10 Things I Hate About
Your R&D Claim
The Australian Government offers a generous incentive for Australian companies to conduct R&D activities in Australia. The ATO can refund up to 45% of your R&D expenditure. Such an attractive proposition leads many to think they can make unsubstantiated or illegitimate claims for the refund without consequences. Others that have bona fide claims may in their rush to obtain the refund also make errors leading to stress if they are asked to verify their claim by the ATO. During a cost of living squeeze many claimants are rushing to get their claims in early this may lead to unnecessary mistakes.
In the late 2010s there were too many illegitimate claims relating to R&D projects focusing on cryptocurrencies. Now AI and ChatGPT related claims are popular for many claimants. No doubt the ATO will be focusing in on people making claims related to such projects.
Given a claimant is essentially asking the Australian taxpayer to subsidise their R&D activities, it is right that the claimant show that they are entitled to their refund.
These are 10 things I hate about your R&D claim.
I Hate Your Records
1. I hate your R&D records. Records for R&D need to be more detailed than records for general deductions
1.1. One common reason that an R&D claim may be denied is because the records do not sufficiently support your expenditure or your claim;
1.2. You may have the best R&D project in the world, if your records do not demonstrate what you and your team have been doing, any refund you may claim may be denied;
1.3. Your records must show, your expenditure was incurred and has a sufficient nexus to your registered R&D activities. Keep this phrase in mind:
“Incurred on your registered R&D activities”
1.4. AAT decisions on this issue highlight that the standard of records and record keeping is higher for R&D notional deductions than ordinary deductions;
1.5. For example, if you hire a technician, they should keep a time sheet of the hours they worked on R&D activities and hours they worked on non-R&D activities. The time sheet should explain what they are doing during those hours. If you are reviewed the ATO are likely to ask you to provide up to 3 months’ worth of time sheets; and
1.6. The policy rationale is justified. If you are going to ask the Australian taxpayer to incentivise your R&D, it is fair enough that you have sufficient documentation supporting your claim and expenditure.
I Hate That You Want the ATO to Understand Your R&D
2. The ATO won’t understand your project or your technology (probably), they don’t have to either;
2.1. I really hate when claimants, their lawyers and their tax agents complain that the ATO officers don’t understand the technology or science that forms the basis for the R&D activities and claim. The ATO officers are not required to, that is AusIndustry’s job;
2.2. Such complaints are not helpful to the ATO or to a client;
2.3. The ATO officers aren’t qualified Engineers or Scientists. If you were an Engineer or Scientist, you wouldn’t work as a case officer at the ATO;
2.4. The ATO officers only need to see that the expenditure you have claimed has been incurred on the registered R&D activities; and
2.5. Time sheets and records of research or records of experimentation should reflect what you are doing. If this is not easily discernible, your records are probably not good enough – see point 1 above.
I Hate Your R&D Advisors
3. I hate that you have sought advice from an inexperienced or unqualified R&D advisor. I especially hate it if you tried to navigate the R&D claim by yourself. You should always use the services of a qualified or registered R&D advisor;
3.1. You should ask questions about your R&D advisors experience and capabilities;
3.2. All advisors should be qualified and registered with a regulatory body;
3.3. If you rely on a tax agent, that tax agent must be registered with the TPB. The TPB also offers registration for agents to work exclusively as R&D advisors;
3.4. You can also seek advice from a lawyer experienced in giving R&D advice, provided the lawyer is registered to practice. You should also make sure your lawyer understands the R&D tax incentive;
3.5. AusIndustry will also ask whether you have sought the services of a professional R&D advisor independent of your ordinary tax agent. You should be truthful when complete this part of your application;
3.6. There are a lot of unregistered R&D advisers out there, many will promise high refunds or “cashbacks” or something similar. Often, they will charge their fee as a percentage of the refund you receive. In such cases, it is in their interest to inflate the claim albeit illegitimately. There are a few of them that operate in Australia and some operate overseas, claimants sometimes never meet their R&D advisor, even via video call;
3.7. Illegitimate advisors disappear at the first sign of trouble and will never help you if you are reviewed. This will leave you on your own dealing with the ATO, and if the claim is false, leaving you bearing the costs of any penalties imposed and no refund;
3.8. A legitimate R&D advisor, tax agent, or lawyer will:
3.8.1. Be qualified and have professional registrations and professional indemnity insurance;
3.8.2. Provide you with a costs agreement or terms of engagement and invoice you based on their work (such as providing advice or preparation of documents) rather than based on a percentage of the refund you receive;
