Reviewed October 2020
One of the key highlights of this year’s Federal Budget was the Government’s increased focus on the enforcement and integrity of the Research & Development (R&D) Tax Incentive scheme.
With R&D on the minds of many taxpayers this time of year, we sort the fact from the fiction by debunking some of the ‘R&D myths’ we commonly see.
Myth: The R&D claim process starts after 30 June.
Fact: In the event of a review or audit, ATO and AusIndustry will ask you to provide contemporaneous documentation i.e. records in existence at the time the R&D activities were conducted. The records should demonstrate that an eligible R&D activity has been conducted and expenditure was incurred in relation to this R&D activity.
It’s crucial that R&D is considered at the start of the income year. Appropriate planning measures will also assist claimants to legitimately maximise their R&D refund by being able to attribute all eligible expenses to the claim.
Myth: if my R&D claim is reviewed, I can talk to the ATO to prove the eligibility of my claim.
Fact: The ATO and AusIndustry are not interested in speaking to you, regardless of how well you can explain your position. Reviews are documentation-driven. Once a claim has been selected for review, ATO and AusIndustry will send a notification to the claimant advising them of the review along with an itemised list of documents and information required, including employee timesheets, accounting records, copies of invoices, progress reports and testing log books.
A common feature of court cases involving the R&D tax incentive (and tax in general) is the court finding that the claimant had no contemporaneous documentary evidence to support their position.
Myth: my application has been approved and we have received the refund, so we’re all clear.
Fact: R&D claims can be reviewed before funds are released, or years after the refund. The R&D tax incentive schedule is subject to the normal amendment periods for tax returns – up to 4 years after lodgement date. We recommend claimants assume they will be eventually selected for review and make preparations accordingly.
Myth: all software development activities are eligible for the R&D tax incentive.
Fact: broadly, for an activity to be eligible for the R&D tax incentive, it must meet the following criteria:
1. the activity is conducted for the purpose of generating new technical knowledge;
2. there is technical uncertainty in the outcome of the activity; and
3. the activity is experimental in nature and involves a systematic progression of work based on principles of established science.
The ATO has released specific Taxpayer Alerts warning taxpayers who are claiming R&D on entire software development projects.
Myth: R&D and company tax are separate matters.
Fact: The R&D tax incentive is part of the Australian tax system e.g. the R&D refund is received through the company tax return. As a result, all tax-related issues such as tax planning, taxable income, related party transactions and tax structuring all impact on the R&D claim.
Therefore, in order to achieve the best outcomes, the R&D tax incentive advisor must also be able to navigate the complex Australian tax system.