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Compliance key to claiming 45% R&D tax offset

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Brad Tonks


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Compliance key to claiming 45% R&D tax offset

Raising money from investors takes time and involves detailed due diligence that goes far beyond a data room. Persuading people to part with their money (or money they manage on behalf of others) is no simple task. It often takes many months with no certainty of a positive outcome.

Compared to this process, the process of claiming the R&D tax incentive seems much less rigorous. For businesses with turnover <$20m, in particular those in a tax neutral or tax loss position, the R&D tax incentive provides a 45% refundable cash offset for every eligible R&D dollar a business spends. The policy intent is to help businesses sustain their investment in R&D in the expectation that this will ultimately drive revenue growth and tax receipts.  A business does not have to show how that R&D will turn into revenue before they can claim the tax incentive like they have to do with an investor. The tax incentive is self-assessing. In effect, the taxpayer will back you on trust when you claim an R&D tax incentive either with cash or an extra tax deduction. 

Whilst the tax incentive is self-assessing, and can result in very significant unlimited cash refunds for a business in a year and over long periods, this does not mean that there are no strings attached. AusIndustry and the ATO have joint responsibilities to administer the tax incentive program have repeatedly stated that they undertake rigorous auditing of R&D tax incentive claims  -

  • to ensure what has been claimed as R&D is in fact eligible R&D activity as defined, and
  • to ensure that spending claimed to have been incurred on those activities has in fact been incurred on those activities.

Ensuring that your R&D claim is maximised is one thing; ensuring that it is properly protected so that the i’s are dotted and the t’s crossed is another thing. Many businesses are happy to take the benefits of a self-assessing tax incentive that may or may not be audited in future, but are less enthused to put in place the processes they need to protect their claims if and when they are audited.

Bearing this in mind, the ATO has again issued a warning to businesses claiming the R&D tax incentive. I’ve reproduced the text here.

“We’re [ATO] working closely with AusIndustry to identify taxpayers involved in aggressive R&D tax incentive arrangements which may include tax avoidance and fraud. We’re concerned businesses and tax agents are following R&D consultant advice without substantiation of expenditure or objectively assessing the advice. It’s your [the business] responsibility to ensure your R&D tax incentive claims are correct before lodging:

  • all figures and details in the R&D schedules
  • all claims for R&D expenditure
  • that R&D activities claimed match your AusIndustry registration
  • expenses (for example labour costs) were incurred on R&D activities”

 The point to emphasise is that tax incentive is not ‘money for old rope’ either for businesses or consultants who advise them. It never has been.

 Just as importantly, don’t forget that the tax incentive exists to drive your future revenue growth.

 Ensuring your R&D claim is well founded and documented, AND ensuring your R&D dollar is invested in developing products and services that create revenue is the key to success.

 At PKF, this is what we focus on.


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