Two more R&D Tax Alerts – Agriculture and Software

R&D Tax Alerts – Agriculture and Software

Georgia King-Siem and Helen Gilfedder review's the updated guidance on industry sectors and the R&D claims being made.

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Robotic agricultural machine

On Monday 20 February, the ATO and AusIndustry released two more R&D Taxpayer Alerts; TA2017/4 and TA2017/5. This now makes 4 Taxpayer Alerts on R&D this year and in combination with recently updated guidance from AusIndustry on industry sectors, demonstrates a sharp focus by the regulators on the R&D claims being made 

TA2017/4 relates to expenditure on R&D activities in the agriculture industry. Previous ATO concerns in relation to R&D activities in broadacre farming (see TA 2015/3) have been extended to the agriculture industry as a whole. The concerns raised are not only the sugestion that are ineligible entities are claiming R&D, but ordinary farming activities are being claimed as R&D and expenditure is being claimed that is not eligible under the R&D Tax Incentive. The breadth of the matters raised is particularly concerning and companies claiming agriculture based R&D activities should review their R&D claims with particular attention on their R&D claim governance framework. 

TA2017/5 is aimed at companies claiming the R&D Tax Incentive on software development projects. Both regulators are concerned that companies are claiming activities that do not qualify as R&D activities because they:

  • only use existing knowledge to achieve technical outcomes;
  • involve business risk rather than technical uncertainty;
  • are implementations of existing software; and/or
  • are described at the project level rather than specific R&D activities.

In addition, the Alert notes that some companies are claiming all or a significant portion of the project as R&D expenditure and notes that many companies mistakenly believe that software development, by its nature, is eligible R&D. The Alert clarifies that unless the company can demonstrate that its core R&D activities were undertaken for the substantive purpose of generating new knowledge and that the new knowledge could not be gained without recourse to experimentation, then it is likely that the activities will not qualify as core R&D. 

For those considering claiming software development under the R&D Tax Incentive, remember that only specific activities can qualify as R&D activities and that contemporaneous documentation must be retained that evidences how claimed activities meet the criteria and expenditure thereon.

As with TA 2017/2 and 2017/3 and the Specific Issue Guidance released by AusIndustry late last year, the latest R&D tax alerts highlight that some taxpayers may have inadequate R&D claim governance. Good project governance does not necessarily equate to good R&D claim governance; more detailed and specific records are required.

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