ATO Tax Alerts highlight need for good R&D claim governance

Need for good R&D claim governance

Georgia King-Siem examines the ATO's Tax Alerts on expenditure on R&D activities in the building and construction industries.

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On 9 February, the Australian Taxation Office (ATO) released two R&D Tax Alerts; TA 2017/2 and TA 2017/3.

TA 2017/2 relates to expenditure on R&D activities in the building and construction industries, and draws taxpayer’s attention to the fact that expenditure on acquiring or constructing a building (or parts thereof including improvements) is excluded from the R&D Tax Incentive.

Further, the ATO is concerned that activities claimed as R&D activities do not meet the requisite criteria. Even where they do, some of the expenditure being claimed may be ineligible due to either exclusions or lack of appropriate apportioning to ensure the expenditure is demonstrably ‘on’ the R&D activities. In response, the ATO will target ‘high risk’ advisors, overly broad R&D activity descriptions and overly high R&D expenditure claims given the industry or stage of business.

TA2017/3 relates to expenditure on R&D activities where there appears to be overlap with the taxpayer’s ordinary business activities (often referred to business as usual or BAU activities). The ATO is concerned that in some cases, taxpayers are retrospectively labelling as R&D BAU activities that fail to meet the criteria, such as:

  • no intention to generate new knowledge (just apply existing knowledge)
  • not experimental in nature
  • outcome is not unknown.

In addition, broad activity descriptions leads to the inclusion of activities that are not R&D activities, such as those that relate to the ordinary production of goods or services.

In both Tax Alerts, the ATO states the need for good governance, finding that many taxpayers fail to apply adequate levels of governance and review to the registered activities and the claim made for the R&D Tax Incentive. While many companies have good project governance, this often falls short of what is required for the R&D Tax Incentive. Instead, companies should review their R&D tax processes and consider using R&D tax specific tools like KPMG’s R&D Edge, and applying these in a real time environment rather than retrospectively. Companies that fail to do so and continue to lodge broadly worded ‘project’ R&D claims, will increasingly find themselves the target of ATO and AusIndustry reviews.

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