Self-assessment
The R&D tax incentive is a self-assessment program, which means the responsibility for compliance rests with the taxpayer. We work with the Department of Industry, Innovation and Science to undertake complementary risk assessment and compliance work.
- The Department of Industry, Innovation and Science's compliance work focuses on the eligibility of R&D activities
- Our compliance work focuses on the R&D tax offsets allowable for those activities.
Industries with issues
From our combined risk assessment and compliance work, we have identified areas of concern. We have identified 4 industries that have too many companies making claims that have issues:
Agriculture
We, and the Department of Industry, Innovation and Science, have seen issues with R&D tax incentives claims made by companies in agricultural industries. There include 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 applying established products and existing methodologies that a competent professional could have worked out the outcome without experimenting
- 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 carried out 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 the Legal database references, see:
- TA 2015/3 Accessing the R&D tax incentive for ineligible broadacre farming activities
- TA 2017/4 Claiming the Research and Development tax incentive for agricultural activities.
Incorrect claims for the wine grapes levy
We, and the Department of Industry, Innovation and Science, are warning about a scheme involving promoters, including those operating under reputable brand names. These promoters are advocating that companies who pay the compulsory Wine Grapes Levy can register the activity with the Department of Industry, Innovation and Science or simply claim the levy. They are suggesting this as all or part of a notional deduction in calculating their entitlement to an R&D tax offset.
The levy is paid by wine producers to the Department of Agriculture and Water Resources and is calculated based on the total number of tonnes of grapes used by the wine producer in a year. The levy is applied to fund the marketing, and research and development programs done 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.
We, and Department of Industry, Innovation and Science, are concerned that some wine producers have been misled into thinking they are able to include the levy as eligible R&D expenditure that has been incurred on registered R&D activities.
A wine producer can usually claim the levy as an ordinary business deduction against their assessable income. However, the way R&D commissioned by Wine Australia is done means that the levy can't be claimed in calculating a refundable or non-refundable R&D tax offset for the wine producer.
You can only claim levies paid to industry organisations 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 that are registered by the claimant with the Department of Industry, Innovation and Science. If a third party is carrying on the R&D activity for you, you need to be able to show that:
- you have effective ownership of the know-how, intellectual property, or other results arising from the R&D expenditure
- you have appropriate control over the conduct of the R&D activities
- you bear 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 the Department of Industry, Innovation and Science – the company’s expenditure on the levy is not connected with the R&D activities it carries on.
In addition, the funds raised through the levy are used by Wine Australia to invest in R&D activities done by research bodies based on the R&D provider’s own project proposals and are carried out 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 that are funded by levies (such as marketing and promotion) are expressly excluded from the definition of R&D activities so related expenditure can't be included in an R&D tax offset claim.
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 while giving fair outcomes for taxpayers who have:
- inadvertently entered into an R&D scheme
- relied on advice they obtained in good faith.
If you consider that our concerns are applicable to your circumstances, you may want to:
- contact us
- seek independent professional advice
- ask us for a private ruling, or in the case of verifying that your R&D activities are eligible, apply for a Finding from the Department of Industry, Innovation and Science
- apply to the Department of Industry, Innovation and Science to amend or withdraw your registration or make a voluntary disclosure to us or amend your tax return.
We can apply penalties if you have incorrectly claimed the R&D tax incentive but they will be significantly reduced if you make a voluntary disclosure. Usually, we can reduce penalties more if you make a voluntary disclosure before we notify you that we are going to examine 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 inform us about this or another arrangement, or a promoter of this or another arrangement, you can
- phone Brett Challans on 08 7422 2382
- email us at InnovationTax@ato.gov.au
Building and construction
We, and the Department of Industry, Innovation and Science, 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
- where R&D consultants advise clients they are eligible to make a R&D claim as their activity is unique.
For the Legal database reference, see TA 2017/2 Claiming the Research and Development tax incentive for construction activities.
Mining
We, along with the Department of Industry, Innovation and Science, have observed issues with R&D tax incentive claims made by mining companies. These include where:
- the scope of the R&D activities in the context of extracting minerals is not clearly identified, which is a concern because if activities in R&D projects are too broad there is an increased risk of over-claim of costs
- activities relating to modelling of mines aren't R&D unless it is associated with a physical experiment, remembering that 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.
