Keeping records and calculating your notional deductions

A guide for what records you need to keep to show what R&D activities you are undertaking and to support your claims.

Records you need to keep

Your business and tax records must show what research and development (R&D) activities you are undertaking and support the amounts you claim.

You must keep records that:

• specify and explain all transactions - including any documents that are relevant for the purpose of working out your tax liabilities
• are made as soon as transactions occur or as soon as possible after they occur
• relate to all taxes for which you are liable - including income tax, goods and services tax, pay as you go taxes, capital gains tax, and fringe benefits tax
• relate to any election, choice, determination or calculation made under a tax law, including the basis on which any were made.

A valid record for the purposes of claiming the R&D tax incentive is any record that verifies or contributes to calculating your claim.

Your records must be in English (or easily translated into English) and you must keep them for 5 years after you make a claim as we may ask to see them. You can store records in either paper or electronic form. You do not need to send your records to us unless we ask you to.

If you are having difficulty maintaining your records you could talk to an experienced bookkeeper or accountant about setting up a good record-keeping system to keep track of your business records.

Records that are backdated or contain non-specific details of the work undertaken are not appropriate records.

The following products and guides will help you meet good record keeping practices:

• Manage your invoices, payments and records
• Valid tax invoices and GST credits
• Record keeping evaluation tool
• Accountability for business record keeping

Information about the types of records you need to keep is also available in the following taxation rulings:

• Taxation Ruling TR 96/7 Income tax: record keeping - section 262A - general principles
• Taxation Ruling TR 2018/2 Income tax: record keeping and access - electronic records

Specific records

Although your usual business and tax records may provide enough information to support your R&D claim, some aspects of the R&D tax incentive may require additional or more detailed records. You may need specific records to show all the following apply:

• The amounts you are claiming relate to your registered R&D activities.
• You receive the major benefit from your R&D activities.
• You have correctly apportioned between eligible R&D activities and non-eligible activities.

R&D record keeping

To work out your notional R&D deduction and support your claims, you need to keep records to show all of the following:

• how the expenditure you have incurred relates to the R&D activities you have registered
• how you have apportioned your expenditure between eligible R&D activities and ineligible activities
• that you received the major benefit from the R&D activities
• when amounts have been paid to associates
• how you have calculated adjustments required because of either        
  • receiving a government recoupment (clawback)
  • producing a marketable product (feedstock adjustments).

These records must be relevant to the year you are claiming your R&D tax offset. However, if you need to make changes in a later year, these records may also be relevant in future years.

You must keep up-to-date records for each R&D activity, so you are ready to calculate and claim your R&D tax offset in your company tax return at the end of the year.

The records you currently keep for your business will generally be enough to support your R&D tax offset claim, if they show:

• you incurred the expenditure (and if incurred to an associate the amount(s) paid)
• the expenditure was eligible for the R&D tax incentive
• you received the major benefit from your expenditure on R&D activities
• the amount of your expenditure that relates to the R&D activities you have registered with AusIndustry.

You must also be able to support your methodology for apportioning your expenditure between eligible R&D activities and non-eligible activities.

• For examples of records you may need to keep in relation to your R&D activities refer to business.gov.auExternal Link

Note: It is your responsibility to show us that the basis for calculating your notional R&D deduction produces, as far as practicable, accurate claims consistent with the law and its interpretation. You must be able to substantiate your claims for R&D expenditure with your records.

Linking your expenditure to your R&D activities

The expenses you can claim as R&D expenditure are limited to the extent they are incurred on R&D activities. Therefore, you must show that the amounts you are claiming on your tax return have been incurred on the activities you have registered with AusIndustry. The type of expenditure that qualifies for a notional deduction under Division 355 of the Income Tax Assessment Act 1997 depends on the facts of each particular case. Administrative costs and overheads may be incurred on R&D activities if there is a direct link between the R&D activities and the expenditure incurred.

