An increasing focus for the Australian Tax Office is companies erroneously claiming BAU expenditure as part of their R&D Tax Incentive (RDTI) claim. Here we explain the key differences between BAU and R&D expenditure, and the necessary company administration required to ensure that the distinction between the two types of expenditure is tracked, accepted, and known at the outset.
The RDTI distinguishes the expenditure of an eligible company into three categories. One of these is the eligible R&D expenditure relating to Core or Supporting R&D activities. The second is BAU expenditure that an entity must sustain for its daily operations but carries with it no inherent risk. And lastly is excluded expenditure which the RDTI legislation nominates as unable to be claimed without meeting the additional ‘Dominant Purpose Test’.
What is the difference between R&D and BAU expenditure?
The RDTI program requires companies to self-assess whether an activity can be classified as either ‘Core’ or ‘Supporting’ R&D. According to the legislation, for an activity to be Core R&D, it must:
- Use a systematic approach to scientifically address a research question, proceeding from hypothesis through to conclusion.
- Must have an unknown technical outcome at the outset requiring experimentation to resolve.
- Must provide new knowledge in relation to developing a new or improved product, process, system or device.
Supporting activities are those that are directly related to these activities and have a close, relatively immediate nexus to the Core activities.
Activities that do not fit this definition and are carried out regularly in the course of daily operations are instead known as BAU activities.
What are the ATO’s concerns?
Back in 2017, the ATO flagged that they were seeing far too many cases where claimants poorly recognised the difference between R&D and BAU activities in their companies. Companies who viewed themselves as ‘R&D companies’ where ‘all they do is R&D’ were told that even these companies have BAU activities such as board meetings, financial discussions, recruitment and non R&D business administration. The ATO issued a tax guidance TA2017/3 in which concerns were highlighted such as claims where:
- No R&D activities have taken place, only ordinary business activities.
- There is a mixture of R&D activities and ineligible BAU activities.
- R&D activities have evolved into BAU activities but continue to be claimed.
In recent discussions this year, the ATO have indicated they are still finding this to be an issue in their reviews with companies. As such, TA2017/3 remains relevant and provides the guidance in relation to excluding BAU activities.
What should companies do to identify the type of expenditure?
To guide you through a thinking framework for dividing the two types of expenditure, the following is recommended.
- Ask yourself the key questions. What BAU activities does our organisation usually do? How can we identify activities outside of these BAU activities? Which of these activities require systematic experimentation?
- What is the relationship between the expenditure and the outcome of the R&D activities?
- Explore whether the expenditure is related to activities that take place in a typical Australian business. For example, general recruitment of staff, banking and accounting fees, and legal fees.
- For any Supporting activity, it must be determined that the Core R&D activity being supported could not have taken place without this Supporting activity. Also that there is no other activity beyond the Core R&D activity to which the Supporting activity could be related.
- Make sure to exclude time that employees have spent on activities that are related to BAU when making your R&D tax claim. These times should be referenced as BAU in the timesheets.
It is a complex area of the legislation and upfront identification and tracking of BAU is necessary to keep your claim compliant. R&D Tax Consultants can help review your activities and set up processes to identify, track and exclude your BAU activities in your claims.