The cliché of the devil being in the detail is especially applicable at tax time. But recently it has rung deafeningly true over the R&D tax incentive which is seeing hundreds of businesses challenged by the Australian Tax Office over eligibility for previous claims.
The R&D scheme was designed to stimulate industry by granting a tax offset of up to 43.5 percent for certain research and development projects. Yet the tricky task of defining exactly what kind of R&D projects qualify as eligible has bubbled to the surface thanks to an ATO audit crackdown – and it has caught even the most prominent names in business off guard, including the Commonwealth Bank.
The bank this week withdrew its challenge launched against the ATO Industry and Science Australia (ISA) in the Administrative Appeals Tribunal (AAT) over a past R&D tax incentive claim relating to “core banking modernisation project that involved digital transformation and software development”.
The move followed last year’s equally high-profile case of Airtasker being instructed to pay back all previous R&D incentives after an ATO audit of claims dating back to 2013 found they were ineligible.
Both cases occurred after auditing was stepped up in reaction to the R&D scheme’s costs spiralling skyward of the original $2 billion budgeted. Many past claims have since been found ineligible, with companies faced with either paying the money back – a move that has in some cases resulted in liquidation - or taking their plight to the AAT.
In light of this situation, it would be understandable to wonder whether pursuing the offset is even worthwhile.
Sydney-based tax, audit and business advisory specialist Rohan McCoy, principal of McCoy Accounting and Assurance, has prepared dozens of R&D incentives with 100% success rate and said while immensely detailed, it can definitely be done. “I’ve never had one knocked back – including when audited,” he said. “These applications are not hard – people are scared by them. The deal is you WILL get audited - it’s not a case of if, it’s when –so you need to have all your documentation kept meticulously and all background to support your project’s eligibility.
“And if you think you have all the documents you need, think again.”
What is the definition of the R&D tax incentive?
The R&D scheme provides a tax offset for the cost of eligible R&D activities by reducing a company’s income tax liability. It is jointly managed by the ATO and the Department of Industry, Innovation and Science. The incentive replaced a previous R&D tax concession.
What qualifies as an R&D tax incentive?
According to the ATO website, eligible activities are those deemed as ‘core’ or ‘supporting’. Core R&D activities are “experimental” which means their “outcome cannot be known or determined in advance on the basis of current knowledge, information or experience”. Core activities must also ”be conducted for the purpose of generating new knowledge (including about creating new knowledge or improved materials, products, devices, processes or services).”
As Mr. McCoy puts it: “You have to be able to prove that when you start the process you don’t know whether the outcome is certain.”
Supporting activities directly relate to the above core R&D activities or have “been undertaken for the dominant purpose of supporting core R&D activities”
Gerry Frittman is managing director of TCF services, specialists in the R&D scheme and leaders in delivering government grants and tax incentives for Australian companies. While highly critical of the scheme (“In my mind, the whole program needs to be revamped and re-thought out,” Mr. Frittman said), these current definitions of what constitutes core and supporting activities demand businesses rigorously examine their projects for eligibility and then keep meticulous documentation.
“The quality of the R&D must be strong with high levels of scientific and technical detail and all records must be kept to substantiate the claims,” Mr. Frittman said.
What is the tax incentive?
The scheme provides a 43.5 percent refundable tax offset for companies turning over less than $20 million a year. All other companies are offered a 38.5 percent non-refundable tax offset. For income years prior July 1 2016 the refundable tax offset and 45 percent and non-refundable 40%.
Can R&D take place outside Australia?
In rare cases R&D activities conducted overseas can qualify but only if they meet criteria of specified under the Industry Research and Development Act 1986 detailed on the Department of Industry, Innovation and Science’s website. (See links below)
What records must be kept?
This is highly significant. TCF’s Mr. Frittman cites insufficient record keeping for letting the majority of businesses down when faced with an audit.
The government has issued a 16-page document detailing what constitutes effective record keeping, stipulating the documenting methods to be used for evaluating projects as well as recording expenditure associated with the eligible R&D activities.
Among obvious documents to keep such as staff time sheets and tax invoices, other evidence listed as “likely to assist” assessing eligibility includes: project planning documents, experiment designs, project records and laboratory notebooks, records of trial runs and samples, prototypes, scrap or other artifacts.
“If you can’t substantiate your claims you may as well put a target on your back,” Mr. Frittman said.
- For all government guidelines on the R&D tax incentive and more visit:
TCT Services www.tcf.net.au
McCoy Accounting and Assurance www.mccoyaccounting.com.au/contact/