Clear records key to Research and Development concessions
Towards the end of last year AusIndustry released version five of the R&D Tax Incentive Application, requiring additional information before a company can apply to claim tax credits.
Although it has always been important, clear and concise documentation of a company's R&D is more vital than ever to ensuring eligibility for the R&D tax incentive.
What has changed?
Applicants are required to describe the new knowledge their core activities aim to produce and how this differs from current knowledge in the field. While this requirement is not new to the legislation, it had previously been general practice to provide details of new knowledge on a project basis, rather than for each activity.
Applicants must now explain how the outcome of the core activities could not have been known already based on current knowledge or experience. Besides adherence to statutory requirements, these details may help AusIndustry assess if the applicant took reasonable steps in considering the extent of knowledge gaps and whether the R&D activities are warranted.
Each registered core activity should be described as an experiment (or set of related experiments) and include a hypothesis and brief details of the experiments/testing carried out, results and conclusion. Each registered supporting activity should include more detail about how it contributes to the corresponding core activity.
The form will take longer to complete as a result of the changes but we see these as definite improvements.
Context to the changes
Companies must understand that it is AusIndustry's view that R&D work is undertaken through projects, and each project has a set of activities. Projects are undertaken to generate specific and new knowledge, however eligibility is assessed on an activity basis so it must be demonstrated how each activity contributes to the project. Activities which are based overseas require an overseas R&D finding to be eligible.
The importance of defining and documenting the activities, not just the overall project, is becoming clearer and is reflected in the updated application form. It is important to note that an eligible activity can be a Core R&D Activity or a Supporting Activity and each type of eligible activity has certain requirements.
Core R&D activities are experimental activities whose outcome cannot be known or determined in advance, but can only be determined by applying a systematic progression of work that:
- Is based on the principles of established science;
- Proceeds from hypothesis to experiment, observation and evaluation, and leads to a logical conclusion; and
- Is conducted for the purpose of generating new knowledge including new or improved materials, products, devices, processes or services.
New knowledge or information includes new or improved materials, products, devices, processes or services. It needs to be more than:
- A simple progression from what is already known; or
- Applying existing knowledge in a different context or location.
Supporting activities do not satisfy the definition of a core activity but are directly related to and support the core activity.
1. Establish your hypothesis and write it down. When you state what you are trying to prove, you will have defined your new knowledge;
2. Set out the project that you will undertake to test this hypothesis;
3. Outline the project tasks which will probably be your activities. Another way of looking at this is to set out everything you need to do to complete the project.
The new, more detailed, application form will help to ensure the information required is set out appropriately.
For further information contact Nick Falzon in Sydney, or one of our other office locations around Australia.