Home » News » Observed increase in compliance activity for R&D Tax Incentive Claims

Observed increase in compliance activity for R&D Tax Incentive Claims

As indicated by the additional funding for compliance activities announced in recent federal budgets (and as widely anticipated by those in the industry), we have recently observed a modest increase in compliance activity by regulators of the R&D Tax Incentive.

The R&D Tax Incentive is dual administered by two government agencies:

• 1: The Department of Industry, Science, Energy and Resources (DISER)

o   Whose role is to assess the eligibility of registered R&D Activities under the legislative criteria; and

• 2: The Australian Taxation Office (ATO):

o   Whose role is to assess the substantiation of R&D Expenditure on registered R&D Activities, as well as other issues such as whether the entity registered is the legally entitled R&D Entity under the law.

Particular compliance focuses at the moment seem to be:

• From The Department of Industry, Science, Energy and Resources (DISER):

o   Documentation of how the company determined that they could not have determined the outcome of the activity in advance. This requires demonstrating the sources of existing knowledge investigated and how the information derived from these sources would not have allowed a relevant competent professional to have determined the outcome of the R&D Activity in advance (such as literature reviews, expert consultations etc);

o   Documentation to evidence the conduct of the R&D Activities (such as testing reports and or photos of physical experiments);

o   Evidence and explanation of why the activities remain R&D and have not transitioned to standard engineering or production.

• From the Australian Taxation Office (ATO):

o   Documentation of expenditure claimed on the R&D Activities:

• R&D Salaries are likely to require records tracking R&D hours for each employee that provide an explanation of the following for claimed employees:
• Dates the activities were conducted;
• How many hours were attributed to R&D on these dates;
• How the hours relate to the specific R&D activities to be registered;
• Contractor costs will likely require:
• Contracts and invoices that include descriptions of work that correlate with the R&D Activity descriptions;
• Evidence of work and detailed basis of the expenditure amount allocated to R&D and non-R&D activities;
• R&D Expenditure from associates or connected entities will likely require:
• Evidence of genuine payment by 30 June of the claim year;
• Evidence of genuine R&D activity conducted by the associate;
• Records to justify that profit margin from charges within groups has been eliminated (ITAA 1997 – SECT 355.415);
• Documentation to justify legal eligibility of the entity registering R&D Activities:

o   Evidence to show that the R&D entity is the entity that receives the major benefit of the activity. The ATO assess this by considering who:

• ‘effectively owns’ the know-how, intellectual property or other similar results arising from your company’s expenditure on the R&D activities
• has appropriate control over the way the R&D activities are conducted
• bears the financial burden of carrying out the R&D activities.

o   Legal contracts and similar documentation may also be required where the ATO is assessing interaction of entities within groups (relevant to ATO Alert TA 2023/4) or the expenditure not at risk provisions.

Swanson Reed hopes that as compliance activities increase, that they remain balanced and reasonable (as we have observed them to be over the past 4 years, since around 2020).

Swanson Reed recognises the important role that the programme regulators (DISER  and ATO) play in maintaining the integrity of the R&D Tax Incentive. Effective compliance processes are key in maintaining the sustainability of the programme.

Companies claiming activities under the R&D Tax Incentive must ensure they have suitable documentation in place before claims are made, as unsubstantiated claims can be subject to reversal of R&D Tax Offset entitlements and the imposition of penalties.

The current regulator guidance is here:

• ATO guidance on expenditure documentation;
• DISER guidance eligible activities.

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.