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R&D Tax Incentives (R&DTI): How to Structure a Project for Success

If you’re in business and developing new technology, refining manufacturing processes, or solving complex technical problems, there may be an opportunity to access valuable government support through the Research and Development Tax Incentive (R&DTI) program. Innovation is essential for Australian businesses looking to stay competitive and improve efficiency, however, claiming an R&D Tax incentive is not as simple as identifying a project and lodging an application. Many businesses fall into the trap of assuming that all innovative work automatically qualifies, only to face reduced claims, delays, or compliance reviews from the Australian Taxation Office (ATO) or the Department of Industry, Science and Resources (DISR).

With further reforms to the R&DTI announced as part of the 2026–27 Federal Budget (these reforms are proposed, not yet enacted), now is an important time for businesses to review how their projects are structured and documented. Businesses that plan carefully from the outset are often in a much stronger position to maximise legitimate claims while reducing compliance risk. Remember, the R&D Tax Incentive is self-assessed, you must be confident your projects meet the strict criteria before lodging, as insufficient evidence can unravel a claim during review.

Understand What Qualifies as R&D

One of the most important parts of preparing for an R&D Tax claim is understanding how the Government defines eligible activities. The R&DTI is designed to encourage genuine experimental activities that generate new knowledge or solve technical uncertainty, not simply everyday operational improvements or standard commercial work.

Broadly speaking, eligible activities are generally classified as either “core” or “supporting” R&D activities. Under the current law, a supporting activity must be directly related to a core R&D activity and carried out for its dominant purpose, otherwise it isn’t claimable, however the proposed reforms announced in the 2026–27 Federal Budget due to come into effect from 1 July 2028 would remove the offset for supporting activities and place greater emphasis on core R&D activities. This means businesses will need to become increasingly deliberate about how they identify and structure qualifying work.

A core R&D activity typically involves experimentation where the outcome cannot be known in advance based on existing knowledge or experience. There needs to be a systematic progression of work, supported by testing, evaluation, and evidence of technical uncertainty. Businesses often underestimate how important this distinction is. Commercial activities such as market research, software implementation, routine engineering, or cosmetic product changes are unlikely to qualify on their own.

The earlier you assess projects against the legislative definitions, the easier it becomes to structure your activities in a compliant and defensible way. Waiting until year-end to retrospectively determine eligibility can create significant problems, particularly if documentation is incomplete or project boundaries are unclear.

Why Project Planning Matters for R&D Tax Incentives

Strong R&D Tax outcomes usually begin well before the claim itself. Businesses that integrate R&D considerations into project planning from day one are often far better prepared when it comes time to register activities and substantiate expenditure.

A common issue in denied or reduced claims is the inability to clearly separate eligible R&D work from broader operational activities. This is particularly relevant in industries such as manufacturing, software development, engineering, construction, and agriculture, where experimental activities often occur alongside commercial production or delivery work.

To improve claim readiness, businesses should establish clear project objectives, document technical uncertainties being addressed, and define how experimentation will occur. In many cases, maintaining structured project plans, meeting notes, testing records, technical reports, and development logs can significantly strengthen the integrity of a claim. From day one, define which tasks are R&D and which are routine, and implement time-tracking or project codes so R&D work (and costs) are clearly segregated from business-as-usual activities.

Staff time allocation is another area that requires careful attention. The ATO expects businesses to reasonably apportion employee costs between eligible R&D activities and non-eligible work. Relying on rough estimates or broad assumptions after the fact can create compliance risks, particularly if there is limited supporting evidence. Implementing time tracking processes throughout the project lifecycle can help businesses maintain more accurate records and reduce disputes later.

Don’t treat R&D claims as an afterthought, if you try to retroactively label routine projects as R&D at year-end, you’re likely to hit roadblocks. Instead, bake R&D criteria into your project plan from the start to ensure only qualifying work is captured.

The proposed Budget reforms also signal a stronger focus on ensuring Government support is directed toward genuine innovation activities with measurable economic value. As compliance scrutiny continues to increase, businesses that proactively structure projects with governance and documentation in mind will likely be in a stronger position moving forward.

The Importance of Contemporaneous Evidence

One of the most misunderstood aspects of the R&D Tax Incentive is the importance of contemporaneous evidence. In simple terms, this means documentation created at the time activities are being undertaken, rather than reconstructed months later during tax season (i.e., evidence created as you conduct the work, not after the fact).

The ATO and DISR jointly administer the R&DTI program under a self-assessment framework. Keep in mind that receiving an R&D registration number is not a stamp of approval, you’ll still need to demonstrate to the ATO and DISR that you met the R&D criteria, with robust evidence.

