How do I prepare to claim the RDTI?
For the purposes of the RDTI, there is a specific statutory definition of ‘R&D’ which is not the same as the commercial, engineering or accounting definitions. The tax credit is not just for scientific research but also for development activity that meets the eligibility criteria.
There are clear criteria around what does and doesn’t qualify as eligible R&D for claiming the RDTI and these should be considered in detail before launching a project.
The RDTI operates on a self-assessment basis. You’re responsible for determining whether your activities and expenditure meet the legislation’s requirements, and for maintaining records to support your claim.
What records should be maintained?
Your business records must be sufficient to verify:
- The nature of the R&D activities
- The amount of money spent on R&D activities
- The relationship between the expenditure and the R&D activities.
Relevant records include those normally kept by businesses to support income tax and GST claims. Additional records will be required to cover the planning and processes of your R&D, and to isolate eligible expenditure. These records will vary depending on the nature of your business and R&D activities.
Records of eligible activities
Your records should establish that you meet all the eligible activity requirements. Ideally you should maintain a project summary document for each core R&D activity that summarises:
- The new or improved knowledge, product, process or service sought
- The scientific or technological uncertainty or uncertainties that needed to be resolved
- The state of knowledge or technology that existed when the R&D was undertaken
- Evidence that the knowledge was not publicly available or deducible by a competent professional – this might include:
- Literature reviews
- Patent or other searches
- Scientific or technological reviews and articles
- Reports or opinions from experts
- Trade journal articles
- Evidence of the systematic approach to the R&D, such as project plans and records of testing and outcomes
- When the core activity commenced and ceased
- How your supporting activities relate to the core activity
- How you identify costs that relate to the eligible activity.
Records of eligible expenditure
You already keep records of your income and expenditure (eg. contracts, invoices, wage records) in your accounting systems and financial statements. However, your existing expense classifications won’t necessarily match up with the definitions of eligible and ineligible expenditure. You’ll need to develop additional systems that make it clear which is eligible.
If your employees, business assets and other resources are used in both R&D and other activities, you will need to apportion the expenditure between those activities.
There are many ways of doing this, and you must use a method or methods that can be substantiated. This could include the use of time records for employees, floor space for rent, and hours of use for plant and equipment.
Whichever method you use, you should be able to show why it is appropriate.
If you perform your R&D activity in conjunction with a commercial production activity (producing products or services for sale), you can only claim the RDTI on:
- expenditure on your employees’ contribution to the R&D activity, and
- the additional expenditure you incur because of the R&D activity.
This means you have to keep records to substantiate the time and costs for employees working on the R&D activity, and any additional costs incurred.
Where any goods produced as a result of the R&D activities are sold, you must deduct the sale price or market value of the goods from your eligible expenditure. You will need to keep records of the production costs, volume and value of goods produced and sold, and the volume on hand at the end of the year.
If you engage a contractor to carry out your R&D activity, any contracts, reports and invoices should enable you to:
- Identify the eligible R&D activities performed by the contractor and describe them as required by the R&D return (and from 2020/2021 the application for general approval)
- Identify the cost of the eligible R&D activity and exclude expenditure on any other work carried out
- Identify and exclude any ineligible expenditure incurred by the contractor
- Identify when and where the contracted R&D was undertaken.
For detailed information on record-keeping to support your RDTI claim, download our Keep Good R&D records How-To Guide.