ATO urges accountants to double-check R&D tax incentive claims

The Australian Taxation Office (ATO) is urging accountants and consultants to review their clients’ Research & Development (R&D) Tax Incentive claims, after identifying potentially costly errors in claims made under the multi-billion dollar scheme.

On Friday, the tax office asked tax R&D advisors to double-check the claims made by their clients and voluntarily disclose any errors.

Issues noted by the ATO include R&D expenditures made to associates.

Businesses can claim an R&D tax offset for payments made to associates when that payment is made, but the ATO has highlighted circumstances where it considers payment has not been made:

• When the amount paid is converted to a loan,
• Arrangements where an R&D entity provides a licensing agreement to an associate, where the licensing fee is offset against what the R&D entity owes the associate,
• “Circular, round-robin type transactions” which are deliberately “contrived to receive a taxation benefit”.

Elsewhere, the ATO has asked advisors to take care when determining which entity counts as the relevant R&D entity.

“Expenditure on R&D activities can’t be notionally deducted if they’re either: not conducted for the R&D entity [or] conducted ‘to a significant extent’ for another entity,” the ATO said.

The ATO will assess which entity has ownership, control, and the primary benefit associated with R&D activities when making that judgment.

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Accountants and consultants must pay close attention to the aggregate turnover threshold rules, which provide refundable and non-refundable R&D tax offsets to entities with an aggregated turnover of below and above $20 million, respectively.

The ATO has strict rules over where the relevant activity is conducted, and will “consider the physical location of where the work is conducted”.

Expenditure cannot be deducted if those funds were never at risk, the ATO added, pointing to instances in which the claimant can expect consideration:

• Directly or indirectly because of the expenditure being made,
• Irrespective of the results of the R&D activities,
• As the result of a grant or contract to undertake the R&D activities.

The warnings are designed to boost the integrity of the tax break, which can provide refundable tax offsets of 18.5% above a company’s base tax rate, meaning businesses on the 25% company tax rate can expect significant a refund of 43.5%.

The Research & Development Tax Incentive was expected to cost $3.2 billion through 2022-2023.