R&D Tax Incentive – Government and Media Causing Unnecessary Concern
The R&D Tax Incentive and before it the R&D Tax Concession, have together provided critical support for Australian innovators for almost thirty years. We believe that they have been the most successful government programs in providing certainty of support to Australian technology development, founded on companies conducting eligible R&D activities and incurring eligible expenditure. This program has many advantages over various grant programs that have come and gone over the years. Grant programs invariably have a high cost in terms of money and resources required in the preparation of an application that then goes forward into a highly competitive selection process, with no guarantee of success that may take many months for a decision.
The Government constantly cites innovation as the driver of our future economy but the recent raft of ATO Taxpayer Alerts and AusIndustry bulletins, further exacerbated by overheated media articles decrying the end of the value of the program, has inevitability created uncertainty and concern amongst companies that rely on this support to assist in funding their further R&D programs.
Uninformed media articles using highly emotive headlines of “Rip-off” and “Crackdown” tend to feed off each other and achieve little except to cause unnecessary concern in the innovation community.
The law that underpins the R&D Tax Incentive has not changed and the eligibility criteria remains the same. If you are using the scientific method to conduct experiments to test an hypothesis, where the outcome cannot be known in advance and which aim to create new knowledge, you are conducting an eligible core R&D activity. It has always been critical that you could substantiate your technical activities, results and conclusions with contemporaneous technical records. This was emphasised by recent judicial findings which make clear that regardless of how worthy and exciting your R&D may be, without contemporaneous technical records, there are no eligible activities.
Claiming “all-of-project” activities and expenditure has always been a concern of the ATO and we can expect that these claims will continue to be considered high-risk and likely to be subjected to closer scrutiny. To claim project undertakings as supporting activities, they must have a direct nexus to the core activities. An enduring “rule-of-thumb” is that the supporting activities and expenditure should be limited to the “minimum necessary to test the hypothesis/technology”. To this end, claimants should carefully consider the continuum of supporting activities and identify where they cease to be critical to the conduct of the experiment and that should be the point where the activity is no longer claimed as R&D.
The most unfortunate consequence of the move from the R&D Tax Concession to the new program, was the loss of a large body of legal precedent and tax rulings. Tax Ruling 2552, now withdrawn, provided clear and logical advice on claiming R&D expenditure and apportionable overheads, which in general terms is still relevant today. Once again, record-keeping is paramount and has not changed or been made more onerous. You must be able to substantiate your expenditure. For the labour hours spent on R&D activities you need timesheets, diary records, job tickets or any other system that can clearly evidence the hours spent and the activities undertaken and their relationship to your core or supporting activities. This is critical both to your direct costs and to the apportionment of overheads.
Another area where claimants can be at risk, is the invoices that they receive for R&D that has been contracted out to other (often related) entities. These invoices must unambiguously detail the work undertaken with respect to the R&D project. Generic wording in such invoices will very likely put otherwise eligible R&D expenditure at risk.
You must recognise that when a company representative signs the declaration on the application to register your R&D, they are declaring that the company holds both technical and financial contemporaneous to support the claim.
Some media articles have referred to questionable practices by consultants. We do not believe that this is widespread. However, there were many new entrants to the R&D consulting community when this new program was launched, many of whom had no direct experience in R&D programs or the identification of eligible activities as defined in the legislation.
Our advice to companies claiming the R&D Tax Incentive is to question both the technical expertise and experience of any consultant and ensure that you fully understand the basis and logic of any expenditure being claimed. As the taxpayer you are required to take reasonable care and ownership of the claim.
Companies should not be deterred from continued claims under the R&D Tax Incentive but need to be sufficiently active and involved to ensure good record keeping is the norm and that the claim does not go beyond the boundary of the R&D.
If you have any concerns about claims you have made or intend to lodge, we would be happy to discuss your issues. If you would like further information, please give me a call.
Michael Lynch is a director of BSI Innovation. Our practice has specialised in the R&D Tax Incentive and before it, the R&D Tax Concession for more than 25 years.