Check areas of concern in specific industries and advice to avoid making an incorrect R&D tax incentive claim.
The Australian Taxation Office (ATO) and AusIndustry jointly administer the R&D tax incentive:
- AusIndustry administers registration and compliance of R&D activities.
- The ATO is responsible for expenditure claimed in the tax return on eligible R&D activities.
The R&D tax incentive is a self-assessment program, which means the responsibility for compliance rests with the taxpayer.
The ATO and AusIndustry undertake complementary risk assessment and compliance work.
AusIndustry's compliance work focuses on the eligibility of R&D activities, while our compliance work focuses on the R&D tax offsets allowable in respect of those activities.
As a result of the risk assessment and compliance work of both, the ATO and AusIndustry have identified a number of areas of concern. Four industries have been identified with significant number of companies making claims that have issues. The remaining areas of concern are not restricted to companies in particular industries.
Four industries have been identified with a significant number of companies making R&D claims that have issues, including:
ATO and AusIndustry have observed issues with R&D tax incentives claims made by companies in agricultural industries where:
- no R&D activities are being conducted
- the activities form part of, or all of, the entity's ordinary business activities
- the activities involve the application of established products and existing methodologies that a competent professional could have worked out the outcome without conducting an experiment
- the activities address a commercial rather than a technical risk
- the scale of R&D activities is disproportionate with the scale of any data collection, observation and evaluation
- the method employed to apportion overhead expenses allocates an unreasonably large amount to R&D
- it is uncertain whether the activities are being conducted by the company on its own behalf or for the entity carrying on the agricultural business
- it is uncertain whether amounts billed to related parties are paid.
For more information see:
- Incorrectly claiming the wine grapes levy
- Taxpayer Alert TA 2015/3 Accessing the R&D Tax Incentive for ineligible broadacre farming activities
- Taxpayer Alert TA 2017/4 Claiming the Research and Development Tax Incentive for agricultural activities
The ATO and AusIndustry have observed issues with R&D tax incentive claims made by companies in the building and construction industries. These include:
- whole of project claims where the technical uncertainty is resolved by applying existing knowledge
- R&D claims where activities involve untested or novel elements where in effect, they relate to fulfilling the building and construction contract
- expenditure that is subject to the building exclusion
- R&D consultants advising clients they are eligible to make a R&D claim as their activity is unique.
For more information, see Taxpayer Alert TA 2017/2 Claiming the Research and Development Tax Incentive for construction activities.
ATO and AusIndustry have observed issues with R&D tax incentive claims made by mining companies. This includes where:
- the scope of the R&D activities in the context of extracting minerals is not clearly identified. Activities in R&D projects are too broad there is an increased risk of over-claim of costs
- activities relating to modelling of mines are not R&D unless they are associated with a physical experiment. A feasibility study does not necessarily mean that R&D has or will occur
- claimants need to explain the technical challenges and how they overcome them using simple terminology
- exploration activities are specifically excluded from being a core R&D activity.
ATO and AusIndustry have observed issues with R&D tax incentives claims by companies in the information technology and software development industries. This includes where:
- R&D claims are made on whole of project basis not considering each of the activities and applying the relevant legislation to determine which activities are R&D activities
- software experiments are not clearly articulated in the R&D registration forms
- technical uncertainties are not clearly identified
- expenditure is incurred in acquiring, or acquiring the right to use, technology that cannot be claimed as a notional deduction
- expenditure is being apportioned between R&D activities and ineligible activities in an unreasonable manner.
For more information see:
- Guidance materialExternal Link to clarify the eligibility of software development activities under the R&D tax incentive
- Taxpayer Alert TA 2017/5 Claiming the Research and Development Tax Incentive for software development activities.
The remaining areas of concern are not restricted to companies in particular industries and include:
- Ordinary business activities vs eligible R&D activities
- Apportionment of overheads
- Payments to associates
- Record keeping
- R&D consultants
The ATO and AusIndustry have observed issues with R&D tax incentive claims that include expenditure relating to ordinary business activities and are not eligible R&D activities. This includes where:
- no R&D activities have been undertaken
- the registered activities include a mixture of eligible R&D activities and ineligible ordinary business activities
- the R&D activities being carried out have transitioned into ordinary business activities
- the R&D activities are not concerned with the generation of new knowledge
- the R&D activities do not involve the application of the scientific method (proving or disproving a hypothesis through experiments)
- the R&D activities address commercial being rather than technical risks.
