Commentary from Dr. Rita Choueiri, Principal of Research and Development Services and Jack Qi, Tax Director.
R&D tax experts say tech companies shouldn’t be deterred by the ATO’s clamp-down on software companies’ eligibility for the Research and Development Incentive.
Dr. Rita Choueiri, Principal of Research and Development Incentives at William Buck, says issues with R&D Tax Incentive claims arise from the way the law is being applied by claimants, not the Government’s assessment criteria.
“The mistake businesses and their advisors make, is thinking that just because they have a commercially innovative business model or product, this automatically means they qualify for the incentive.”
“Translating commercial activities into eligible activities for R&D purposes is a process which involves having a depth of understanding of the business intricacies, and then being able to overlay the R&D law to assess whether they qualify.”
“There’s no point in submitting claims hoping they will slip through. AusIndustry and the ATO are just applying the law. Tech companies and their advisors need to do the same thing.”
“There’s also a false sense of security believing they’re eligible and compliant with the R&D Tax Incentive law when past R&D claims have been submitted without any further questioning by AusIndustry.”
“This isn’t necessarily the case, because under the self-assessed R&D scheme the R&D claims submitted are not always reviewed in detail by AusIndustry or the ATO.”
This can mean that four or five years later you will be facing repayment of the benefits of incorrect claims plus fines and penalties – which for some, may lead to insolvency.”
“While the latest news doesn’t encourage fence-sitters wanting to claim the R&D Tax Incentive, these businesses of tomorrow are key to our economy’s success. They shouldn’t feel deterred from claiming R&D and should rightly utilise the significant financial benefits that this incentive brings.”
“I think it’s important to provide a level of comfort to tech companies that if they apply the law properly and keep documentation, then there shouldn’t be any issues – which is what our experience has been.”
Jack Qi, Tax Director at William Buck, says the widespread adoption of agile methodology of software development can result in insufficient documentation of genuine R&D processes that did take place, making it difficult to prove eligibility during audits by AusIndustry and ATO who by and large focus on one thing – documentation.
“Tech companies need to understand that an R&D claim should not be an after-thought that’s quarantined to after the year end. It’s a process that permeates the entire software development process throughout the year – with its own processes, documentation and resources dedicated purely to demonstrate your compliance with the rules,” says Qi.
Choueiri says William Buck have successfully assisted clients through AusIndustry reviews – including reviews of IT based R&D claims.
“R&D really comes down to the skill of the individuals involved and explaining the R&D to AusIndustry. The skill of phrasing and describing eligible activities with an appropriate level of detail are critical to a claim’s outcome. This involves having a deepened understanding regarding the industry you’re claiming for, says Dr. Choueiri.
“Good documentation is imperative, and the purpose and intention of the activities must also be documented. Many companies may not have compliant R&D claims because their internal documentation to substantiate their eligible R&D activities is inadequate,” says Dr. Choueiri.
“What’s not normally in the scope of R&D claims is having documentation reviewed by an advisor and it’s something we recommend because of the importance of keeping contemporaneous documentation to substantiate R&D claims,” says Dr. Choueiri.
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