3.8.3. Be able to provide you with assistance if you are reviewed; and
3.8.4. Tell it to you straight if you try to make an incorrect claim or are about to make a mistake.
3.9. If you are investigated by the ATO, the ATO will ask you why you chose this R&D advisor including what qualifications and experience they may have. This goes to your behaviour if errors are identified in your claim. If you are seen as choosing an unqualified advisor, or not making reasonable enquiries about that advisor, the ATO may infer you were reckless in your actions and claim;
3.10. Always seek the advice of a qualified, experienced and registered advisor; and
3.11. For the record if you use a qualified, registered and experienced R&D advisor, I do not hate them.
I Hate Your Period of Review
4. The regulations state that the Period of Review for an R&D claim is four (4) years, regardless of the size or turnover of the entity making the claim (many in the ATO don’t know this and assume POR is 2 years). Your records must be kept for a minimum of 4 years;
4.1. The Period of review starts on the later of
4.1.1. The day you lodge your tax return; or
4.1.2. the day after the ATO issues you with a notice of assessment;
4.2. If the ATO suspects fraud, there is an unlimited period of review (though this is unlikely);
4.3. If AusIndustry cancels your registration, they will inform the ATO of this outcome. The legislation allows the ATO an unlimited period of time to give effect to AusIndustry’s findings. This allows the ATO an unlimited amount of time to amend your tax return and deny your claim; and
4.4. There is nothing you can do other than retaining your records for 4 years.
I Hate Your Overseas Activities
5. I hate that you try to claim expenditure on your overseas activities. Unless you have an advanced overseas finding, your R&D must be conducted in Australia (if you want to claim);
5.1. This goes back to the point that if you want the Australian taxpayer to fund your R&D, the money should be spent in Australia;
5.2. The legislation is very clear, unambiguous, and it is not possible to read an alternative interpretation into the legislation. If the R&D hasn’t been conducted in Australia, and you don’t have an overseas finding from AusIndustry, you cannot claim the expenditure for R&D;
5.3. Even if you meet the criteria for an advanced overseas finding, but don’t have the finding itself, you cannot claim expenditure incurred on overseas activities; anyone who says different is wrong;
5.4. The ATO have in the past allowed administrative concessions to allow claims for minor incidental overseas expenditure (such as attending some conferences or ordering a small part from overseas), but they haven’t allowed this for some time. It always was at the sole discretion of the ATO and has no basis in any law. They would only allow this if the rest of your claim was squeaky clean;
5.5. Advanced overseas findings are only available from AusIndustry and you must obtain this finding in advance and before you incur the expenditure. If you spend the money first and then ask for a finding, you will not receive a back dated finding; and
5.6. The AusIndustry overseas findings can be intense and is a full examination of your proposed overseas activities. You will need to show that it is not possible for your R&D activity to take place in Australia. Cost factor alone is not sufficient grounds to obtain a positive overseas finding from AusIndustry.
I Hate Your Application
6. I hate that you have a poorly written R&D application. One of the biggest red flags for the ATO is a poorly written AusIndustry application;
6.1. Your R&D application is the second document the ATO will examine (after your tax return);
6.2. You are limited in what you can register as your core activities. But you should explain your hypothesis or what you intended to or have researched or developed and broadly speaking the nature of the activities you will be undertaking;
6.3. You should then register your supporting activities. There are less restrictions with these but you need to explain how those activities support your core activities, this is where you can be more specific and detail what your experimentations will be. You can also use this as an opportunity to include additional expenses;
6.4. If you fail to properly register your supporting activities, the ATO may not be convinced that that the activities you undertake are genuinely in support of your core activities. They may then decide to deny any claim for those activities;
6.5. The application is critical and you should take your time to get this right; and
6.6. If you make a mistake always seek advice and lodge an amendment to your R&D registration, before you lodge your R&D claim.
I Hate That You Think You Can Claim Everything;
7. I hate that you have registered an activity and assume everything registered is R&D. I hate that you think you can claim all expenditure;
7.1 Many claimants obtain their registration from AusIndustry and assume everything they spend is claimable. This is not always true;
7.2. Claimants also assume that registration automatically makes it so the activity is automatically R&D;
7.3. AusIndustry has limited staff and budget when compared to the ATO. Often all AusIndustry will verify is that the claimant details on the application form are correct;
7.4. With around 13,500 applications each year AusIndustry do not have the capacity to examine every single registration and make a finding that the activities are R&D activities. This leads to most applications being registered;
7.5. The issue of whether an item of expenditure is claimable is left to the ATO to examine;
7.6. The ATO are reluctant to make determinations of whether something is R&D, but will make a decision as to whether you have spent the money on the R&D activities. You still need to show that your expenditure has a sufficient nexus to your registered R&D activities;
7.7. However, if your activity looks like business-as-usual activities you may find the ATO referring the registration back to AusIndustry, for their review;
7.8. If something isn’t R&D you shouldn’t register the activity;
7.9. AusIndustry may investigate after registration is issued though they usually wont unless they have a tip off usually from the ATO; and
7.10. If AusIndustry cancels your registration, the ATO have an unlimited period of amendment to give effect to that decision.
