R&D Eligibility Assessment Skill

Systematic methodology for assessing R&D Tax Incentive eligibility under Division 355 ITAA 1997.

When to Use

Activate this skill when the task requires:

• Evaluating if activities qualify as R&D

• Classifying core vs supporting R&D activities

• Quantifying eligible R&D expenditure

• Calculating potential tax offsets

• Preparing registration documentation

Division 355 Framework

Legislative Structure

Division 355 - R&D Tax Incentive ├── Subdivision 355-A: Guide ├── Subdivision 355-B: Entitlement to tax offset │ ├── s 355-100: Tax offset for R&D entities │ └── s 355-105: Amount of tax offset ├── Subdivision 355-C: Core R&D activities │ └── s 355-25: Core R&D activity definition ├── Subdivision 355-D: Supporting R&D activities │ └── s 355-30: Supporting R&D activity definition ├── Subdivision 355-E: Notional deductions │ ├── s 355-200: R&D expenditure │ └── s 355-205: Decline in value of R&D assets └── Subdivision 355-F: Clawback provisions

Core R&D Activity Test (s 355-25)

The Four Requirements

An activity is a core R&D activity if it meets ALL of these:

┌──────────────────────────────────────────────────────────────────┐ │ ELEMENT 1: EXPERIMENTAL ACTIVITIES │ │ │ │ "Activities whose outcome cannot be known or determined in │ │ advance on the basis of current knowledge, information or │ │ experience, but can only be determined by applying a systematic │ │ progression of work..." │ │ │ │ Test Questions: │ │ □ Is there genuine technical uncertainty? │ │ □ Could a competent professional determine the outcome in │ │ advance using existing knowledge? │ │ □ Is experimentation required to resolve the uncertainty? │ └──────────────────────────────────────────────────────────────────┘ ↓ ┌──────────────────────────────────────────────────────────────────┐ │ ELEMENT 2: SYSTEMATIC PROGRESSION OF WORK │ │ │ │ Work that: │ │ (a) proceeds from hypothesis to experiment │ │ (b) involves observation and evaluation │ │ (c) leads to logical conclusions │ │ │ │ Test Questions: │ │ □ Was there a defined hypothesis or theory? │ │ □ Were experiments conducted methodically? │ │ □ Were results observed and evaluated? │ │ □ Were conclusions drawn from the work? │ └──────────────────────────────────────────────────────────────────┘ ↓ ┌──────────────────────────────────────────────────────────────────┐ │ ELEMENT 3: PURPOSE - GENERATING NEW KNOWLEDGE │ │ │ │ Conducted for the purpose of generating new knowledge: │ │ (a) new knowledge in any field │ │ (b) including new or improved materials, products, devices, │ │ processes or services │ │ │ │ Test Questions: │ │ □ Is the outcome new to the field (not just to the company)? │ │ □ Does it advance technical knowledge? │ │ □ Is it creating genuinely new capability? │ └──────────────────────────────────────────────────────────────────┘ ↓ ┌──────────────────────────────────────────────────────────────────┐ │ ELEMENT 4: SCIENTIFIC METHOD (Principles) │ │ │ │ Based on principles of established science: │ │ - Uses scientific or technological principles │ │ - Follows rational, logical approach │ │ - Documents methodology and findings │ │ │ │ Test Questions: │ │ □ Is the work based on scientific/technical principles? │ │ □ Is the methodology documented? │ │ □ Are results recorded systematically? │ └──────────────────────────────────────────────────────────────────┘

Exclusions (s 355-25(2))

The following are NEVER core R&D activities:

❌ Market research, market testing, or sales promotion ❌ Quality control or routine testing ❌ Management studies or efficiency surveys ❌ Research in social sciences, arts, or humanities ❌ Mineral, petroleum, or gas exploration or extraction ❌ Commercial, legal, or administrative aspects of patenting ❌ Activities related to compliance with statutory requirements ❌ Development of internal administrative systems ❌ Developing, modifying, installing commercial software (routine)

Supporting R&D Activity Test (s 355-30)

An activity is a supporting R&D activity if:

Option 1: DIRECTLY RELATED

• Directly related to core R&D activities

Option 2: DOMINANT PURPOSE

• For the dominant purpose of supporting core R&D

Option 3: GOODS AND SERVICES

• Producing goods or services to be used in core R&D

Note: Supporting activities must be reasonably proportioned to the core activities they support.

