Undertaking research and development (R&D) is an inherently risky venture. When we think of research, we usually think of analyzing scholarly material.
However, if you are involved in any type of business operation, research will assist you in gathering the necessary data for your industry’s success.
Indeed, asking questions and researching answers or recommendations is critical when making major business decisions.
This could include industry research, market research, or user research based on your business objective, so that your business plan is aligned with the right customers and does an excellent job of executing its goals.
Some companies reap huge benefits from striving to develop a new or improved product or process, while others have yet to reap financial rewards for years of hard work.
Investment in R&D is an essential factor driving innovation and growth which is true for both the macro and micro levels for governments and individual businesses.
What is R&D Tax Incentive?
The R&D Tax Incentive is administered by AusIndustry and the Australian Taxation Office, and it serves as a reward for eligible companies that implement effective knowledge management systems and strategies in the pursuit of new technology, which manifests itself in new or improved products, systems, processes, services, or devices.
The Incentive is governed by legislation, which includes a definition of what constitutes “R&D activities” for the purposes of registering with the program.
This means that companies interested in applying for an incentive must determine whether their work meets the program’s definition of “R&D activities.”
Activities are classified into two types:
- Experiments or core activities like clinical trials
- Activities that support experiments through direct, necessary supporting activities such as recruitment, data management, and so on.
How Does Your Company Determine Eligibility for the R&D Tax Incentive?
The RDTI is a joint government programme administered by the Australian Taxation Office and the Department of Industry, Innovation, and Science (AusIndustry) that offers companies a tax offset ranging from 38.5 percent to 46.5 percent, depending on their annual turnover.
R&D credit eligibility is much broader than many businesses realize, encompassing not only product development but also activities and operations such as new manufacturing processes, software development, and quality improvements.
You should also take note that a business or a company must have undertaken eligible R&D activities during the income year.
You must conduct or plan to conduct at least one core R&D activity to register eligible R&D activities.
Any supporting R&D activities must have a direct relationship to your core R&D activities. When you register for the R&D Tax Incentive, you must specify your activities.
To be eligible, you must complete the following tasks:
- Carry out or plan to carry out at least one core R&D activity.
- Check that your core R&D activity is not one of the excluded core R&D activities.
- Register your primary research and development activity.
Only support R&D activities that are directly related to a core R&D activity should be registered. But in some cases, they must also be activities carried out with the primary goal of supporting a core R&D activity.
Core R&D activities
Core R&D activities are those that have outcomes that a competent professional cannot predict or predict based on current knowledge, information, and experience.
Only by following a systematic progression of work can the outcomes of core R&D activities be determined.
- is founded on well-established scientific principles
- from hypothesis to experiment, observation, and evaluation, leading to logical conclusions
You must conduct them in order to generate new knowledge. Your new knowledge may manifest itself as new or improved materials, products, devices, processes, or services.
Supporting R&D activities
Supporting R&D activities are those that are directly related to core R&D activities. This also applies to activities carried out primarily to support core R&D tasks.
This means that supporting R&D activities must be intrinsically linked to the core R&D activity in a significant way in order to be claimable.
This is known as the “dominant purpose requirement,” and it applies to activities that produce goods and/or services, or are at least directly related to these processes.
Supporting R&D activities can also include activities that are not core R&D but still serve to support a qualifying core activity.
Keep all your records as proof of your R&D activities
When reviewing your application or registration, records will be the most powerful evidence to back up your claims.
These are some examples of contemporaneous documentation:
- Payroll documents
- Expense detail from the general ledger
- Lists of projects
- Notes on the project
- Results of laboratory tests
- Emails and other documents generated by a company during the normal course of business
These records, along with credible employee testimony, can serve as the foundation for a successful R&D credit claim.
Check this link to see a more detailed list of the documents required.