The Australian Taxation Office (ATO) recently drew specific attention to the case of Hadrian Fraval Nominees Pty Ltd v Commissioner of Taxation in its Large Business Bulletin released in September 2013.
The Tribunal affirmed the Commissioner’s decision that Hadrian Fraval Nominees Pty Ltd (HFN) was not entitled to claim the R&D Tax Concession for the 2004 year, and in the 2005 year HFN was entitled to an amount significantly less than was claimed. As a result, the AAT imposed penalties at the rate of 25% of the tax shortfall.
HFN is a lighting company specialising in developing environmentally friendly lighting systems for residential houses.
The Tribunal found that the applicant did not take the care a reasonable person in like circumstances would have taken in making an R&D Tax Incentive claim for expenditure. It was not able to substantiate that expenditure.
The AAT ruled that: journal entries in the book of accounts simply recorded a transaction and were not evidence of a transaction entries in accounts that had no apparent source documents were questionable and needed to be examined very closely.Failure to keep good records in this case denied the company R&D offsets of $225,563 and $174,118 over two years.
The R&D Tax Incentive program requires companies to have substantiating documentation to demonstrate that activities did occur (see NaughtsnCrosses Pty Ltd and Innovation Australia).
The applicant failed to prove on the balance of probabilities that the assets depreciated were owned during the income year or were used in the R&D project.
AAT Case  AATA 127, Re Hadrian Fraval Nominees Pty Ltd and FCT, AAT, Ref Nos 2010/2281 & 2010/2437, Fice SM,12 March 2013
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