Tips for Lodging an R&D Tax Incentive Claim
Co-Authored by James Longworth
When deciding to claim the Research & Development Tax Incentive (RDTI), there are many things to consider to ensure you are lodging a defendable RDTI claim, these include:
Tip #1 – Engage a Reputable Agent
It is strongly recommended you engage a reputable R&D Tax agent who understands your technology. This will enable you to confirm eligibility through the identification of eligible Core and Supporting activities under which eligible expenses can be linked and claimed.
It is possible for claimants to prepare and lodge their own claims without the assistance of R&D tax agent, however, due to the complexities of the program there is an increased risk that your claim could be challenged as audits may occur up to 4-5 years after receiving the benefit whereby if rejected would require the repayment of the initial benefit plus penalties and interest
Tip #2 – Maintain Proper Records
As an RDTI registration application can only be lodged up to 10 months after the completion of each financial year, maintaining contemporaneous R&D records is important for the following reasons:
- It is difficult to remember specific details of the R&D activities that was undertaken in a prior year
- Having to go back through the files and collect all the relevant documents and costs that are associated with the R&D activities makes the RDTI process onerous
- It could lead to a reduced claim as not all the R&D activities/expenditure can be backed up
- To ensure compliance in case your claim is audited
If records are maintained (and date stamped) throughout the R&D activities and placed in an R&D file, it will make the process easier when it is time to submit the application. This will make them more accurate, strengthening the validity of the R&D claim.
Tip #3 – Doublecheck your associate payments
Ensure any R&D expenditure incurred to an associate (related entity) is paid before the end of the financial year so that you drawdown the R&D benefit related to the costs as opposed to having to carry it forward in your tax return until it’s paid.
Lodge the RDTI application early. The processing time for RDTI registration applications has increased due to the increasing number of applicants and the more in-depth review processes recently implemented by AusIndustry, the prior 10 day processing period has increased to:
- 40 business days for first-time registrants
- 20 business days for registrants that have applied within 6 months after the end of the income period
- 80 business days for registrations submitted from 6 to 10 months after the end of the income period.
Remember you can’t claim your R&D Tax benefit in your tax return until AusIndustry has firstly processed and registered your project activities. Therefore, it’s important to maintain contemporaneous records, lodge the registration application as early as possible and ensure your external accountant is preparing your financial statements up to draft tax return stage whilst AusIndustry is processing the registration application. Having these measures in place will allow the tax return to be lodged on time, avoiding the need to lodge an amended tax return which will delay the receipt of the benefit
Which costs can be claimed under the RDTI?
When analysing the R&D entity’s financials, the R&D expenditure needs to be allocated into the following 9 categories in which eligible expenditure can be claimed. Please note there are many nuances to the RDTI and this is a general guide.
R&D expenditure – Research Service Provider
Registered Service Provider’s (RSP’s) are entities approved by Innovation Australia and are unrelated to the R&D entity. As RSP’s have appropriate scientific or technical expertise and resources, they can perform R&D on behalf of an R&D entity and are therefore the RSP expenses are eligible to be claimed under the RDTI.
R&D expenditure – Contract expenditure (not RSP)
Contractors (other than RSP’s) that undertake R&D activities are eligible to be claimed under the RDTI. It is important to consider the following when employing an R&D Contractor,
- Make sure the specific R&D activities they will be working on are detailed when preparing their Contract / Scope of Activities statement.
- Ask the Contractor to distinguish their time between the R&D activities and non-R&D activities on their invoices and Progress Reports.
- Detail minutes of any meetings between yourself and the contractor (this will assist in keeping contemporaneous records)
- It is also important to note that if Contractor payments are paid into a family trust, further investigation on RDTI eligibility is required.
R&D expenditure – Salary expenditure
Salaries and wages of employees engaged directly in conducting eligible R&D activities can be eligible under the RDTI to the extent of their R&D involvement. The relevant employees may include:
- researchers undertaking the conception and/or creation of new knowledge and products
- employees undertaking technical tasks in support of the R&D activities, such as persons keeping records, preparing charts and graphs, operating equipment, and writing computer programs
- supervisors of researchers and technical staff.
It is important to note that superannuation can contribute to the Salary Expenditure and must be paid by the 28th of July each year.
If a salary is paid via a loan account, further investigation will be required.
R&D expenditure – Other
This general category can be split into two types of expenditure
- Direct; which is expenditure directly related to R&D activities such as R&D related travel, R&D materials (including overseas purchases), or hiring specific equipment that is used for R&D only etc.)
- Overhead; these expenses are apportionable (to the extent of R&D) such as rent, internet and electricity etc.
The rate of apportionment can be determined 3 ways and the most appropriate rate will be allocated to the R&D entity.
- Cost Rate: the total R&D wages vs. total wages
- Hourly Rate: the total R&D hours vs. the total hours worked
- Floor Space: the floor area used for R&D activities vs. the total floor space
R&D expenditure – Feedstock input expenditure
Goods or materials that are transformed or processed during R&D activities along with the energy input directly into that transformation or processing are eligible under the RDTI,
However, if the feedstock used and transformed through R&D activities results in a tangible product that is then sold or used for internal purposes, a feedstock adjustment will be required.
R&D expenditure – Paid to associates in the current year
Generally, associates are entities that by reason of family, ownership or business connections, might appropriately be regarded as being associates to the claimant company. This includes wages and contracting payments to the directors or owners of the company as well as contracting fees to companies that have similar owners. Common non-arms-length transactions can include companies that may have a separate company for their intellectual property or staff that contract across R&D expenditure. Association also applies to companies that might be owned by a spouse or related family and other similar arrangements.
R&D associate expenditure must be identified and recorded in the financial year it was incurred and only claimed under the RDTI once it’s paid. This means that if the R&D associate expenditure incurred was not paid for within the financial year, it will be noted as unpaid and carried forward until payment is made, making it claimable in a future year.
R&D assets – Decline in value
R&D assets – Balancing adjustment losses
The sale or disposal of a depreciable R&D asset that would normally give rise to a Section 40-285 balancing adjustment will be affected by the RDTI.
If an asset was used to conduct R&D activities, it entitles the claimant to claim the balancing adjustment deduction as a notional deduction for R&D instead of a normal deduction. Conversely, if a claimant receives a sale price greater than the adjustable value (purchase price minus depreciation) this should be reflected as an increase in assessable income to reduce the R&D benefit previously received.
Cooperative Research Centre contributions
Similar to RSP’s mentioned above, Cooperative Research Centre’s (CRC’s) have appropriate scientific or technical expertise and resources, but they perform R&D on behalf of multiple participants who fund the research via contributions. These contributions are eligible under the RDTI.
For further tips for lodging your claim,
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- Scope your potential to claim various grant programs
- Assist with the preparation and lodgement of grant applications
- Review or provide a health check on your internally prepared grant applications
- Establish record-keeping practices as required under various grant programs
- Provide prepayment loans against future cash refunds under the R&D Tax Incentive
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