March 2024

R&D claims, watch out – the ATO eyes incorrect deductions

The R&D tax incentive remains a valuable resource for fostering innovation and advancement.

The Research and Development (R&D) tax incentive program serves as a catalyst for innovation, encouraging companies to engage in R&D activities by providing targeted tax offsets. However, recent concerns have prompted the Australian Taxation Office (ATO) to issue two taxpayer alerts, highlighting potential misuse of the incentive.

Who can apply for the R&D tax offsets?

To take advantage of the R&D tax offsets, you need to be an R&D entity. An R&D entity is either a corporation that is incorporated under an Australian law or, in some circumstances, a foreign corporation.

Taxpayer alerts

The ATO’s recent alerts (TA 2023/4 and TA 2023/5) focus on specific issues related to R&D tax incentive arrangements.

TA 2023/4 identifies arrangements where an entity incorrectly claims the R&D tax offset for expenditure incurred under an agreement with an associated entity that conducts those activities.

TA 2023/5 discusses potential misuse involving R&D activities conducted overseas for foreign-related entities. The alert outlines the ATO’s concerns about arrangements where Australian entities claim the R&D tax offset for expenditure incurred on R&D activities conducted overseas. Arrangements of concern include where an R&D entity has purported that R&D activities were conducted for its own benefit, but those activities were instead conducted for a foreign entity that is ‘connected with’, or is an ‘affiliate’, of the R&D entity.

Concerns and misuse

The ATO expresses concerns that certain arrangements may lead to the improper claiming of R&D tax offsets. Misuse includes claiming the offset when not eligible or artificially inflating the claimed amount. Penalties may apply to participants in such arrangements, with the ATO encouraging voluntary disclosures to reduce penalties.

Red flags and vigilance

Claimants are advised to stay vigilant and seek independent advice on their R&D claims. Red flags include approaches by new tax agents or consultants promising inflated claims or suggesting ordinary business expenses qualify as R&D. Discussing any R&D claim with a tax agent and reporting suspicious behaviours to AusIndustry or the ATO is crucial for safeguarding against potential misuse.

Record-keeping and compliance

Maintaining accurate records is essential to substantiate and demonstrate the eligibility of R&D activities and associated expenditures. The ATO, in collaboration with AusIndustry, offers guidelines on record-keeping requirements to support R&D claims. By keeping meticulous records, businesses can not only comply with regulations but also streamline the process and minimise costs associated with compliance and risk reviews.

To safeguard the integrity of the program, entities must remain vigilant against potential misuse, stay informed about ATO alerts, and prioritise accurate record-keeping. By doing so, businesses can navigate the complexities of the R&D tax incentive, ensuring compliance while maximising x the benefits for both innovation and financial gains.

More like this