Software development
We, and the Department of Industry, Innovation and Science, have observed issues with R&D tax incentive claims by companies in the information technology and software development industries where:
- R&D claims are made on whole of project basis, not
- considering each of the activities
- applying the relevant legislation to decide which activities are R&D activities
- the software experiments aren't clearly articulated in the R&D registration forms
- technical uncertainties aren't clearly identified
- expenditure is incurred in acquiring, or acquiring the right to use, technology that can't be claimed as a notional deduction
- expenditure is being apportioned between R&D activities and ineligible activities in an unreasonable manner.
We have Guidance materialExternal Link to clarify the eligibility of software development activities under the R&D Tax Incentive and the Legal database reference TA 2017/5 Claiming the Research and Development tax incentive for software development activities.
General issues
The following areas of concern aren't restricted to companies in particular industries:
- ordinary business activities vs eligible R&D activities
- apportionment of overheads
- payment to associates
- record keeping
- R&D consultants
- fraud
Ordinary business activities vs eligible R&D activities
We, and the Department of Industry, Innovation and Science, have observed issues with R&D tax incentive claims that include expenditure relating to ordinary business activities that aren't eligible R&D activities. These include where:
- no R&D activities have been done
- 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 aren't concerned with generating new knowledge
- the R&D activities don't involve applying a scientific method (noting that a scientific method means proving or disproving a hypothesis through experiments)
- the R&D activities address commercial being rather than technical risks.
For the Legal database reference, see TA 2017/3 Claiming the Research and Development tax incentive for the ordinary business activities.
Apportionment of overheads
You can use apportionment methodologies, but you 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, you may be able to use R&D salary divided by total staff to apportion personnel costs but you can't do this for utilities.
We have seen apportionment methodologies that result in an unreasonable apportionment of overhead expenses to R&D activities over non-R&D activities.
Your company must use a reasonable basis of apportionment, which must reflect the extent to which the expenditure has been incurred on R&D activities. This includes where:
- 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.
Document the methodology you adopted and the rationale for that methodology.
Payment to associates
We have observed R&D tax incentive claims that include notional deductions claimed for expenditure incurred to associates where the amount has not been paid. You can only claim notional deductions for expenditure incurred to associates of the company where the amount has also been paid.
Record keeping
It is a requirement that companies maintain contemporaneous recordsExternal Link to support their R&D claims. This view is supported by AAT Cases (Tier Toys Limited v FC of T [2014] AATA 156 and Ozone Manufacturing Pty Ltd v FC of T [2013] AATA 420). In these cases, taxpayers didn't maintain contemporaneous records so they couldn't demonstrate that the expenditure was anything more than normal business expenses.
Your 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. You can't succeed in establishing those requirements if you don't have detailed documents recording the process of each activity as it develops.
You have the responsibility to ensure that reasonable methods have been used to differentiate between expenditure on eligible R&D activities and other activities. It is vital to follow key governance steps and processes.
If you create documents after the fact, they won't be adequate on their own without some contemporaneous records (that is, records of activities at the time they were done).
R&D consultants
Tax agents and R&D consultants have an important role to play as intermediaries in giving advice to taxpayer about the R&D tax incentive. However, we have concerns with how the R&D tax incentive is being advised to taxpayers.
We, and the Department of Industry, Innovation and Science, have concerns with some of the practices of tax agents and consultants, including:
- '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 for funding of companies in financial difficulties
- charging excessive commissions that are a large percent of the refundable R&D tax offset
- a registered activity that relates 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 (which 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 also 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.
Fraud
Most taxpayers and advisors do the right thing. We and the Department of Industry, Innovation and Science 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 programme.
These arrangements:
- are inconsistent with the requirements of the R&D regime
- may have feature of tax avoidance
- may be fraudulent.
Refer to the Department of Industry, Innovation and Science website on the eligibility of R&D activities and registration for the R&D tax incentiveExternal Link for more information.
Contact us
Information on eligible activities
If you need more information about whether your activities are eligible, you can ask the Department of Industry, Innovation and Science (who act for Innovation and Science Australia) for advice by:
- phoning the Department of Industry, Innovation and Science Hotline on 13 28 46
- emailing them or using Web Chat on their Contact usExternal Link page.
Information on eligible expenditure
If you need more information about whether the expenditure you are claiming is eligible for the research and development (R&D) tax incentive, you can contact us on the phone numbers listed on our Phone us page.