R&D Unwound

Written by Ascentium Content Team | 18 September 2024

The R&D Tax Incentive (R&DTI) landscape has been particularly fluid over the last few years. As such, Ascentium Australia aims to provide timely updates covering key topics relating to the R&DTI to ensure claimants have the most up-to-date information. This covers areas such as changes to legislation, R&DTI-related news, case studies, and more.

This edition includes:

Reminder – R&D Transparency Report
Spotlight – R&D Documentation

Reminder – R&D Transparency Report

In July 2021, a new requirement was introduced for the Australian Tax Office (ATO) to publish the R&D data of entities that claim the R&DTI. This will be reported 2 years after the end of the financial year that the data relates to. The first of these reports will be published in late September this year, and it will include R&D entities that claimed the R&DTI in their 2022 company tax return.

The data to be published will be limited to the following:

Entity name;
Entity’s Australian business number (ABN) or Australian company number (ACN); and
Total R&D expenditure.

Please note that the following information will not be included in the report:

Details of the R&D activities conducted;
The calculations behind the R&D expenditure;
The amount and type (refundable or non-refundable) of R&D tax offset the entity received; and
Any audit or compliance activities that the company has been, or is currently being, subjected to.

Please note that if an amendment was made to the R&D schedule, the ATO will look to report both the original information as well as the most recent company-initiated amendment (including any voluntary disclosures). However, please note that commissioner-initiated amendments will not be published.

It is also important to note that R&D entities cannot choose to opt out of having their R&D information published in the report.

Spotlight – R&D Documentation

One of the main requirements for entities wanting to lodge an R&DTI claim is that they must maintain contemporaneous records to support their claim. Recently, the ATO and the Department of Industry Science and Resources (DISR) have placed additional emphasis on the requirement for documentation to substantiate the R&D activities conducted. Below, we have split out documentation types that the regulators require to be kept on hand for both the technical and financial aspects of an R&DTI claim:

Documents to substantiate the registered R&D activities:

Hypothesis – this can be in the form of project plans, test plans, and meeting notes, highlighting at the outset of experimentation, what the company was trying to achieve and how they think they could achieve this.
Unknown Outcome – this can be in the form of internet searches, literature articles, and competitor analyses, detailing the current limitations of existing products/technologies, and demonstrating why a competent professional in the field could not have derived the outcome before experimentation.
Systematic progression of work – this can be in the form of experimental protocols, test reports, project specifications, records of trial runs, and analysis of results. For software R&D claims, this can include extracts from task management systems, JIRA tickets, or code commits. These documents should directly relate to the hypothesis and indicate how the hypothesis was proven or disproven.

Documents to substantiate the claimed R&D expenditure:

Time tracking – this can be in the form of contemporaneous timesheets or other time-tracking methodologies to substantiate the time spent on R&D activities (both core and supporting) versus business-as-usual activities by an employee, associate, or contractor. Please note that although timesheets show the time spent on R&D activities, there is still the requirement to have evidence of contemporaneous documentation that links the R&D time of an individual to the R&D activities conducted during the financial year. For example, if the timesheets record that an employee spent 8 hours on the R&D throughout a given week, there must also be documentation on hand to show the work being conducted or the output from this work.
Loan Agreements – in cases where the R&D entity is mainly funded by an associated entity, it is crucial that a loan agreement is in place highlighting that the loan is on a commercial basis (i.e. showing the date of the agreement, repayment terms, interest rates etc.). This agreement must indicate the R&D entity’s intention to repay the loan, and evidence that the expenditure is at risk (a provision that must be met to claim R&D expenditure).
Invoices and Contracts/Statement of Work – for contractors, the R&D entity must have both invoices and agreements (e.g. Statements of Work) between the entity and the contractors providing the R&D services. The agreements should outline who effectively owns the intellectual property gained from the R&D activities, who is funding the R&D activities, and who has control over how the R&D activities are conducted.
Evidence of physical payments – for associates, it is vital that the R&D entity has evidence on hand to show that the associate’s (both entities and individuals) expenditure was both incurred and physically paid within the financial year. For example, if the associate is an employee of the R&D entity, evidence that may show physical payment are monthly pay slips and employment agreements. Similarly, for associate contractors, sample evidence may include invoices rendered, alongside bank statements for both the R&D entity and associate, showing the physical payment being made from the R&D entity to the associate. It is important to note that in cases where the associate entity/individual is contracted out to undertake the R&D work whilst also funding the R&D entity for the same amount, these types of transactions are known as “round robin”. For example, the following situation would be considered as round robin transactions:
- An associate entity invoices $30,000 to the R&D entity;
- The associate entity then loans $30,000 to the R&D entity; and
- The same $30,000 is then paid back to the associate in order to pay off the rendered invoice.

Please note that if the documentation above is not maintained in a particular financial year, then an R&DTI claim cannot be made for that financial year.

Contact us

If you would like more information on any of the above topics and the impact that these could have on your current or future R&D Claims, please reach out to your Ascentium Australia R&D Consultant or Sameer Kassam at sameer.kassam@incorpadvisory.au.