From the 2020-21 year onwards a person wanting to claim the R&D tax credit must obtain prior approval of their R&D activities before filing their supplementary R&D return. Most businesses will apply for approval of their core and supporting activities for each R&D project. This is known as general approval.
However, large businesses that reasonably expect to spend more than $2m on eligible R&D per year have the option of applying for criteria and methodologies (CAM) approval instead of general approval.
You can also apply under the general approval method for projects not covered by the CAM process.
Criteria and methodologies approval for significant R&D performers
Under criteria and methodologies approval the Commissioner and Callaghan Innovation assesses the person’s systems, processes and governance for identifying eligible R&D activities and expenditure. If the Commissioner is satisfied that the person can use those systems and processes to accurately identify what is eligible and what isn’t they will be approved, and the business will be able to self-assess whether activities and expenditure are eligible or not.
The aim of CAM is to minimise the compliance costs for the person and administration for the Commissioner, while at the same time giving the person and the Commissioner a level of confidence that R&D activities and expenditure are being correctly identified and classified.
As part of criteria and methodologies approval, the person is required to both:
- engage an approved R&D certifier to review their RDTI supplementary return and other information before it is filed
- obtain an R&D certificate from the certifier which is provided to the Commissioner with the supplementary return.
Being an approved R&D certifier
R&D certifiers must have the necessary accounting and tax knowledge to be able to satisfy the Commissioner they are competent to review the R&D supplementary return. Therefore, the Commissioner will only approve accounting firms that have licenced auditors as partners, directors or employees of their firms. This ensures that the R&D certifiers are subject to high professional and ethical standards.
Accounting firms wanting to apply for approval must complete the application and declaration and return it to the Commissioner. The names of approved certifiers and contact details will be published on the IR website by the Commissioner.
Role of R&D certifier
R&D certifiers are required to carry out an agreed upon procedures (AUP) engagement in accordance with APS – 1 (revised) Agreed Upon Procedures Engagements to Report Factual Findings (issued by Chartered Accountants Australia and New Zealand) before completing the R&D certificate.
The agreed upon procedures engagement is a pre-determined set of procedures the R&D certifier will perform aimed at obtaining evidence that a person has followed the approved criteria and methodologies for identifying their eligible expenditure. The agreed upon procedures can be found here .
Additional guidance for R&D certifiers
The approved criteria and methodologies are a clear description of how a person identifies its eligible and ineligible R&D activities and expenditure.
R&D certifiers are only required to perform the agreed upon procedures in relation to the approved criteria and methodologies for identifying eligible and ineligible R&D expenditure.
The certifier needs to do all of the following:
- Obtain and be familiar with both the application for approval and the approval letter.
- Obtain a draft copy of the R&D supplementary return and supporting calculations.
- Perform the agreed upon procedures before the supplementary return is sent to the Commissioner.
A certifier is required to both:
- select a sample of the expenses included in the supplementary return
- develop appropriate tests to obtain evidence that the person followed the approved criteria and methodologies.
The agreed upon procedures for identifying and calculating eligible depreciation expenditure are:
- All assets used in performing R&D activities are recorded in the person’s accounting system under cost centre for Research & Development.
- Accounting depreciation is ignored for the purposes of the R&D tax credit.
- The person produces a report of the tax depreciation for the period from the tax fixed asset register for the Research & Development cost centre.
- Eligible depreciation is calculated by multiplying the tax depreciation on assets in the cost centre for Research & Development for the period by the percentage of time spent by employees on eligible R&D as recorded in the person’s project management and time tracking system. ie tax depreciation on assets x time spent by employees
The R&D certifier should develop tests and procedures to confirm that the depreciation included in the R&D supplementary return has been calculated in accordance with the approved criteria and methodologies. This could include:
- Comparing the total depreciation amount in the R&D supplementary return with the underlying calculations and workpapers.
- Selecting a sample of the depreciation amounts claimed and confirming that the assets are recorded in the cost centre for Research & Development.
- Sampling depreciation amounts and confirming that they are calculated using Inland Revenue rates and methods.
- Sampling depreciation amounts and confirming that any apportionment between eligible activities and other activities has been calculated by multiplying the tax depreciation for the sampled asset by the percentage of time spent by employees on eligible R&D from the person’s project management and time tracking system.
Businesses that receive criteria and methodologies approval will have different business structures, accounting systems and processes for identifying eligible and ineligible expenditure. It’s likely the certifier will develop tests for each person that they perform the agreed upon procedures for.
On completion of the procedures, the findings are documented in a report that must be attached to the R&D certificate.
The certifier is not required to express an opinion on the following matters:
- Whether the approved criteria and methodologies are appropriate.
- Whether the sampled expenditure is eligible expenditure.
- Whether the supplementary return is materially correct.
The R&D certificate
On completion of the certifier’s agreed upon procedures engagement you must provide the person with an R&D certificate IR1242, which they (the person) provides to the Commissioner with their supplementary return.
The R&D certificate asks the certifier to:
- Specify the total amount of R&D expenditure in the supplementary return that the certifier performed the agreed upon procedures in relation to.
- Confirm that the certifier performed the agreed upon procedures and the date on which it was completed.
- Attach a copy of the certifier’s report outlining the findings.
The R&D certificate must be signed by the person in the certifier’s firm who has overall responsibility for the agreed upon procedures engagement. This will often be a partner or director of the firm.
It is not necessary for the certificate to be signed by a licenced auditor.