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Save your creativity ‒ innovative R&D doesn't need innovative evidence: An R&D tax incentive evidence guide
Evidencing your R&D Tax Incentive claims shouldn't require you to be overly creative if you maintain conscientious record-keeping practices.
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.
Is the activity conducted for the purpose of generating new knowledge?
What was the state of the knowledge, information or experience before starting any of the core activities?
Issues:
- generating new knowledge must be a "significant" purpose for conducting the activity
- the knowledge must be "new"
Documents / records may include:
- industry / process / product review
- competitor / competitive advantage analysis
- expert opinion
- patent / novelty or prior art searches
- literature review
- business case, scoping review, feasibility studies, stakeholder presentations
Could the outcome of the activity be known or determined in advance?
Issues:
- must go beyond a "simple progression" from what is already known
- must be significant enough to require application of the scientific method
Documents / records may include:
- planning documents and internal assessments of technical challenges
- industry / process / product review
- expert opinion
- patent searches
- literature review
- business case, scoping review, feasibility studies, stakeholder presentations
Is the activity following a systematic progression of work involving an experiment?
Issues:
- need to demonstrate a plan including consistency with progression from hypothesis to experiment, observation and evaluation, leading to logical conclusions
- contemporaneous material and records need to have a level of precision which would be expected of a systematic investigative process or a well-documented research and development program
Documents / records may include:
- project management / planning documents including development plans, Gantt charts, progress reports
- work plan/internal memos by key personnel intending to conduct the experiments outlining experiment methodology
- test reports, log-books with detailed comments and analysis of iterations / results
- internal feedback and evaluation reports of successful and failed iterations
- project scope revisions
- evidence of iterations / prototypes including photos / videos, engineering and design documents
- emails between project team members, especially technical personnel
- R&D committee agenda/papers/minutes
- business case, scoping review
- feasibility studies
Are the activities excluded activities, or could they, if misunderstood, be seen as excluded activities?
Issues:
- careful characterisation is important where an activity could be misunderstood as an excluded activity
Documents / records may include:
- statement of differentiation
- scholarly journals
- expert opinion
- business case, scoping review
You should also ensure that you maintain documentation evidencing the nexus between supporting R&D activities and the relevant core activity, as well as the nexus between the R&D activities and expenditure claimed in the R&D tax incentive schedule.
How are supporting R&D activities directly connected or undertaken for the dominant purpose of particular core activities?
Issues:
- supporting R&D activities must have either a direct, close and relatively immediate relationship to, or in some circumstances, be conducted for the dominant purpose of undertaking, the core R&D activities
Documents / records may include:
- business case, scoping review, feasibility studies
- project management / planning documents
What is the nexus between the R&D activities and expenditure claimed?
Issues:
- expenditure claimed under the R&D tax incentive must have a sufficient link to the R&D activities conducted for the R&D entity
Documents / records may include:
- employee timesheets
- contracts
- records of resources / assets allocated to the project
- tax invoices
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Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.