Contemporaneous evidence can include items such as:

• Meeting minutes
• Experiment records
• Test results
• Prototype testing results
• Version control logs
• Technical drawings
• Project plans
• Design schematics
• Emails discussing technical challenges
• Timesheets
• Board or management meeting notes
• Laboratory results / notebooks
• Software version histories

Importantly, documentation should demonstrate not only what work occurred, but also why the work involved technical uncertainty and experimentation. Businesses sometimes provide extensive commercial documentation but fail to adequately evidence the actual experimental process. The ATO expects thorough, contemporaneous documentation

This area may become even more important under the proposed reforms, particularly with increased public transparency surrounding R&D expenditure and the ongoing application of anti-avoidance provisions under Part IVA. The Government has signalled a clear intention to better target the incentive toward legitimate innovation activities and discourage aggressive or poorly substantiated claims.

Good documentation practices do more than simply support compliance. They can also improve internal project management, budgeting, and decision-making, creating broader operational benefits for the business.

Common Pitfalls That Lead to Claim Issues

Many R&D Tax disputes arise not because businesses intentionally do the wrong thing, but because they misunderstand the rules or fail to maintain sufficient evidence. Understanding common pitfalls can help businesses avoid costly mistakes. Even well-intentioned companies get tripped up by these common R&D claim mistakes, often leading to audits or denied claims. Watch out for the following.

One frequent issue is attempting to claim routine business activities as R&D. While a project may involve innovation from a commercial perspective, it still needs to meet the legislative tests for experimental activities. Simply improving efficiency or customising an existing product is not automatically eligible.

Another common problem is poor apportionment methodologies. Businesses must be able to justify how they calculated staff costs, contractor expenses, software expenditure, and overhead allocations relating to eligible activities. Avoid guesswork in costing, for instance, don’t use unsupported percentages for R&D time or overheads. The ATO will scrutinise any figures that seem inflated or arbitrary.

Deliberately overstating R&D or indulging in artificial claim structures can also trigger the general anti-avoidance rules (Part IVA), a serious risk to avoid at all costs.

Businesses should also be cautious about relying heavily on advisers at the end of the financial year to “build” a claim retrospectively. While specialist advice is extremely valuable, claims are generally much stronger when evidence has been captured progressively throughout the project lifecycle.

The proposed changes to supporting activities also reinforce the importance of correctly categorising work. Businesses that currently rely heavily on supporting activity expenditure may need to reassess how projects are structured before the proposed commencement of reforms from 1 July 2028.

Finally, businesses should remain aware that the R&D Tax Incentive includes anti-avoidance provisions. Arrangements entered into primarily for the purpose of accessing higher offsets or generating tax benefits may be challenged by the ATO.

Preparing for the Future of R&D Tax Incentives

The proposed 2026–27 Federal Budget reforms demonstrate that the R&D Tax Incentive remains an important Government initiative, but one that is evolving toward greater accountability and more targeted support for genuine innovation.

With the possibility of supporting activities being excluded from 2028, companies should start transitioning their R&D approach now, focus on designing projects around genuine core R&D and documenting them thoroughly.

For business owners, this creates both opportunity and responsibility. Businesses undertaking legitimate experimental activities may continue to access valuable support, particularly where projects are structured appropriately and supported by strong documentation practices. At the same time, increased compliance expectations mean businesses can no longer afford to treat R&D claims as a simple year-end exercise. If your business is undertaking innovative projects or considering an R&D Tax claim, the team at McKinley Plowman can help you navigate the evolving R&DTI landscape with confidence. Our R&D Tax Incentive Advisory service works closely with Australian businesses to assess eligibility, improve documentation processes, and structure projects for stronger compliance and claim readiness.

To discuss your situation, book your complimentary consult here or call us (08) 9301 2200.

written by:

Dean Birch

With close to two decades of experience in tax consulting across Australia and the United Kingdom, Dean Birch is a highly regarded tax specialist known for his ability to interpret complex legislation and translate it into practical, commercial outcomes for clients. His career spans public practice, large corporate environments and hands-on management roles, giving him a well-rounded understanding of both technical tax issues and real-world business challenges.

Dean specialises in providing tax advisory services to corporate entities, government agencies, not-for-profit organisations, Aboriginal corporations and small to medium enterprises. His areas of expertise include income tax, indirect taxes, employment taxes, Fringe Benefits Tax, GST, capital gains tax, salary packaging, fuel tax credits, PAYG and superannuation guarantee matters. He is particularly valued for his pragmatic approach and his ability to deliver clear, workable solutions in highly regulated and complex environments.

Having spent more than 15 years in senior management roles within a multinational organisation in the UK, Dean brings strong commercial insight to his advisory work. This experience enables him to look beyond compliance and focus on how tax outcomes support broader operational and strategic objectives.

Committed to delivering high-quality advice and supporting the broader advisory team, Dean plays an active role in technical training and mentoring. He is known for his practical mindset, clear communication style and collaborative approach, all of which align strongly with McKinley Plowman’s commitment to delivering thoughtful, client-focused advice.

Outside of work, Dean has a wide range of interests. He’s a classic car enthusiast and proudly owns a Triumph Spitfire back in the UK, though he admits it’s getting far less road time since he moved to Australia! A long-time Nottingham Forest supporter, Dean continues to cheer them on from afar (no matter how nerve-wracking the season gets). When he’s not following the football, you’ll often find him exploring new places, enjoying good coffee, or catching up with friends.