AusIndustry and the ATO recently discussed R&D compliance concerns with the R&D advice community.
There are two points worth noting:
The Registration Application is not a form-filling exercise. The RA is designed to allow AusIndustry to assess R&D eligibility easily without needing to ask clarifying questions.
Follow the rules of the road. The R&D incentive is a self-assessing tax benefit but it is also a cost to revenue, and as take-up rates increase expect that eligibility will be policed with increasing vigilance.
Five areas of concern
AusIndustry and ATO outlined five areas of concern, followed by our commentary.
1. Registration form inconsistencies
The Registration Form is the Project story. Its component parts must tell that story concisely and clearly
- Identify the background to the Project
- Separate Commercial from Technical Objectives. State Technical Objectives precisely
- Link each Technical Objective to an item of New Knowledge, being the unique product / service attributes the Project is developing. State the technical uncertainty in each item of New Knowledge
- Describe the existing state of industry knowledge. State how the Project goes beyond this knowledge base to create a new way to do something or create something new
- Describe as a Core Activity the purpose and experiments conducted to address each technical uncertainty.
2. Record-keeping deficiencies
Maintain a contemporaneous record of Project progress
- Project documentation and a log of email communication
- A dated log of all design iterations, key ‘uncertainties’ and how they have been addressed.
3. Ordinary business activities and whole-of-project-type claims
All Project activities and all Project expenditures cannot generally be claimed as R&D. The R&D incentive applies only to particular Project activities that qualify as core or support activities. Focus the claim on the Project activities that qualify as core R&D activities and related ‘supporting’ activities.
Draw distinctions between the R&D and non-R&D elements of a Project. Just because a Project is to develop a new product does not mean that all Project activities qualify as R&D activities or that all Project expenditures are eligible R&D expenditures. R&D stops when the technical uncertainties in a Project have been resolved.
Computer Software presents particular challenges because it is hard to distinguish between developments that are really the application of existing knowledge and those that have some path-breaking or New Knowledge character.
4. Complying with statutory and regulatory requirements
The purpose of R&D must be to develop New Knowledge by undertaking activities to solve identified technical uncertainties in a Project not just to satisfy statutory or regulatory requirements. By definition these are just existing industry knowledge standards.
5. The ‘conducted for’ test
The Project must be undertaken on behalf of the R&D applicant, so the nature of contractual terms becomes very important, for example as between a client who wants an outcome and a researcher (the applicant) who has to deliver it.