In February 2017, the ATO issued a series of Taxpayer Alerts outlining concerns identified in a review of R&D claims. More recently, the ATO has begun contacting companies that have registered R&D activities with AusIndustry seeking to ensure that claims for the R&D tax incentive are valid and supportable.
What are the ATO’s concerns?
In brief, the ATO is concerned that the R&D tax incentive is being claimed in respect of:
- Activities that do not qualify for the incentive.
- Expenditure that does not relate to eligible R&D activities.
More particularly, the ATO is concerned that:
- The R&D tax incentive is being claimed on a ‘whole of project’ basis and not just the R&D component of the project (that is, including project management and other ineligible activities).
- R&D expenses cannot be substantiated due to inadequate record keeping.
- The methodology used to apportion expenditure between ordinary business activities and R&D activities cannot be substantiated.
- Amounts payable to associates being incorrectly claimed as part of the R&D tax incentive where the amounts have not been ‘paid’ prior to year-end.
The Tax Act requires that taxpayers support their R&D claims with contemporaneous records (i.e., timesheets, diaries, project reports, invoices) that clearly demonstrate the nexus between the expenses claimed and the registered R&D activities.
In addition, the ATO also has concerns around the provision of R&D Consultancy services being provided to claimants by particular advisors.
What does the ATO require?
The ATO is contacting companies that have registered R&D activities with AusIndustry requiring them to review their prior year R&D claims and confirm that no errors were identified or indicate those years in respect of which an amendment will be lodged.
In addition, companies that engaged an R&D consultant to assist with the claim are being asked to provide the name and contact details of the consultant, an explanation of the services they provided and details of any contracts or invoices provided by the consultant.
What happens if I ignore the ATO letter?
The ATO warn that failure to respond by the date notified in the letter may result in further compliance action including a tax review or audit. The letter warns that penalties may be imposed if any such follow up action results in the ATO amending an R&D tax incentive claim.
What are the next steps?
All R&D claimants should review their R&D claims to ensure that, in the event of an ATO review, they can substantiate their R&D tax incentive claims.
Pitcher Partners’ specialist R&D consultants are able to assist clients in undertaking a ‘health check’ of previous R&D claims. Such a review would:
- Review expenditure included as part of the R&D tax incentive claim to ensure that there was sufficient nexus between the expenditure and the registered R&D activities.
- Review supporting documentation to ensure it complies with the legislative requirements.
- Review methodology adopted to attribute expenditure to the R&D tax incentive.