Did you know the Australian Government offers tax incentives to Australian businesses doing research and development (R&D)? The R&D Tax Incentive program provides eligible businesses with tax offsets up to 43.5% for the costs involved in advancing your innovation. This is an awesome opportunity to prioritise research and innovation within your business and to help put Aussie businesses on the map.
But due to the tricky nature of self-assessing what makes R&D eligible under the legislation, some businesses misinterpret the guidance and make R&D tax claims for activities that aren’t eligible. Audits by AusIndustry and the ATO can lead to corrections or even dismissals of flawed claims, including the repayment of any benefits. Yikes! We want to help you avoid this awful scenario.
Check out our list of advice below on the 10 most common errors all businesses should be aware of before making an R&D Tax Incentive claim.
1. Conducting R&D in the wrong business structure
Before you’ve designed your first logo, as an innovator you should set up your company in the best way to make the most of the R&D Tax Incentive. This should take into consideration the protection of the company’s IP, its longer-term goals and your personal affairs.
An eligible R&D entity is a corporation that is incorporated under an Australian law (i.e. a company). There are a few exceptions, including, in some circumstances, a foreign corporation. A trust is not an eligible R&D entity.
Too often we see businesses conducting their R&D in the wrong structure and accidentally blocking their access to hundreds of thousands of dollars in funding. Company structures can be changed, but only a time machine would help to claim those old costs.
The right business structure can’t be prescribed using a one-size-fits-all approach.
2. Claiming for whole R&D projects, not individual activities
When conducting R&D, think of the project in terms of the specific activities being conducted within it, and not the project in its entirety.
Identify and separate any experimental (core) activities and the directly related supporting activities from the usual routine activities that would be undertaken in the absence of the R&D project (these may not be eligible R&D activities).
Activities being claimed as supporting R&D activities must be directly related to an eligible core R&D activity or undertaken for the dominant purpose of supporting core R&D activities. Just being an activity within the same project is not enough on its own.
3. Assuming that R&D activities are automatically eligible because they follow a software development lifecycle
The process of developing, modifying or customising software appears similar to the eligibility requirements for core R&D activities because it can be systematic and may involve testing.
Keep in mind, however, that software R&D development must meet the following criteria:
- It tests a hypothesis
- It has an outcome that could not be known or determined in advance by a competent software engineer with relevant credentials and experience
- It is conducted for the purpose of generating new knowledge
4. Failing to identify a specific technical knowledge gap
Activities that solve challenges by applying existing knowledge and expertise, without needing to undertake experiments, are not eligible as core R&D activities. The requirement is more than simply whether the technology has not been developed before.
Just because something is new does not mean it’s developed by testing a hypothesis.
A technical knowledge gap means the answer can’t be readily derived by an expert in the field. If there is a technical knowledge gap, it follows that there must be a hypothesis and an experiment will be required.
We often see companies make this error when trying or developing something new, and though the business innovation is clear and has no equal, competent professionals in the field can determine the outcome without conducting an experiment.
5. Claiming for R&D activities related to the development of internal administration software
The R&D Tax Incentive has specific exclusions and one of these is software development for the purpose of the business’s internal administration. Even if the activities would otherwise meet the eligibility criteria for core R&D activities; developing, modifying or customising administration software entirely for your business is not eligible. However, this does not exclude such activities from being eligible supporting R&D activities.
6. Keeping poor documentation that doesn’t support the R&D activities or expenditure
Companies need to assume that a lack of real-time R&D records means non-compliance and no R&D claim. You must keep records throughout the whole R&D process that demonstrate what you did for each core R&D activity, including a record of each experiment and how much it cost.
A company must record each step of an experiment undertaken, not just a record of the final outcome.
Some companies are agile and fast moving but this methodology is not conducive with the R&D Tax Incentive and these companies will need to adapt. The agile approach will not be accepted as an excuse for failing to keep adequate records.
Companies must document how they meet each of the eligibility criteria, including:
- how each experimental activity was carried out and applied a systematic progression of work (think of the hypothesis, variables, measurements, setup, etc)
- proof that the outcomes could not be known or determined in advance by an expert (attempts to use the status quo, competitor reviews, online searches, patent searches, open source code searches, etc)
- that each activity was conducted for a purpose of generating new knowledge (R&D plans, meeting minutes, white papers, emails, etc)
- for supporting activities, evidence for what was done and how it relates to the core activity.
It is usually acceptable to make use of less formal records, such as screenshots, messaging histories, and exports from task tracking or project management tools.
To be eligible for the R&D Tax Incentive, you must also have records of the expenditure on eligible R&D activities, and how it relates to the activities. In particular, labour tracking R&D time sheets are the best way to apportion time spent by staff and contractors as well as ensuring that contractors have a detailed contract for the work they are performing on behalf of the company.
7. Using badly worded R&D project descriptions
Sometimes, a company may have an eligible R&D project, but due to a lack of experience on how to accurately describe the activities or answer the questions required in the application form, they may be unintentionally increasing the risk of a time-consuming review or even a project being denied. Experienced R&D experts are skilled at application writing ensuring that your project is reflected accurately in the language required of the R&D legislation.
8. Under or over-calculating eligible R&D costs
Companies can make R&D Tax Incentive applications with project costs that are far less or far more than what they should be claiming. There are many ways in which a company may miscalculate its R&D expenditure, including taking a too wide or narrow view of R&D expenses or using an inappropriate apportionment method for claiming overheads. There are also specific exclusions for costs that can be included as R&D expenditure, which must be identified and excluded.
9. Including costs where the R&D activities are not being conducted by the company on its own behalf
In some instances, companies employ or are employed by a third party as a contractor to assist in certain aspects of an R&D activity. In these instances, we need to ensure that the correct company is claiming the R&D Tax Incentive on behalf of the project. To do this we need to consider the following points:
- Who is bearing the financial risk?
- Who owns any resulting IP?
- Who directs the undertaking of the R&D activities?
10. Not considering all the possible supporting R&D activities that are eligible
Both core R&D activities (experiments) and supporting R&D activities are eligible. Supporting R&D activities are eligible when they have a direct relationship with the core R&D activities; for example, collecting data to use in an experiment. Some companies are so focused on their core R&D activities that they inadvertently don’t claim for the other eligible costs. This means they accidentally underclaim and leave money on the table. No one wants to do that!
How can BlueRock help?
As R&D Tax Incentive experts, we demystify the complex regulation and guidance to ensure you get the most out of your R&D Tax Incentive claim. This means we work with your team to clearly identify the project’s eligible activities and costs before communicating these to AusIndustry in the most effective way to ensure your R&D Tax Incentive application is accepted.
The process of applying for the R&D Tax Incentive with assistance from BlueRock involves:
- quarterly workshops to gather information on the R&D activities to determine eligibility
- preparation of the AusIndustry application for Registration summarising the eligible R&D activities
- preparation of the financial calculation to determine eligible expenditure
- submission of the R&D Tax Incentive application to AusIndustry
- management of the AusIndustry inquiries, including meetings, site visits, information requests and other communications.