Ineligible expenses are those without sufficient link to the R&D activities, particularly if they relate to general company operations or marketing expenditure that would be incurred regardless of the R&D activities.

In these circumstances, prior to claiming the amount, you should ensure that you have carefully considered the extent to which this expenditure has been incurred on R&D activities. If you are unsure if an amount is eligible for the R&D tax incentive, you should seek guidance from us or a registered tax professional

Claims under review

If we review your claim, we may request a full description of your R&D activities to ensure that they have the required relationship to the expenditure incurred.

We jointly administer the R&D incentive with AusIndustry (on behalf of Innovation Australia). AusIndustry determine if a particular activity is a 'core R&D activity' or a 'supporting R&D activity' – but this only covers the eligibility of the R&D activity itself. It is your responsibility to ensure that you have appropriate records to demonstrate the connection between your expenditure and the R&D activities you have undertaken. Your records must also be sufficient to demonstrate to AusIndustry that the claimed R&D activities took place and that they met all aspects of the legislative definition of 'core R&D activities' or 'supporting R&D activities'.

The records needed for specific expenditure types will vary and you may need to keep different records to show the connection between the amounts claimed and the registered R&D activities.

Salary expenditure for employees carrying out your R&D activities

You must substantiate the time spent on eligible R&D projects by your employees (that is, the researchers and technicians who carry out the R&D project). How you substantiate this depends on your specific circumstances.

Appropriate records for salary expenditure

The most accurate and effective method of allocating time is to maintain timesheets or job cards. If you don't use these methods, it may be more difficult to show that the allocation of time is accurate. It is your responsibility to make sure you keep sufficient records to support your claims.

However, we acknowledge that it may not always be practical for you to retain timesheets or job cards. If so, a summary sheet may be acceptable if the information is accurate and as reliable as a timesheet.

Situations where timesheets may not be practical include:

• having a large number of employees making it difficult to retain individual timesheets
• when an employee works exclusively on eligible R&D activities
• when an employee works on long term projects which are mostly eligible R&D activities and the ratio of time between eligible and non-eligible activities is fairly constant – in this case, the employee could maintain a diary of activities.

Note: If you use project hours as a basis of apportionment for other expenditure types, you may need to retain timesheets for this purpose, even if you do not need them to help support the salary component of your claim. 

If your employees do not work a standard number of hours each day, you may need to establish how much time they spent on non-R&D activities. You need to calculate an employee's hourly rate of pay to work out the cost of employing that person on R&D activities.

Where a portion of a staff member's time is allocated to R&D as a component of 'other' expenditure, it would be useful for that staff member to keep a detailed timesheet. If it is unreasonable to keep detailed timesheets for these staff, you must still use a reasonable basis of apportionment for their time and be able to demonstrate how it relates to your R&D activities.

If salary amounts for R&D activities relate to your associate, you must calculate the amount on an arm's length basis and only amounts paid are eligible for a notional R&D deduction.

Note: If you choose to use any method of apportionment to calculate your claim, you must be able to explain why this is the most reasonable basis. You may need to keep additional records to do so. 

Feedstock expenditure records

If a feedstock adjustment is triggered, you must include an amount in your assessable income. This may be in the current or in a future income year, depending on when the output is sold or applied.

It is important to keep detailed records of your feedstock expenditure to help work out your feedstock adjustment, especially if the feedstock adjustment may be triggered in a year after the R&D activities are conducted.

Specifically, records you may need to keep for this purpose are:

• invoices from the sale of the marketable products
• working papers documenting        
  • the market value of products you apply to your own use
  • valuations of all goods and materials subject to processing or transformation and feedstock outputs
  • calculation of feedstock expenditure and resulting feedstock adjustment
• records showing energy usage input directly into the transformation or processing
• records of the R&D process, including the flow-through of materials or goods, subject to processing or transformation, to the marketable product
• records that describe the processing or transformation activities.

For more information refer to Feedstock adjustments.

