Record Keeping

The R&DTI is a self-assessment process, so a taxpayer makes their own judgements of eligibility and submits the corresponding expenditure amounts as part of the tax return. Whether the process is assisted by a tax agent or R&D specialist, the onus is on the taxpayer to ensure they can prove that they comply if either AusIndustry or the ATO decide to audit the application.

The AusIndustry compliance process is an assessment of eligibility of activities on a pass/fail approach.

An ATO audit is an assessment of the eligibility and proportioning of expenditures.

It is an expectation of the R&DTI that records are retained to show how the activities were conducted, the expenditures incurred in conducting them, and how the assessment of eligibility was made.

For the ATO this will include records of effort of staff and contractors (not necessarily timesheets), invoices from contractors, service providers and consultants and receipts for materials, subscriptions etc.

It is expected that these records are retained for 5 years, although for small businesses, the ATO cannot amend the tax return after 2 years as part of the small business concessions.

The most contentious parts are payments to associates, loan agreements, constructive payments, staff time allocations, and the appropriate proportioning of overheads.

For AusIndustry, the record keeping requirements are aligned with the eligibility criteria and they expect documented evidence of the process used to establish that the knowledge to be gained is new, that there was no existing method of gaining the knowledge, that there was a hypothesis at the start of the experiment, and then that the experiment followed a scientific method.

There is a comprehensive guide from AusIndustry here.

This requirement to produce documents can be very difficult to meet if responding to an audit that may occur over a year after the activities were conducted. Although there is at least one quote from a court judge which states that records of R&D activities can take many forms including oral statements, AusIndustry themselves still focus on written documents.

The strongest recommendation is keep records as the projects and activities progress. Also, keep a monthly summary of the main pain points and investigations, and any supporting work done. These can help to show the timelines and make the application process much easier as well.