17 May ATO warning for taxpayers making R&D claims
The Australian Taxation Office (ATO) and Department of Industry, Innovation and Science (DIIS) have collectively released two new taxpayer alerts as a caution to taxpayers who are incorrectly claiming or intentionally exploiting the Research & Development (R&D) Tax Incentive program.
The R&D tax incentive program encourages companies to engage in R&D activities that will benefit Australia, by providing a tax offset for eligible R&D activities. In 2013–14, more than 13,700 entities spent $19.5 billion on R&D, claiming a benefit of around $3 billion.
The alerts relate to particular issues identified in the building and construction industry where specifically excluded expenditure is being claimed as R&D expenses. The alerts also supply clarification for a wide range of businesses who have been incorrectly claiming ordinary business activities against the R&D tax incentive. The alerts are designed to clarify what can and cannot be claimed as R&D activities and assist businesses to avoid making incorrect claims.
The ATO has seen a rise in claims for ordinary business activity expenses, or for large parts of projects that do not correspond to the scale or scope of experimental activities. Ordinary business activities are not generally carried out with a purpose of generating new knowledge. The ATO is increasingly seeing issues including claims that encompass whole projects and where the activities use existing knowledge and expertise.
In another two separate alerts, the ATO has issued warnings against claiming the R&D tax incentive for ineligible software development and agricultural activities. The ATO and AusIndustry are reviewing arrangements of companies that are claiming the R&D tax incentive on software development projects and agricultural activities where some or all of the expenditure incurred is on activities which are not eligible R&D activities. The ATO believes there are examples in these sectors where companies are trying to claim ordinary business activities as research activities. The taxpayer alerts specifies the types of arrangements under review and the ATO’s concerns regarding R&D claims.
The ATO is currently undertaking a range of compliance activities to address businesses and advisors who are intentionally doing the wrong thing and will take legal action against those who knowingly misuse the R&D Tax Incentive.