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Review claims by clients and voluntarily disclose errors, the Tax Office urges.
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‘Integrity issues’ prompt ATO to clarify rules for R&D incentive
31 October 2023
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The ATO has clarified rules around the Research and Development Tax Incentive after identifying a number of integrity issues with claims.
It said the problems concerned R&D expenditure to associates, what the R&D was “conducted for”, aggregated turnover figures, overseas expenditure and expenditure not at risk.
The incentive offers companies with $20,000 or more spending on R&D a refundable offset equal to their corporate tax rate plus 18.5 per cent and is self-assessed annually.
The Tax Office said R&D expenditure to associates could only be claimed in the year the associates were paid unless the R&D entity made an irrevocable election.
“We regard the following arrangements as not resulting in the expenditure being paid to the associate:
- The amount owed to the associate is converted to a loan. This is not payment, and we consider the amount unpaid.
- The R&D entity and the associate enter a licensing agreement where the licence fee payable by the associate is offset against the amount the R&D entity owes the associate for R&D services. In other non-arm’s length arrangements, the amount being transacted is often more than market value.
- Circular, round robin-type transactions that are artificial in nature and contrived to receive a taxation benefit.”
Any of these arrangements would disqualify an R&D entity from claiming an R&D notional deduction, it said.
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To claim notional deductions, the activity had to be conducted for the R&D entity that had registered the R&D activities.
Expenditure on R&D activities could not be notionally deducted if they were not conducted for the R&D entity or conducted to a significant extent for another entity.
“To determine if the conducted for the rule is satisfied, we make an ‘on balance’ assessment of which entity:
- Benefits from the R&D activities and requires consideration of who bears the financial risk.
- Has effective ownership of the results of the R&D activities.
- Has control over the conduct of the R&D activities.”
Another issue was aggregated turnover, which had to be less than $20 million to qualify. However, R&D entities that were 50 per cent controlled by exempt entities, regardless of their aggregated turnover, were entitled to the non-refundable R&D tax offset.
Overseas expenditure could only be claimed for activities conducted overseas where the entity had a positive “overseas finding” from the Department of Industry, Science and Resources.
“Without one, claimants must demonstrate the work was carried out in Australia and not subcontracted out or otherwise performed overseas. We consider the physical location of where the work is conducted,” the Tax Office said.
Finally, it was impermissible to notionally deduct expenditure under the R&D tax incentive if the expenditure was not at risk.
“Expenditure is not at risk to the extent that when it’s incurred, the R&D entity could reasonably be expected to receive an amount of consideration:
- As a direct or indirect result of the expenditure being incurred (the nexus to expenditure test).
- Regardless of the results of the activities on which you incur the expenditure (results test).
- The expenditure is not at risk if the R&D entity has a grant or contract to undertake the activities.
The ATO urged tax agents and R&D consultants to review clients’ claims and voluntarily disclose any errors.
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