| name | rnd-eligibility-assessment |
| description | R&D Tax Incentive eligibility assessment methodology. Evaluates activities against Division 355 criteria, classifies core vs supporting R&D, and calculates refundable tax offsets. |
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 |