I Hate Your Lack of Payments to Associates
8. I hate that you haven’t paid your associates;
8.1. For most expenses you don’t actually have to pay the expense immediately in order to claim the expense. For example, if you hire an independent contractor to do some R&D work for you, and they invoice you on 20 June, but you don’t actually pay them until 2 July, you can claim that expense in either financial year (but not both years) for R&D purposes. This acts on the condition that you actually intend to pay them. This should be reflected in the end of year financial statements e.g. creditors account;
8.2. It is common for claimants to hire or contract some of the R&D work to their director or shareholder or other associate. There is nothing wrong with this;
8.3. However, in order to claim your associate’s salary and wages, you must actually pay them the market value for their services;
8.4. You must also report Superannuation payments and PAYG. During a review or audit the ATO will analyse your BAS and compare it to your other lodgements;
8.5. The payments to associates rule for R&D is pretty clear;
8.6. Don’t try and use a clever way of paying your associate (if you’re inexperienced), don’t use journal entries or loan accounts (if this is done incorrectly, you can be denied that expense);
8.7. Don’t try and issue no value shares in the company to your associates, that doesn’t work either;
8.8. There have been a few cases now where different entities incurred R&D expenditure and tried loan accounts to pay the expenses. It didn’t work then and the ATO don’t let it work now;
8.9. Any payment must be an actual form of payment, this can be cash, bank transfers, cheques, promissory notes or other bills of exchange;
8.10. In addition, if you are not careful you may end up having Div 7A, 100A, GST or SGC issues; and
8.11. Always, seek advice on this before making any claim.
I Hate That Your Refund Was Retained
9. The ATO may decide to retain your refund, pending an examination of your claim, in the short term the cause of this will be the ATO, if your refund is held up long term it is likely your claim and records are the cause;
9.1. The ATO by law are allowed to retain all or a portion of your refund;
9.2. This goes for R&D refunds, GST refunds and personal income tax return refunds;
9.3. When the ATO make a decision to retain a refund, they must consider 10 factors. These factors are:
9.3.1. The likely accuracy of the notified information;
9.3.2. The likelihood that the notified information was affected by:
22.214.171.124. Fraud or evasion; or
126.96.36.199. Intentional disregard of a taxation law; or
188.8.131.52. Recklessness as to the operation of a taxation law;
9.3.3. The impact of retaining the amount on the entity’s financial position;
9.3.4. Whether retaining the amount is necessary for the protection of the revenue; including the likelihood that the Commissioner could recover any of the amount if the notified information were found to be incorrect after the amount had been refunded;
9.3.5. Any complexity that would be involved in verifying the notified information;
9.3.6. The time for which the Commissioner has already retained the amount;
9.3.7. What the Commissioner has already done to verify the notified information;
9.3.8. Whether the Commissioner has enough information to make an assessment relating to the amount;
9.3.9. The extent to which the notified information is consistent with information that the entity previously provided; and
9.3.10. Any other relevant matter;
9.4. If the ATO find your claim is acceptable they will release the refund to you. If they don’t, they still may assess you as having a shortfall amount which means shortfall penalties, even if they don’t give you a refund;
9.5. The ATO may also decide to make a partial release of your refund if they are satisfied that a portion of your claim is correct, and continue examining the remainder of your claim; and
9.6. The decision to retain your refund is a separate decision to that of your eligibility to claim R&D. The decision to retain the refund is appealable to the AAT, you will need to determine what factors the ATO has considered and whether they have given them full consideration. You are allowed to FOI the decision including any ATO worksheets they have relied on to retain your refund.
I Hate the Size of Your Claim
10. I hate that you try to make your claim small, so that the ATO will not review your claim;
10.1. The ATO review claims great and small, and a small claim can attract suspicion, especially if you’re a new claimant;
10.2. The ATO will review a claim for $20,000 of refund;
10.3. The ATO will review a claim for $1M of refund; and
10.4. Just because you’re big or small, doesn’t make you invisible. Make sure any claim is squeaky clean.