For more information, see Taxpayer Alert TA 2017/3 Claiming the Research and Development Tax Incentive for ordinary business activities.
Apportionment methodologies may be used in some instances, but the company can only claim notional deductions under the R&D tax incentive to the extent that the expenditure has been incurred on eligible R&D activities. For example, it may be appropriate to use R&D salary over total staff to apportion personnel costs but not for utilities.
It is commonly observed that the apportionment methodologies used by claimants can result in an unreasonable apportionment of overhead expenses to R&D activities over non-R&D activities.
The company must use a reasonable basis of apportionment. It must reflect the extent to which the expenditure has been incurred on R&D activities if there is no single apportionment method that can be used to apportion expenditure between R&D and ordinary business activities on a fair and reasonable basis.
The appropriate methodology to apportion an expense depends on the nature of the expense. The company should document the methodology adopted and the rationale for that methodology.
The ATO has observed R&D tax incentive claims that include notional deductions claimed in relation to expenditure incurred to associates where the amount has not been paid. Notional deductions can only be claimed in relation to expenditure incurred to associates of the company where the amount has also been paid.
It is a requirement that companies maintain contemporaneous records to support their R&D claims. This view is supported by AAT Cases (Tier Toys Limited v FC of T  AATA 156 and Ozone Manufacturing Pty Ltd v FC of T  AATA 420). In this case, contemporaneous records were not maintained so the taxpayer could not demonstrate that the expenditure was anything more than normal business expenses.
The taxpayer’s business records must be sufficient to verify the:
- amount of the expenditure incurred on R&D activities
- nature of the R&D activities
- relationship of the expenditure to the activities.
Self-assessment requires evidence that substantiates that each and every part of the legislative requirements are met. A taxpayer cannot succeed in establishing those requirements in the absence of detailed documentation recording the process of each activity as it develops.
The taxpayer has the responsibility to ensure that reasonable methods have been used to differentiate between expenditure on eligible R&D activities and other activities.
Documents created after the fact will generally not be adequate on their own without some contemporaneous records (that is, records of activities at the time they were conducted).
For more information see:
- Key governance steps and processes
- Keeping R&D records
- Keeping records as evidence of your R&D activitiesExternal Link
Tax agents and R&D consultants have an important role to play as intermediaries in providing advice to taxpayers in relation to the R&D tax incentive. However, we have concerns with how the R&D tax incentive is being advised to taxpayers.
The ATO and AusIndustry have concerns with some of the practices of tax agents and consultants. These include:
- cold calling taxpayers and advising them that their business activities are eligible R&D activities
- using late registrations to amend claims to access the R&D refundable offset to provide funding for companies in financial difficulties
- charging excessive commissions that are a large percent of the refundable R&D tax offset
- a registered activity relating to the whole of the project rather than a specific activity
- registered tax agents, including R&D consultants, advising companies to make incorrect R&D tax incentive claims, - they may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.
Promoter penalty laws may apply under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters of schemes to access the R&D tax incentive for ineligible activities.
While most taxpayers and advisors generally do the right thing, the ATO and AusIndustry are working closely to identify taxpayers and advisors that may be involved in aggressive R&D arrangements. We are taking a coordinated approach to address these behaviours to ensure the integrity of the R&D tax incentive program.
- are inconsistent with the requirements of the R&D regime
- may have feature of tax avoidance
- may be fraudulent.
For further information about compliance work, refer to Help to self-assess my eligibility and register my activitiesExternal Link.
The ATO and AusIndustry are warning about a scheme involving incorrectly claiming the wine grapes levy as R&D expenditure.
The levy is paid by wine producers to the Department of Agriculture and Water Resources. It is calculated on the total number of tonnes of grapes used by the wine producer in a year.
Some promoters, including those operating under reputable brand names, are incorrectly advocating that companies who pay the compulsory wine grapes levy (the levy) can register the activity with AusIndustry or simply claim the levy, as all or part of a notional deduction in calculating their entitlement to an R&D tax offset.
The levy is applied to fund the marketing, and research and development programs undertaken by the Australian Grape and Wine Authority (‘Wine Australia’). Wine Australia is not a registered research service provider (RSP) nor a Cooperative Research Centre under the R&D tax incentive program.
What are our concerns
The ATO and AusIndustry are concerned that some wine producers have been misled into thinking they are able to include the levy as eligible R&D expenditure which has been incurred on registered R&D activities.
