R&D Tax Incentive and Record Keeping


A 2014 AAT decision has reinforced the need for businesses which claim the R&D Tax Incentive to keep good records of their R&D expenditure.

In the Tier Toys case, the Tribunal found that Tier Toys Ltd had failed to prove that their claimed expenditure was ‘directly in respect of’ eligible R&D activities. In this case, the relevant records were missing and were not available as evidence of their R&D expenditure. The Tribunal therefore found that the expenditure could not be taken into account in calculating Tier Toys’ R&D deductions and tax offset.

To avoid situations like this, your records must:

  • be detailed enough to distinguish between charges associated with eligible and ineligible R&D activities;
  • verify the nature, amount and relationship of the expenditure incurred on R&D activities; and
  • show how you apportioned expenditure between your eligible core and supporting R&D activities as opposed to your other non-R&D activities.

It is also your responsibility to satisfy the ATO that you use reasonable methods to differentiate between your expenditure on eligible and non-eligible R&D activities.

And remember that you must generally keep your records for a minimum of five years, and that penalties may be imposed if you do not keep proper records.