At this time of the year, and particularly against the backdrop of the Government's concerns about the integrity of the R&D tax incentive program, many companies seeking to apply for the R&D tax incentive will be working towards finalising the details of their application. While drafting the activity descriptions of your innovative projects can often be almost as time-consuming as developing the innovation itself, it is critically important to ensure that you collate and maintain evidence to support what has been described.

Concerns in relation to the sustainability, effectiveness and integrity of the R&D Tax Incentive programme following the Ferris, Finkel and Fraser Review have led to increased compliance review activity from both AusIndustry and the ATO in recent years. Examples of deficient record-keeping and unavailability of evidence demonstrated in recent tribunal cases such as Rix’s Creek Pty Ltd; Bloomfield Collieries Pty Ltd and Innovation and Science Australia (2017) AATA 645 and Docklands Science Park Pty Ltd and Innovation Australia [2015] AATA 973, as well as the significant decision in Mount Owen Pty Limited (aka DBTL) and Innovation Australia [2013] AATA 573 (on the R&D tax concession), which turned on the availability of the evidence, highlight the decisive role of evidence in supporting an application for the R&D tax incentive.

As companies wait for the Government's Budget announcement on R&D policy in response to Innovation and Science Australia's 2030 Strategic Plan for Australian Innovation (delivered to the Government in November 2017) ‒ as well as a response to the Ferris, Finkel and Fraser Review of the R&D Tax Incentive (concluded April 2016) ‒ there has never been a more appropriate time for businesses to revisit their internal knowledge management and record-keeping processes. Whatever happens next, the Government has signalled it has concerns about the integrity of the program and companies would be well-advised to ensure that proper evidence of R&D claims is available.

Tips for efficient and effective management of evidence in support of R&D activities

Documentation should be contemporaneous and contain technical detail

Documentary evidence generated at the time that the R&D activities are conducted will be of foremost importance to evidencing their eligibility. In particular, documents with detailed technical analysis and evaluation generated from the experimental activities will be held in high regard.

While oral evidence (including that of experts) can be of assistance, its value can be significantly diminished if it is given by persons without first-hand involvement with the R&D activity, and / or such evidence is imprecise, or based on incomplete or insufficiently detailed documentary evidence (Mount Owen Pty Limited and Innovation Australia [2013] AATA 573). Non-contemporaneous evidence may, in some circumstances, raise a concern that the activities claimed fall into the controversial category of "business-as-usual" being re-badged as R&D.

Maintain contemporaneous documentation, contemporaneously

Do not wait until the last minute before you submit your R&D tax incentive application (or worse, after submitting your R&D tax incentive application) to gather and organise your supporting documents. Instead, liaise with key technical and project management personnel on a regular basis (especially at key R&D activity milestones and earlier, during project planning processes) to collaboratively compile relevant material throughout the income year. Doing so should be considered an integral part of both the R&D development effort, and submission of the R&D tax incentive application.

R&D tax incentive evidence guide

While the scope and nature of relevant documents will vary by industry and business, general guidance as to the documents that may assist in evidencing a core activity is set out below. In general, many of these documents should ordinarily arise out of standard business practice and a robust commercial R&D program.

Further documentary evidence may be required when applying for an Advance Finding or Overseas Finding.