The Research and Development (R&D) Tax Incentive is one of the most generous concessions in the Australian tax system: eligible companies with aggregated turnover below $20 million can claim a 43.5% refundable tax offset on eligible R&D expenditure. For larger companies (turnover $20M+), the rate is a non-refundable 38.5%.
For companies that genuinely qualify, this can mean substantial cash refunds — often hundreds of thousands of dollars. The challenge is that the ATO's compliance focus on R&D claims has intensified significantly since 2022, and many claims fail not because the R&D wasn't real, but because the record-keeping was inadequate.
As a bookkeeper, your role is not to assess whether R&D qualifies — that's a specialist decision. But your records are the foundation on which any claim is built or challenged. Getting the financial records right matters.
The Two-Part Test: Core and Supporting Activities
Eligible R&D activities split into two categories:
Core R&D activities must involve an experiment-based process aimed at generating new knowledge — with genuine technical uncertainty about whether the outcome is achievable using current knowledge. The activity must be conducted for the purpose of generating new knowledge, not just applying known techniques.
Supporting R&D activities are activities directly related to core R&D activities but that don't themselves involve experimental investigation. These can be included in the claim if they wouldn't be conducted but for the core R&D.
The "eligible R&D entity" must be incorporated in Australia (or a foreign-incorporated entity that's an Australian tax resident). Partnerships and sole traders cannot register.
Registration Comes First
Before expenditure can be claimed, the entity must register its R&D activities with AusIndustry (under IP Australia / the Department of Industry). Registration opens on 1 July of the income year and must be lodged within 10 months of the end of the income year — so for a 30 June balance date, registration closes 30 April the following year.
The bookkeeper's immediate role: flag to the tax agent or specialist if the client has potential R&D activity before the registration window closes. A valid claim cannot be backdated to include years where registration was missed.
What Financial Records Are Required
The ATO's record-keeping requirements for R&D are more detailed than standard business records. The entity needs to maintain records that substantiate:
1. That the expenditure was incurred Standard documentation: invoices, contracts, payroll records, timesheets. No different from any other deduction — but the ATO expects these to be retained for the full four-year amendment period plus the time it takes to finalise the claim.
2. That the expenditure was on eligible R&D activities This is where most R&D claims fall apart. The ATO requires a nexus between each dollar of expenditure and a specific registered core or supporting R&D activity. Broad allocation ("30% of our staff time was on R&D") without underlying substantiation is a red flag.
3. Feedstock adjustments If R&D activities produce a product or material that is sold, used, or consumed — a "feedstock" — the R&D deduction must be reduced by the value of that output. Bookkeepers need to identify whether any R&D activity produced marketable outputs and document the adjustment.
4. Contracted R&D Where R&D is contracted out, both the contractor and the entity that pays for it cannot both claim the same expenditure. The bookkeeper needs to identify all R&D-related contracts and confirm whether the expense sits with the entity or has been assigned to a related party.
The Additionality Problem
Salary and wages are the largest component of most R&D claims. The ATO expects detailed contemporaneous records of how employee time was allocated to R&D versus non-R&D work. This means:
- Timesheets or project-tracking records broken down to activity level
- Evidence that the time-split claimed was actually maintained throughout the year (not reconstructed at year-end)
- Consistent treatment year-on-year — a jump from 10% R&D time to 40% without a corresponding change in business activity will attract scrutiny
Where companies use project management software or time-tracking tools, bookkeepers should ensure those records are preserved and can be exported in a format the ATO can review.
Interacting With the ATO's R&D Reviews
The ATO conducts two types of R&D compliance activity: pre-lodgement reviews (where companies can voluntarily seek assurance before lodging) and post-lodgement audits. The ATO has also been known to issue Notices of Amended Assessment disallowing R&D claims years after the original lodgement.
If a client receives an R&D review letter, bookkeepers typically need to produce:
- A reconciliation of the R&D expenditure claimed to the general ledger
- Source documents for the largest expenditure items
- Employee cost schedules showing how the R&D payroll allocation was calculated
- Evidence that registered activities took place (lab notebooks, engineering reports, meeting notes)
The better the underlying records, the less disruptive a review is. The worst outcome — paying back the refund plus GIC interest and penalties — is almost always a record-keeping failure rather than a fundamental ineligibility issue.
Practical Tips for Bookkeepers
- Segregate R&D costs in the chart of accounts — use dedicated cost centres or account codes for R&D projects from the start of the year, not retrospectively
- Flag any R&D-related invoices at the time of entry, not at year-end
- Retain all project documentation — emails, design specs, test results, engineering notes — not just the financial records
- Review the registration each year — if the nature of activities has changed, the registration may need updating
- Involve the R&D specialist early — ideally at the start of the income year, not in April when the registration deadline is approaching
The R&D Tax Incentive rewards genuine innovation. The bookkeeper's contribution is ensuring that the financial records are solid enough to support the claim under scrutiny.