With the 2013 financial year behind them, many businesses are now considering whether they are eligible to claim a tax offset under the Federal Government’s R&D Tax Incentive Program. In doing so, it is worth reflecting on key lessons from the Program’s inaugural year, and how this information can be used to maximise R&D claims and reduce compliance burden.

What you need to know

  • How you frame your core and supporting R&D activities can have a significant impact on the eligibility of a claim and the associated compliance burden
  • It is a company’s responsibility to determine whether an activity is, or forms part of, a core or a supporting R&D activity
  • Sufficient documentation to evidence R&D activities and expenditure is vital to substantiate an R&D tax offset claim

Compliance lessons

At a recent R&D Tax Incentive information event, AusIndustry (the government body responsible for administration of the R&D tax incentive program) revealed some key lessons from its 2012 compliance activity.

Of particular interest were comments made regarding the classification and breadth of core and supporting R&D activities registered including that:

  • All applicants who registered no supporting R&D activities were subject to desk review (where applicants were contacted for additional information), so as to determine whether there were legitimately no supporting activities;
  • Applications that did not articulate a clear link between core and supporting R&D activities often faced compliance activity; and
  • Applicants who fail to update registered activities as projects evolve will likely face compliance activity for FY2013.

The core and supporting activities that a company registers in its R&D Application have a direct impact on the breadth of costs claimable in the company’s income tax return. As such, issues such as the number of core and supporting activities registered, the information included in the core and supporting activities and the classification of activities as core or supporting, can have a direct impact on a company’s claim.

AusIndustry guidance material

To illustrate its view on how activities should be classified and documented, AusIndustry has recently released sectoral guidance for the Built Environment, Energy and Manufacturing industries.

Along with previously released material for the ICT, Agrifood and Biotechnology sectors, this guidance provides a useful insight into AusIndustry’s interpretation of the legislative definitions of core and supporting R&D activities. However, it is important for each company to apply the legislative definitions to its own specific fact situation in order to determine whether an activity forms part of a core R&D activity, or whether it would more correctly be classed as a supporting R&D activity. When making these determinations, companies need to consider how close an activity is to the experiment, its significance to the experiment and the record-keeping requirements that can substantiate their decisions.

It’s not what you know; it’s what you can prove

The importance of maintaining sufficient documentation and records for claims made under the R&D Tax Incentive program has also been made patently clear this year with a number of claims being denied in the Administrative Appeals Tribunal (AAT) on the basis that documents to substantiate the carrying on of activities could not be produced. 1 This supports the conclusions reached in Griffith Hack Consulting’s November 2012 article on this topic, "If it's not written down, it didn't happen".

AusIndustry compliance activity shows no signs of slowing with 65% of FY2012 registration reviews going to desk review, and 26% of desk reviews moving to activity review (where issues investigated during desk review remained unresolved).

In conclusion, companies claiming an R&D tax offset for activities conducted in the 2013 financial year need to carefully consider the scope and classification of the core and supporting activities that they register. It is also vital to ensure that adequate documentation is available to substantiate the carrying on and eligibility of registered R&D activities, and the legitimacy of the expenses claimed.