Knowing how to keep contemporaneous records for the R&D tax incentive (RDTI) can leave entrepreneurs scratching their heads. By tax time, this can escalate into a full-blown paper trail chase. But what are contemporaneous records? And why are they so important for your RDTI application? We answer these and other important questions to help you get your R&D paperwork in tip-top shape this financial year.
What are contemporaneous records?
Contemporaneous records are the records the Australian Tax Office (ATO) expects you to make around the time you plan and conduct your R&D activities. This contemporaneous documentation, in the eyes of the ATO, is the strongest evidence of your R&D activities when it reviews your RDTI registration and application. So these records are absolutely vital for all things RDTI.
Why is good record-keeping important?
Proficient record-keeping helps you self-assess your eligibility for the RDTI in the first place. It also helps you substantiate your eligible R&D expenditure and meet your compliance obligations for the RDTI. If your paperwork is tickety-boo, it will make your life easier at tax time and save you from sleepless nights and headaches if the ATO decides to review your registration or application.
Going on the record
You need to keep records of your core R&D activities and any supporting activities.
Core R&D records
There are three elements that the ATO requires you to provide evidence of when it comes to verifying your core R&D.
- Evidence to show the outcome of your R&D can’t have been known in advance
- Evidence that there is a systematic progression of work
- Evidence that you plan or planned to generate new knowledge
Outcomes weren’t known in advance
Your records must confirm that a competent professional in the field, using current knowledge, information and experience, couldn’t have known or worked out the results before you completed your research. So the ATO expects you to complete a worldwide search (secondary research) for an existing way to achieve the outcome you’re seeking before you start your own research. Once you begin your primary research phase, you need to conduct an experiment to verify your concept. Examples of suitable records for the first component of your core R&D record-keeping include patents and other searches, journal articles and technology reviews, as well as a business case, experimental protocols, test plans and test results.
Your record-keeping must include evidence that points to you conducting or planning to conduct each element of a systematic progression of work. These elements include your hypothesis, experiment, observation, evaluation and logical conclusions. Acceptable records include contracts or research agreements, lab books, project plans and prototypes. The crucial point to remember for the systematic progress requirement is that you must keep evidence that shows when and how your research progressed through the five systematic steps that the ATO requires.
Your records must demonstrate that when you began your research your main purpose was to generate new knowledge. You can rely on items, such as board minutes, email correspondence and annual reports to demonstrate this.
Supporting R&D records
Remember supporting R&D activities can form part of your RDTI, so you need to record these too. Demonstrating a clear connection between your supporting activities and at least one core R&D element is paramount. And in some cases supporting the core R&D must be the main purpose of the supporting activity. You can substantiate your supporting R&D activities with documents such as annual reports, technical project documents and prior year claims.
Which formats are acceptable for records?
The good news is when it comes to providing evidence for your RDTI application, you can use different formats. The ATO advises that written records, videos, oral statements and expert opinions are acceptable.
Now you know which information and formats you need for the ATO, what’s the best way to approach the task ahead? Having robust processes in place and making sure you and your team stick to these will yield optimal results.
- Build record-keeping into your R&D from the outset: Ensure the internal processes that support your project plan and management also support your RDTI documentation requirements.
- Understand that contemporaneousness counts: Be sure to identify and document your R&D projects and eligible activities when you’re conducting them. This is more likely to provide a better picture of all your associated costs in real-time.
- Record your record-keeping process: When you’re documenting your R&D records, write down the methodology for identifying and recording eligible R&D activity and expenditure. That way you’ll have a clear understanding of how you sourced the information for your RDTI application. You’ll also be able to make RDTI claims more easily in future years because you can repeat your documented process.
- Get everyone on the same page: Make sure your team has a common understanding of your project’s requirements when it comes to record-keeping for the RDTI. From your researchers completing the R&D through to the team members responsible for RDTI record-keeping and preparing your application.
- Join the dots between activity and expenditure: Ensure, as part of your process, you’ve established strong links between your records for R&D activity and associated expenditure.
Gaining early access to your R&D refund
Apart from meeting your compliance obligations and making your RDTI application smoother sailing, being across your RDTI record-keeping makes the process of applying for R&D finance far easier as well.
If Radium Advances are on your radar, as part of the process you’ll be engaging the specialist services of an R&D tax consultant. And this, in and of itself, provides your business with advantages. R&D tax consultants can advise on whether your R&D and expenditure are eligible for the incentive. They can also assist with the documentation, such as the comfort letter, for your Radium Advance application. Having expert advice provides you with additional reassurance, especially if you opt for regular Radium Advances, because your R&D tax consultant will be routinely reviewing your activities and RDTI record-keeping.
At Radium, with our seamless platform approach, we offer early access your expected R&D refund as frequently as your business requires. That means your business can benefit from perfectly timed non-dilutionary capital and steady cash flow throughout the year rather than waiting up to 18 months for the R&D refund to arrive from the ATO. Schedule a call with our R&D experts to find out more or head to our online platform to start your Radium Advance application.*
*Radium Capital is a specialist R&D financier. In assessing your eligibility and preparing your RDTI claim, we recommend you seek the advice of an R&D tax consultant.