Records to show you receive the major benefit from the R&D activities

Expenditure on R&D activities conducted to a significant extent for another entity will not be notionally deductible by you under the R&D tax incentive. These amounts may instead be deductible by the entity receiving the major benefit. Some special rules and exceptions apply if the R&D activities are conducted for associated foreign corporations or by an R&D partnership.

Your eligible expenditure must be on R&D activities conducted for yourself and not (to a significant extent) for some other entity. This is intended to limit claims to cases where you receive the major benefit from your expenditure on those activities. It will also prevent duplication of claims by different entities where essentially the same R&D activities are involved.

Whether an R&D activity is conducted for you is a matter of fact. You need to work out if the activity is conducted, in substance, to provide the majority of knowledge benefits resulting from the activity to you.

If someone is conducting R&D activities (in whole or part) for you under contract, or you are under contract to produce a specific product for someone else (and R&D activities will be required to meet the contract), it is particularly important to ensure you maintain records to support this requirement.

For more information refer to Who R&D activities are conducted for.

Work performed for you under contract

If the R&D activity is undertaken for you by a contractor, documents relating to the contract and the R&D activities (for example, the project report and invoices) must contain:

• the dates the R&D activities are undertaken
• sufficient detail to ascertain the amount of expenditure incurred on the R&D activities as opposed to other goods or services being provided under the contract
• ownership of results – ownership of or rights to the resulting intellectual property as opposed to an end product.

If the contract is with your associate, the fee must be charged on an arm's length basis and only amounts paid are eligible for a notional R&D deduction.

To establish the relationship between your R&D activities and the expenditure you have incurred under the contract, we may need to look through the contract to establish the extent of the work done by the contractor on your behalf, particularly if you are not contracting at arm's length. You must keep sufficient records for this purpose. This may be required where the broad nature of the agreement makes it difficult to determine the extent to which your expenditure has been incurred on R&D activities.

Supporting records

Records to support this requirement generally relate to the contracts and other agreements between yourself and any parties involved. On review of these documents we should be able to work out who:

• 'effectively owns' the know-how, intellectual property or other similar results arising from your company's expenditure on the R&D activities
• has appropriate control over both the day-to-day management and the overall direction of the R&D activities
• has the financial burden of carrying out the R&D activities.

If the commercial contracts you have entered into do not clearly show this, you will need to keep additional records or include additional clauses in your contracts to clearly show the arrangement between yourself and other parties.

When contracting with a related party, verbal contracts are made. Verbal contracts are recognised contracts under law in relation to commercial transactions. However, it may be difficult to remember the specific details of the agreement for the length of your two or four year review period under tax laws. For this reason, you could make a detailed written record, including (but not limited to) the parties involved, time, place and specific details of your agreement.

Apportionment

You can only claim a notional deduction under the R&D tax incentive to the extent that the expenditure has been incurred on R&D activities. In the case of expenditure to an associate it must be paid within the income year you want to claim the R&D tax offset in. The words 'to the extent that' mean that a method of apportionment may be required if you cannot specifically identify the value of expenditure incurred on R&D versus non-R&D activities.

There are many ways and methods you can use to apportion your expenditure. It is up to you to determine the most reasonable basis with the information you have at the time. You need to take into account your circumstances, accounting methods and the type of expenditure.

For some types of expenditure incurred on R&D activities it may be difficult to examine each invoice received and calculate the amount of expenditure applicable to the R&D activity. You may need to apportion the expenses to achieve the best degree of accuracy. The method you chose to use will depend on the internal accounting procedure adopted by your company and the type of expense involved.

Under the R&D tax incentive, it is not accepted that one apportionment method or formula will be suitable for all expenditure types you may have. You need to consider each expenditure type separately to ensure that the method of apportionment you have used is reasonable and provides the most accurate measure of R&D expenditure.

To obtain certainty about the method of apportionment you have used, you can apply for a private binding ruling. Getting help provides information about different ways we can help.