The levy can usually be claimed by a wine producer as an ordinary business deduction against the wine producer’s assessable income. However, the way R&D commissioned by Wine Australia is conducted, means that the levy cannot be claimed in calculating a refundable or non-refundable R&D tax offset for the wine producer.
Levies paid to industry organisations can only be claimed in calculating an R&D tax offset if the industry organisation is a Levy Collecting RSP. Wine Australia is not a Levy Collecting RSP.
Generally, eligible R&D expenditure can only be claimed on R&D activities which are registered by the claimant with AusIndustry. If the R&D activity is carried on for the claimant by a third party, the claimant also needs to be able to show that:
- it has effective ownership of the know-how, intellectual property, or other results arising from the R&D expenditure
- it has appropriate control over the conduct of the R&D activities
- it bears the financial burden of carrying out the R&D activities
- the R&D activity is not carried out to a significant extent for another entity, or entities.
It follows that although a company that produces wine may have registered R&D activities with AusIndustry, the company’s expenditure on the levy bears no connection with the R&D activities it carries on.
In addition, the funds provided through the levy are used by Wine Australia to invest in R&D activities undertaken by research bodies based on the R&D provider’s own project proposals and are conducted at the direction of Wine Australia. The know-how and intellectual property arising from the R&D activities is retained by the entities investing in the R&D, and as is the case with the financial risk, the results are broadly shared.
Finally, the R&D activities commissioned by Wine Australia are carried on for the benefit of the broader grape and wine industry, not just for individual companies that pay the levy.
We also note that many of the activities carried on by Wine Australia which are funded by levies, such as marketing and promotion, are expressly excluded from the definition of R&D activities and therefore related expenditure cannot be included in an R&D tax offset claim.
What you should do
You should consider whether our concerns are applicable to your circumstances.
We are committed to maintaining the integrity of the R&D program. We deal firmly with dishonest promoters whilst providing fair outcomes for taxpayers who have inadvertently entered into an R&D scheme or relied on advice they obtained in good faith.
If you consider that our concerns are applicable to your circumstances, you can:
- contact us by phone or email to the contact details below
- seek independent professional advice
- ask the ATO for a private ruling, or in the case of verifying that your R&D activities are eligible, apply for a Finding from AusIndustry
- apply to AusIndustry to amend or withdraw your registration, or
- make a voluntary disclosure to the ATO or amend your tax return.
Penalties can apply if you have incorrectly claimed the R&D tax incentive. They will be significantly reduced if you make a voluntary disclosure. Generally, the reduction in penalties is greater if you make a voluntary disclosure before we notify you of an examination of your tax affairs.
Registered tax agents, including R&D consultants, who advise or encourage companies to make incorrect R&D claims may be referred to the Tax Practitioners Board to consider whether they have breached the Tax Agent Services Act 2009. Promoter penalty laws may also apply to the promoters of schemes designed to inappropriately access the R&D tax incentive.
To provide information about this or another arrangement, or about a promoter, you can phone Brett Challans on 08 7422 2382.
For more information, see Check if you're eligible for the R&D Tax IncentiveExternal Link.
You can get further help and advice about the R&D tax incentive from the ATO and AusIndustryExternal Link. The type of help and advice you receive will depend on your specific needs and circumstances and whether or not you want an answer in writing.
The ATO and AusIndustry administer the R&D tax incentive jointly. You should seek help or advice from the agency that administers the aspect of the program that relates to your query.
AusIndustry manages the registration of your R&D activities and checks that they comply with the law. They provide public guidance and advance findings about the program so that R&D entities are better informed about their entitlements and obligations. Their findings set out how their decisions apply to you and your specific circumstances.
The ATO determines whether or not the expenditure you are claiming for your R&D activities is eligible. We offer different types of advice and guidance that give our view on how the laws we administer apply. These range from published guidance about how the law applies generally, to advice given to a taxpayer about how the law applies to their particular circumstances.
- private rulings, which set out our opinion about the way a tax law applies to you in specific circumstances
- public rulings, which deal with priority issues that require clarifying and include product rulings (which are intended to provide certainty to participants about an arrangement)
- class rulings (which are intended to minimise the need for a group of participants to individually seek private rulings in relation to the same scheme).
For more information see our:
- Research and development tax incentive calculator to help work out your entitlement
- ATO advice products – rulings
- Tailored technical assistance