Did you receive a letter from the AusIndustry regarding your R&D Tax Incentive (RDTI) claim? What is it and what does it mean for your RDTI claim? Why does it happen? How often does it happen? You might have a lot of questions, and this article will give you a better understanding of the significance of receiving a letter from AusIndustry and essential tips to help you navigate through a review.
Applications for R&D Tax Incentive are considered “self assessment” which means you make your own assessment about eligibility, fill out the form and submit. AusIndustry get over 2,000 applications for R&D tax each year and are not going to review each one in detail. However you must still comply with the program requirements to be eligible and failure to comply may lead to you repaying your rebate in part or in full.
AusIndustry has several levels of reviews
- Before registration: Ausindustry may hold off registering your application if the form is incomplete or something stands out that might bring attention to the fact that you might not be doing eligible R&D activities.
- Post registration reviews: You may get your registration number and then be selected for review.
- Retrospective claims: AusIndustry can go back 4 years and make a ruling on your prior claims.
- Internal review: A second detailed review may be made, if requested.
What types of reviews will they conduct?
There are a few different levels of review:
- Desktop review: This is done by AusIndustry without you knowing. They will do their own research and send you a letter offering advice on how you could have better addressed the application questions.
- Request for further information (RFI): Generally, this will be a letter with standard questions asking for you to evidence your claim.
- Site visits: They may arrange face to face meetings to assist in the process of reviewing. This can often be helpful to ensure that both parties understand the facts and program requirements in detail.
What questions will they ask?
Ausindustry reviews are asking you to show what records you have to prove you were doing eligible R&D activities.
For core R&D activities, records should document the following:
- The state of knowledge or technology that existed when the R&D was undertaken
- The new knowledge or information concerning the creation of new or improved materials, products, devices, processes or services that was sought through the R&D
- Knowledge or information was not publicly available. For example, this might include: literature reviews, patent or other searches, scientific or technological reviews and articles; and trade journals.
- Documents detailing the experiments undertaken, the experiments’ results, the analysis of the results, and the subsequent changes implemented to the experiments
For supporting R&D activities, records about a “directly related” relationship need to establish that the relationship between the supporting R&D activity and core R&D activity existed and was sufficiently direct, close and immediate. Records about supporting R&D activities that produce, or are directly related to producing goods or services, need to demonstrate how you determined that the dominant purpose of these activities were to support core R&D.
What can’t they ask?
ATO is responsible for regulating the R&D Tax Incentive expense allocation and entity. Ausindustry will not review these areas.
How to avoid reviews ?
Answer the questions in the registration form factually and provide technical examples of how you address each of the criteria, being outcomes unknown, the knowledge gap, the experiment and the results.
Spend time reviewing and keeping documentation that can be used to support your review. Set up files and folders to keep the evidence when it is created. Formalise R&D meetings with minutes, notes, reports or photos of whiteboards. For software development, don’t rely on bug tracking software or code commits alone.
Avoid excluded R&D activities such as Software for Internal Administration. There are 8 categories of excluded core activities.
How to respond?
You must provide evidence to support your claim. In R&D tax reviews the onus of proof lies with the applicant. Failing to provide the requested documentation will result in a negative finding (or a failure to comply).
You will need to provide evidence for each core and supporting activity identified in your RFI letter. This will likely cover the key areas you will need to show:
You may wish to change your registration form to better reflect the eligible activities in which case you can complete a Request to Vary or Revoke an R&D entity’s R&D Tax Incentive Registration.
If you need more time to present the evidence, ask for an extension (before the date).
What if you disagree ?
If you get to the point of receiving a negative finding after your review you can ask for an internal review. This gives you the opportunity to provide further information to support your case.
Essential tips when under a review
Here are some essential tips on how to respond if you receive a letter for review regarding your R&D tax claim.
- It is important that you respond before the reply date they gave you. This shows you are prepared and have nothing to hide.
- Address all questions forthrightly and provide additional information if appropriate. Use a Word document to respond directly to all questions.
- Clearly label all files requested.
- Keep file sizes small.
- Once you have sent your response, request a meeting to discuss and review over the phone with the ATO.
Maximising your R&D tax refund
Compliance is key. Make sure you have a streamlined system that will record and store your R&D activities and expenditure. But what does this actually look like?
First, understand the eligibility nature of R&D tax incentive scheme. For a detailed description on what RDTI scheme is, you may download our free R&D Tax Incentive eBook.
Second, record keeping is king. We cannot stress this enough. Make sure that you streamline your processes or systems. Read more about this in our R&D Tax Record Keeping Tips blog.
Most importantly, engage a qualified R&D Tax Consultant right from the very start. Credible and skilled consultants will guide you through and help embed into your systems or processes what you need to do as you conduct your R&D activities.
We have 14 years of experience preparing R&D Tax claims and can assist in making sure you receive your maximum tax refund.
Working with us means you get the maximum grant with minimum risk and effort. Our expertise includes R&D Tax Incentive registration and tax schedules, Export Grants, Capital Expenditure and Infrastructure Grants.
Get in touch with us and let’s discuss this more in detail.
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