There is a prevailing belief that the 2025-2026 Federal Budget was a non-event for the majority of us in the Australian tech sector. But besides being a missed opportunity to move the dial for Australian founders, are there any risks to watch out for in the Budget?
Well, yes, actually. In our view, one particular aspect of the Budget could have significant and long-lasting repercussions for many Australian businesses, regardless of their size or industry.
The Budget announced that the Government will ‘strengthen the fairness and sustainability of Australia’s tax system by providing $999.0 million over four years to the Australian Taxation Office (ATO) to extend and expand tax compliance activities.’
Ostensibly, the ATO crackdown will be directed at tax avoidance, the shadow economy and the personal income tax program. However, it would be naïve to believe that a war-chest of that size will not directly lead to additional resources for ATO audits and reviews across a range of industries and risk areas.
A perennial risk in the eyes of the ATO is the R&D tax incentive (RDTI) – the lifeblood of many innovative startups and scaleups.
“History doesn’t repeat itself, but it rhymes” – Mark Twain
As far as the number and intensity of ATO reviews and audits go, things come in cycles. For RDTI, this cycle is complicated by the fact that the incentive is co-administered by the ATO together with a second Government body – the Department of Industry, Science and Resources (DISR), also known as AusIndustry.
Many founders can remember 2018 and 2019, when audit activity surrounding RDTI claims reached a crescendo to the point that some genuinely innovative startups and scaleups, so concerned were they about the media headlines of denied RDTI claims, avoided making a claim altogether – to them, the RDTI was just not worth the risk anymore. This was not a good outcome for the tech sector or the economy as a whole.
Due to the extent of public outcry, there was an easing of pressure before COVID struck and for two or three years there was hardly any review and audit activity as the focus turned towards supporting businesses and protecting jobs.
However, we have seen a steady increase in ATO and DISR reviews over the last 18 months. It is starting to feel like 2018 and the massive increase in ATO resourcing likely spells rough seas ahead for RDTI claimants. The climate is clearly shifting and tech companies need to adapt accordingly.
Some common ways RDTI claims become unstuck – and how to avoid getting caught out
RDTI is often described as a form of non-dilutive capital for startups and scaleups, which is somewhat accurate. However, if we continue with that analogy, RDTI is a form of capital whose ‘investor’ can ask for the money back within a 4-year window if the rules are not followed. This money has strings attached.
So what can Australian tech companies do to minimise the risk of being asked to pay back their RDTI? What pitfalls do they need to avoid?
Expenses incurred to related parties – These are typically viewed by the ATO as high-risk, and understandably so. Having sufficient appropriate documentation will be key to defending your RDTI claim. You must ensure that, at a bare minimum, there needs to be a contract and invoices that clearly spell out what is being provided and at what cost-structure. The ATO expectation is that the details in those contracts and invoices accurately reflect the R&D activities being registered with DISR. An inability to clearly demonstrate the link between the two could spell trouble.
Sweat equity – Has your startup paid a supplier or contractor with shares instead of cash? Unless structured properly, their expenses may not be claimable for the RDTI and may not even be tax-deductible. Refer to this ATO document for more information.
For hardware and advanced manufacturing companies – We are seeing the ATO demand comprehensive documentation from claimants detailing how specific pieces of plant and equipment are being used to conduct R&D activities. Importantly, the ATO expects to see records of how the machinery is being used and how that usage is different to ordinary business activities. Accordingly, we encourage people to keep detailed written records of experimentation and testing, as well as machinery usage reports and photos of the equipment and output. Additionally, expenses on buildings and fixtures to buildings are generally ineligible for RDTI.
Expenditure not at risk – Expenditure on R&D activities may not be claimable where the company is not bearing the financial risk associated with that expenditure. An example is expenditure for which the company is recompensed, or expected to be recompensed, regardless of the outcome of those activities. Post-revenue B2B businesses that deliver major projects have a higher risk of being selected for audit focusing on this issue.
Government grants – Special rules may apply to reduce the RDTI to prevent claimants from receiving a benefit under both the RDTI and another government grant for the same expenditure unless that grant is the CRC program. If your R&D expenses were funded in whole or in part by a government grant, ensure your RDTI is adjusted accordingly.
The above are by no means a comprehensive list of things that can go wrong in an RDTI claim for a typical tech startup or scaleup. In fact, this article is a follow-up to a previous article, and the points raised there remain highly relevant today. I would strongly recommend giving it a read: How to steer clear of R&D tax incentive landmines when you’re a startup
Lastly, in addition to reducing risk, this also is a great time of the year to implement tax planning measures before 30 June that legitimately optimises your RDTI claim – see here for our article on tax planning.
If you’d like tax advice on how to navigate the R&D Tax Incentive, contact your local William Buck advisor.
