As reported in the media this week, the Senate Economics Legislation Committee discussed the administration of the R&D Tax Incentive.

Swanson Reed has reviewed the discussion in detail. It involved interactions between three people, whose comments are summarised and paraphrased below:

• Greens Senator Barbara Pocock:
  • Had queries around how many reviews are conducted each year;
  • Queried whether staff conducting reviews include personnel with Science and Engineering qualifications;
  • Asked for details of fines or penalties for incorrect claims, and indicated concerns that possible penalties may be pathetic or weak;
  • Focused on whether reviews are being conducted on specific Oil and Gas companies named during the discussion;
  • Queried what processes are in place to ensure claims support genuine R&D as opposed to supporting business as usual activity.
• ATO Second Commissioner Jeremy Hirschhorn:
  • Noted that last year, of around 14,000 R&D Tax Incentive claims submitted, the ATO conducted 400 compliance cases;
  • Noted that ATO Staff conducting reviews do not generally have Science and Engineering qualifications, but that these resources were available to them if needed (by bringing in experts);
  • Noted that the size of a claim is one factor considered when selecting claims for review, but that generally the ATO does not set limits on what triggers a review, since doing so could risk claimants clustering their claimed expenditure just under such limits;
  • Noted that publication around reviews or compliance of individual cases is not made public unless they are in tribunals or courts;
  • Noted that there are graded penalties under the tax system ranging from:
    • Potential nil penalties for returns that are reasonably argued; to
    • Significant penalties, calculated based on multiples of the tax foregone, in cases of fraud;
  • Took on notice a request for more detailed information about penalties and compliance activity;
  • Responded that the ATO takes the program seriously and that the ATO’s biggest influence is through the RDTI advisers and firms that applicants use for lodging claims.
  • Noted that the ATO provides guidance to these advisers and also issues taxpayer alerts on incorrect RDTI practices which concern them.
• Industry Minister Tim Ayres:
  • Noted that the R&D Tax Incentive is a system that has supported a level of private sector investment in R&D in Australia;
  • Responded that the Government is always looking at the structure of the system, given its importance to Australia’s research and development framework and private sector contribution.

Swanson Reed respects the role of the Senate Economics Legislation Committee, and Senator Barbara Pocock is entitled to raise these questions as a matter of probity given the significant cost of the R&D Tax Incentive to taxpayers.

However, Swanson Reed is concerned that this discussion in the Senate Economics Legislation Committee and the questions raised by the Senator do not fully reflect the administrative processes underlying the R&D Tax Incentive and the seriousness which stakeholders (companies, advisors and regulators) must adopt if participating.

Swanson Reed wishes to note the following in response to the discussion in the Senate Economics Legislation Committee this week:

• The R&D Tax Incentive in dually administered by regulators who are qualified to assess both eligible activity and eligible expenditure:

• • The Australian Taxation Office (ATO) and the Department of Industry, Science and Resources (DISR/AusIndustry) jointly administer the R&D Tax Incentive. DISR assesses the technical eligibility of R&D activities, while the ATO handles the financial expenditure and tax offset claims. Registration with DISR is mandatory before claiming;
  • Staff from DISR often have qualifications in Science and Engineering and they are suitably qualified to assess eligibility around whether activities are suitably technically knowledge generating;
  • In addition, staff from the ATO usually have suitable accounting and law backgrounds, and are able to asses issues around legal eligibility of a claimant or technical matters such as whether expenditure may be excluded (for example if it is expenditure on a tangible depreciating asset);
• Compliance reviews occur often and in many forms:
  • Whilst the ATO seemed to provide a general indication of compliance statistics in the discussion, we consider that the level of compliance indicated (400 out of 14,000) is not suitably reflective of the actual level of compliance activity in the programme.
  • In our view, the 400 number quoted may relate only to the number of ATO claims subject to an Audit each year. Audits of R&D Claims are enormously resource intensive and can span over a number of years. In our view, this 400 number quoted may not include other compliance activities, including:
    • ATO reviews which do not proceed to an audit;
    • DISR/AusIndustry examinations;
    • DISR/AusIndustry pre-registration reviews;
    • ATO and DISR/AusIndustry desk/integrity reviews which may not lead to company contact.
• Penalties are Substantial for incorrect claims or aggressive advisors:
  • The Penalties for incorrect participation in the R&D Tax Incentive are substantial:
    • In ATO Audits we see (many of which are for claims we have not initially prepared), we rarely see nil penalties. Penalties for incorrect or unsubstantiated claims are usually around 50% of the tax shortfall. Interest is then usually levied on top of this.
    • The ATO have levied enormous penalties upon advisors who have been found to misuse the R&D Tax Incentive. These include:
      • $22.68 million penalty — Bogiatto (2021);
      • $13.6 million penalty — Bakarich (2024);
      • $4.25 million penalty — Australian R&D Funds and Grants Services Pty Ltd.

It is possible that the discussion in the Senate Economics Legislation Committee this week may be focused on whether it is suitable for Fossil Fuel type companies to be claimants of the R&D Tax Incentive, particularly given there is now proposed legislation to exclude gambling and tobacco companies from claiming. However, it is important that any policy discussion about which industries receive public support for R&D is not conflated with questions regarding the suitability of compliance processes or penalties for misconduct under the R&D Tax Incentive.

Swanson Reed takes the integrity of the R&D Tax Incentive very seriously and has observed that the regulators (ATO, DISR and TPB) likewise play an active, visible and important role in maintaining programme integrity.

In our view, whilst the R&D Tax Incentive is not perfect, in our view the program is significantly stronger and cleaner than in the past. This improvement is largely attributable to the regulators’ sustained efforts to address inappropriate practices.

It is also important to note that a Government examination of Australia’s R&D System is currently underway and the stated aims of this review includes seeking to harness and grow business investment in R&D.

Swanson Reed has actively participated in the consultation process and will continue to advocate for a stable and sustainable R&D Tax Incentive.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.