Methods of apportionment

Preferably, your accounting and record keeping processes should enable the tracking of expenditure to your R&D activities on a 'real time' basis, so apportionment methodologies are only used in limited situations. However, we recognise that this is not always practical for companies, especially smaller companies where R&D activities only make up a small portion of the company's activities.

The appropriate basis of apportionment needs to be determined for each expenditure type based on all of the following:

• the type of R&D activities you are conducting
• how you are conducting your R&D activities
• the type of expenditure you have incurred.

If the expenditure is incurred over a period of use (for example, utilities such as electricity, decline in value of R&D assets), an apportionment based on the time spent by employees on R&D activities over total company employee hours may be more appropriate than a dollar value of R&D salary over total company salary. A dollar value can inflate or deflate an amount you can claim, because employees within a company are unlikely to be renumerated consistently. A dollar value is unlikely to be representative of time spent.

Expenses such as rates, land taxes, rent and lease costs which are mainly for the area used for R&D activities, may be best apportioned on a basis that reflects the area of use. How many staff and time spent is irrelevant for determining the extent to which this type of expenditure has been incurred on your R&D activities and would therefore not represent a reasonable basis of apportionment.

The apportionment basis of R&D salaries over total company salaries, for expenditure, will only be considered reasonable under the R&D tax incentive where the expenditure is based on how much an employee earns (for example, payments of super, worker's compensation and payroll taxes) and if these amounts can not be separately determined by reference to a company's accounts.

Using the decline in value costs for assets used in R&D activities as a proportion of total company decline in value, to apportion all expenditure (including expenses unrelated to the use of the R&D asset), is not an appropriate apportionment methodology.

Choosing the correct apportionment method

When working out your basis of apportionment for each expenditure type, you can ask yourself if the apportionment method best reflects the extent to which the expenditure has been incurred on my R&D activities.

If the answer is yes and you can explain why it is the best method of apportionment for this type of expenditure, then it is likely that you have chosen a reasonable basis of apportionment.

If you are unable to answer yes to this question, you should not use this basis of apportionment.

If you are still unsure and would like certainty from us, we can provide you with a private binding ruling. For more information about the individual advice we offer, refer to Getting help.

Examples of acceptable records

The types of records kept for tax or business purposes generally, may help you to substantiate your R&D claim. These can include:

• project plans and design specifications
• contracts between yourself and people conducting work for you
• contracts between yourself and a third party for which you have agreed to develop a product
• progress reports
• sales and purchase tax invoices
• receipts
• bank statements
• diaries
• expenditure journals and cash books
• R&D working papers
• financial statements
• apportionment based log books
• credit card statements
• bank deposit books and cheque butts
• bank account statements employee records such as copies of tax file number declarations, wage books, time sheets and super records
• motor vehicle expenses, including logbooks
• debtors and creditors lists
• records of depreciating assets
• stocktake records
• records of any private use in relation to assets or other purchases
• timesheets.

Compliance and monitoring

We work together with AusIndustry to undertake complementary risk assessment and compliance work. AusIndustry's compliance work focuses on the eligibility of R&D activities and our compliance work focuses on the R&D tax offsets allowable for those activities.

It is your responsibility to show us that the basis for calculating your notional R&D deduction produces, as far as practicable, accurate claims consistent with the law and its interpretation. You must substantiate a claim for R&D expenditure by reference to reliable source documents.

If you make incorrect claims, you may incur penalties. For more information about our compliance and monitoring, refer to Compliance model.

Refer to business.gov.auExternal Link for more information about AusIndustry's compliance work.

Contact us

For information on eligible entities and how to claim the incentive:

• phone us on 13 28 66 between 8:00 am and 6:00 pm Monday to Friday.

Contact AusIndustry

For information on registration, eligibility of R&D activities and findings, you can contact AusIndustry by:

• phone on 13 28 46
• submitting an email enquiry External Link

Refer to Contact us on the business.gov.auExternal Link website for the full list of contact details.

A guide for what records you need to keep to show what R&D activities you are undertaking and to support your claims.