Assessment Methodology

Step 1: Activity Identification

Activity Template: name: "[Descriptive name]" description: "[What was done and why]" period: "[Date range of activity]" personnel: "[Who performed the work]"

technical_uncertainty: - "[Uncertainty 1]" - "[Uncertainty 2]"

hypothesis: "[Initial hypothesis or theory tested]"

experiments: - "[Experiment 1 description]" - "[Experiment 2 description]"

observations: "[Key observations from work]"

conclusions: "[Conclusions reached]"

new_knowledge: "[What new knowledge was generated]"

Step 2: Eligibility Scoring

For each activity, score against Division 355 criteria:

┌─────────────────────────────────────┬───────┬──────────┐ │ Criterion │ Score │ Evidence │ ├─────────────────────────────────────┼───────┼──────────┤ │ Unknown outcome? │ 0-3 │ │ │ Systematic progression? │ 0-3 │ │ │ New knowledge purpose? │ 0-3 │ │ │ Scientific method? │ 0-3 │ │ ├─────────────────────────────────────┼───────┼──────────┤ │ TOTAL │ /12 │ │ └─────────────────────────────────────┴───────┴──────────┘

Scoring Guide: 0 = Does not meet 1 = Partially meets 2 = Meets 3 = Strongly meets

Eligibility Assessment: 10-12: High confidence eligible 7-9: Likely eligible, document well 4-6: Uncertain, seek Finding 0-3: Not eligible

Step 3: Expenditure Calculation

R&D Expenditure Categories:

1. SALARY & WAGES = (Employee annual salary × R&D time %)

   • Superannuation (11%)
   • Workers compensation
   • Payroll tax

2. CONTRACTOR PAYMENTS = Total payments to R&D contractors (Must be at arm's length)

3. DIRECT MATERIALS = Cost of materials consumed in R&D (Not assets, consumables only)

4. DEPRECIATION = Decline in value of R&D assets × R&D use % (Assets used predominantly for R&D)

5. OVERHEADS = Rent × R&D allocation %

   • Utilities × R&D allocation %
   • Other overheads × R&D allocation %

TOTAL R&D EXPENDITURE = Sum of above

Step 4: Offset Calculation

For Small Business (Turnover < $20M):

Tax Offset = Total R&D Expenditure × 43.5%

Example: $100,000 eligible expenditure × 43.5% = $43,500 refundable tax offset

Note: Refundable means cash refund even if in loss position!

Documentation Requirements

Contemporaneous Records

The ATO requires records created at the time of the R&D:

Project Records

• Project plans and specifications

• Technical design documents

• Progress reports

Time Records

• Timesheets showing R&D hours

• Project allocation records

• Team member roles

Experiment Records

• Hypothesis statements

• Test plans and protocols

• Test results and data

• Analysis and conclusions

Financial Records

• Invoices and receipts

• Payroll records

• Asset purchase records

Registration Documentation

For each R&D activity (max 1,500 words per activity):

[Activity Title]

Description of Activity

[What R&D was conducted]

Technical Uncertainty

[What couldn't be known in advance]

Systematic Progression

[How hypothesis-experiment-observation-conclusion was followed]

New Knowledge Outcome

[What new knowledge was generated]

Relationship to Other Activities

[How this relates to other R&D projects if applicable]

Output Format

<rnd_eligibility_assessment> <project id="RND-001"> <name>[Project Name]</name> <period> <start>2023-07-01</start> <end>2024-06-30</end> </period>

<classification>Core R&D | Supporting R&D | Not eligible</classification>
<confidence>High | Medium | Low</confidence>

<criteria_assessment>
  <unknown_outcome score="3">
    <evidence>[How outcome was uncertain]</evidence>
  </unknown_outcome>
  <systematic_progression score="2">
    <evidence>[How methodology was followed]</evidence>
  </systematic_progression>
  <new_knowledge score="3">
    <evidence>[What new knowledge was generated]</evidence>
  </new_knowledge>
  <scientific_method score="2">
    <evidence>[Scientific basis of work]</evidence>
  </scientific_method>
  <total_score>10</total_score>
</criteria_assessment>

<expenditure>
  <salary_wages>$45,000</salary_wages>
  <contractors>$15,000</contractors>
  <materials>$5,000</materials>
  <depreciation>$3,000</depreciation>
  <overheads>$7,000</overheads>
  <total>$75,000</total>
</expenditure>

<tax_offset>
  <rate>43.5%</rate>
  <amount>$32,625</amount>
  <refundable>true</refundable>
</tax_offset>

<documentation_status>
  <timesheets>Yes | No | Partial</timesheets>
  <project_records>Yes | No | Partial</project_records>
  <experiment_records>Yes | No | Partial</experiment_records>
</documentation_status>

<recommendations>
  <item priority="high">[Required action]</item>
</recommendations>

</project> </rnd_eligibility_assessment>

Key Precedents

Case Principle

Moreton Resources [2018] AATA 3378 Technical uncertainty must be genuine

Core Surveys [2008] AATA 989 Systematic progression is essential

Harding [2019] FCAFC 29 Software can be R&D if innovative

AusNet [2020] AATA 1972 Routine implementation not R&D

Common Pitfalls

Pitfall Avoidance

No contemporaneous records Implement time tracking immediately

Mixing R&D and non-R&D Clearly separate activities

Over-claiming Use conservative allocations

Missing deadline Register within 10 months

Poor activity descriptions Use structured format above