The ATO, together with AusIndustry have issued several Tax Alerts in the past weeks regarding the R&D Tax Incentive. These Taxpayer Alerts have related to claiming for ‘ordinary business activities’ and to specific industries.
There is no doubt the Alerts that the ATO and AusIndustry have issued reflect alarm about cost blow out and what is perceived as rorting of the R&D Tax Incentive. Claimants therefore need to take this on board and ensure that they comply with requirements for documentary evidence so that a meaningful discussion can take place about the application of the legislative definitions, if and when an audit takes place.
To date, the Taxpayer Alerts are:
- TA 2017/2 Claiming the R&D Tax Incentive for construction activities,
- TA 2017/3 Claiming the R&D Tax Incentive for ordinary business activities,
- TA2017/4 Claiming the R&D tax Incentive for agricultural activities,
- TA 2017/5 Claiming the R&D Tax incentive for software development activities.
The Alerts have raised a degree of alarm amongst claimants that this is the beginning of a strategy to rein in the cost of the R&D Tax Incentive. It is always wise to heed the warnings from the Government regulators and any tightening of the criteria for eligibility is best taken into consideration in completing a claim for the R&D tax Incentive.
The cost blow out for the R&D Tax incentive and its effectiveness is well documented in a Government review of the R&D Tax Incentive recently undertaken by Ferris, Finkel and Fraser.
Recent decisions of the Administrative Appeals Tribunal (AAT) and the introduction of new guidelines issued by AusIndustry indicate that the requirements for contemporaneous documentation will be enforced more rigorously.
A major thread of concern in each of these Tax Alerts, is that ineligible activities are being claimed as eligible R&D for the purposes of the Tax Incentive. Activities seeking to be claimed as eligible may be excluded because they are building costs, ordinary business activities or that the whole of the project costs are being claimed rather than just specific identified and registered R&D activities.
We have not yet had any judicial consideration of what constitutes eligible R&D activities under the current definition in the Income Tax Assessment Act 1997.
In recent cases before the AAT, there was found to be a lack of evidence that the activities have taken place at all, therefore not requiring a conclusion as to whether they meet the legislative definition or not. See our previous article which discusses these cases.
Tax Alerts though useful, do not carry the force of law. The ATO and AusIndustry may consider:
- Dealing with the recommendations of the FFF review and seeking changes to the legislation,
- Allowing the AAT to determine the definition of Core R&D activities and supporting R&D Activities to provide definitive guidance on the concepts which are pivotal to claiming the R&D Tax Incentive.
Companies cannot survive international competitive practices without high performing software to achieve increased innovation and improved efficiencies. In this way, R&D activities are very much ‘business as usual’ costs in a world of modern commerce, making the task of identifying R&D activity particularly challenging.