What Does an R&D Tax Incentive Audit Involve?

April 6th, 2016

Undeniably, the research and development (R&D) tax incentive can result in very significant cash refunds for a business which can drive its future revenue growth. However, as the R&D Tax Incentive is a self-assessed claim, AusIndustry issues ‘Request for Further Information’ (RFIs) to ensure that all companies claiming the incentive remain accountable for their claims. Therefore, because of this “self-assessment” process, it is important that you understand the compliance requirements.

Moreover, the ATO has recently stated that they are working closely with AusIndustry to ‘identify taxpayers involved in aggressive R&D tax incentive arrangements’. The concern of the ATO is that businesses are completing applications without adequate substantiation of expenditure. Furthermore, recent court cases have reinforced the need for companies to maintain a certain class of documentation to support their R&D claims in the event of review or audit.  An adverse finding on review or audit may lead to a denial of benefits and a need to make a tax adjustment payment.

Whilst the governing bodies (ATO and AusIndustry) don’t issue data about how frequently R&D applications get reviewed. As a general rule, it is recommended that customers expect their claim to be reviewed once every three years, and to retain supporting documentation regarding your R&D efforts for five years.

Despite the fact that receiving notification of a review or audit can be a daunting thought, in most cases, AusIndustry just need a little help understanding the more technical aspects of your project. Nevertheless, there are several different types and categories of audits or reviews that can take place for an R&D claim. These range from an education visit where AusIndustry will wish to study more about your business and claim, through to a risk review from the ATO. In addition, this compliance monitoring can span pre-registration reviews, registration desk reviews, activity reviews, large business innovation reviews and formal audits.

Typically, AusIndustry will contact you personally asking for further information. In most cases, they will highlight a few significant areas of your R&D claim and ask you to describe and define your project and related expenses in further detail. In some instances, they may request additional documentation as evidence to your R&D claim. Ultimately, the level of evidence necessary will fluctuate depending on the type of review.

Fundamentally, what the governing bodies are looking for is whether the company claiming the R&D Tax Incentive has contemporaneous records of their activities. This requirement can scare some companies into thinking that the only eligible activities are those carried out by people in white lab coats who write scientific papers about their experiments. However, the fact is that experiments occur in a wide range of settings and the contemporaneous documentation required could include internal emails, minutes from meetings, design sketches, logbook records, or photos of a prototype.

Swanson Reed has a formidable record of defending our client’s R&D tax incentive registrations at audit or review. We have a highly successful history with both AusIndustry reviews and ATO audits across a range of industries and our Audit Defence Advisory Service is what separates us from most other accounting firms. For more details on this service, visit our Audit Advisory page. For further information about the process of claiming the R&D Tax Incentive, check out or Snapshot of the R&D Tax Incentive blog post, or alternatively, contact one of our specialist R&D tax advisors today.