In light of this increased focus on the industry, what should manufacturing companies be mindful of when compiling their R&D Tax Incentive claims?
Below are some of the key issues:
- R&D projects undertaken solely in a production environment must have at least one experimental activity (core activity).
- companies must apply the 'feedstock' provisions for any feedstock expenditure incurred on R&D activities where those activities produce either a marketable product or a product the company applies to its own use.
- when supporting R&D activities are undertaken in a production environment, companies must consider whether these activities are undertaken for the dominant purpose of supporting the core R&D. Only those activities undertaken for the dominant purpose of the core R&D activities can be claimed.
- all R&D activities and expenditure must be substantiated with sufficient contemporaneous documentation. This includes maintaining records of trials/experimentation undertaken to test hypotheses, results generated, analysis undertaken and any conclusions reached, as well as how relevant supporting activities meet the dominant purpose.
- A recent Administrative Appeals Tribunal of Australia (AATA) case highlighted the need to ensure trial costs are substantiated, including maintaining timesheets for those involved in undertaking R&D activities in a production environment.
The increased focus on the manufacturing industry by the ATO means manufacturing companies claiming the R&D Tax Incentive should expect a review of their R&D claim. As such, companies should invest in good record keeping practices and ensure they have fully considered the above issues under the new R&D Tax Incentive.