How to protect your Research & Development claim: A proactive approach

13 July 2015

Mark Pollock , Partner, Tax |


Australia’s Research and Development (R&D) Tax Incentive scheme provides funding to companies engaged in R&D activities in the form of tax offsets, fuelling efforts to innovate and improve products and services.

However, the Australian Taxation Office (ATO) is concerned that not all companies applying for these refunds have the evidence to back up their claims, calling into question whether they’re entitled to the funding they obtain. On 21 May, the Commissioner indicated that an initial round of reviews uncovered a number of taxpayers who were unable to substantiate their R&D tax claims.

As a result, the ATO will be working closely with AusIndustry to evaluate these applications and identify cases that may involve negligence, tax avoidance and fraud. What can you do to ensure your R&D refund claim is safe?

Strength in numbers: Documenting your R&D activities

Even if you’ve acted in good faith applying for the R&D incentive, it’s your responsibility to have the documentation to back up your claim. To avoid penalties that result from failure to do so, you need to take steps to ensure your paperwork is in order.

Beyond knowing the nuances of what qualifies as an R&D activity according to the letter of the law, your company needs to ensure it has the cold, hard facts to show that the expenses recorded in its tax return actually occurred - and were put towards qualifying endeavours.

What kind of documentation should you be tracking? It depends on the type of activity and expenses claimed, but a few examples include:

  • Labour specifically spent on R&D, such as time sheets that show how much time each employee worked on the R&D project
  • Expenditure on materials and equipment, with records of precisely which purchases were used for the qualifying activities
  • Overhead costs, apportioned towards the R&D project where possible to demonstrate this segmentation.

While some documentation - such as receipts for materials - are easy to collect, others may be impossible to generate without intentionally recording them from the outset. Timesheets in particular tend to present challenges since the hours spent on R&D activities must be specified.

The value of a proactive approach

Some companies wait until tax time to decide which activities they can claim as R&D projects. In this case, it’s extremely difficult to collect enough evidence to accurately support their reported expenditures.

Instead, businesses should take a more proactive approach, planning for these claims from the earliest stages of their R&D endeavours. From there, having a documented internal process for how they’ll collect the pertinent information - such as time sheets and equipment costs - will help ensure they gather this data as the project progresses.

To get organised in this way, companies should create manuals for these procedures, speaking with tax experts who can detail exactly which types of information they need to collect to support their claims. In some cases, they may need to adjust their basic ledger and accounting strategies, by establishing separate accounts to track which expenditures are going towards their R&D activities for example. Importantly, these strategies should be tailored to the unique requirements, reporting structure and operations of each company.

When these measures are in place, they’ll be tracking the necessary data throughout the year, avoiding a last-minute scramble come tax time.

Claim with confidence

This increased scrutiny into R&D claims shouldn’t deter companies from carrying out R&D activities or seeking the financial support they’re entitled to receive.

In other words, you needn’t be conservative or tentative in your tax claim out of fear that you may land in hot water with the ATO. Instead, taking a proactive approach to identifying in advance which activities you’ll claim as R&D projects, and then ensuring you have processes in place to record the appropriate data, will enable you to apply for this concession in good faith and with confidence.

The tax specialists at BDO can help your company evaluate its R&D claims and develop strategies to more thoroughly and proactively collate the proper documentation. That way, you can rest assured that your R&D claim is in good order, regardless of whether or not the ATO decides to investigate.