive

April 15th, 2016

As the cut-off for lodgement of R&D tax claims draws near, companies should now be turning their focus to the preparation and registration of their R&D tax credit claim for 2015. With higher levels of review activity and scrutiny by AusIndustry and the ATO, companies need to focus on, and be able to, reinforce and substantiate their R&D claims with suitable records and contemporaneous documentation in the event of an audit.

In short, companies must keep sufficient records to validate:

  • They conducted eligible research and development activities
  • They experienced eligible expenditure in relation to those activities
  • Their R&D activities and expenditure met all other legislative requirements under the scheme

To elaborate on this, the type of records required for the R&D Tax Incentive can fundamentally be broken down into two categories:

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. For example:

  • Notes/Minutes from meetings with project and technical staff.
  • Business plans.
  • Results of background research, such as Literature reviews, Patent or other internet searchers, technological reviews, articles & trade journals.
  • Documents detailing the experiments undertaken, the experiments’ results, the analysis of the results, and the subsequent changes implemented to the experiments.
  • File notations and updated records to track the progress of an R&D activity.
  • Photographs and videos.
  • Samples and prototypes.

2. Expenditure-based Record-Keeping

Expenditure-based records justify expenditure claims for eligible R&D activities. For example:

  • Staff 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.
  • Contractor invoices should contain a clear description of the activities performed by the contractor to link the expense with a particular R&D activity.

However, this list is not exhaustive. Ultimately, financial records need to show a nexus amongst the expenditure and the R&D activity.  Maintaining these documents is advantageous to companies as it will condense the expenditure that may be associated with a compliance review. It also supports the company to conduct its work and re-visit ideas, processes and solutions in the future. Moreover, if the company desires to commercialise its work, impending investors will expect having access to a wide-ranging range of records.

Overall, the records must be sufficient to verify:

  • The amount of expenditure incurred on R&D activities
  • The nature of the R&D activities
  • The relationship between the expenditure and the R&D activities. It is the company’s responsibility to satisfy the ATO of the accuracy of the method used to allocate and calculate the proportion of expenditure on core R&D activities and supporting R&D activities.

If the R&D activity is undertaken by a contractor, documents involving to the contract, the R&D activities and the project report and invoices should contain:

  • The date the R&D activities are undertaken
  • Sufficient detail to ascertain the amount of expenditure on the R&D activities
  • A description of the activities performed by the contractor to link the fee with a particular R&D activity. Under tax law, records must generally be kept for a minimum of five years.

Undeniably, the rules and regulations surrounding the R&D tax credit may be bewildering for some. However, with April 30 only two weeks away, a company may wish to seek external assistance to help identity their R&D eligible activities and evade error judgements. Many accountants are not acquainted with the ins-and-outs of the R&D Tax, thus you may wish to consider a consultant that specialises in the area. Swanson Reed specialises in the R&D Tax Credit – contact us today to discuss your eligibility and learn more about how the R&D Tax Incentive may benefit your business.