Given R&D is trending in Govt reviews, here are my ten thoughts on the R&D tax incentive, by a tax lawyer (Cartland Law) and AI developer (Ailira) who claims R&D himself

  1. The ‘Research Hypothesis’ model doesn’t fit software development. This isn’t like High School science when you develop a hypothesis and then test it. Mostly people just tinker and experiment and make something that works. Which is probably more like actual scientific discovery than scientism.
  2. Hire a specialist to make the claim. I am a tax professional and even I don’t do my own claims.
  3. Follow the rules (even if you don’t like them). If you have to come up with a bullshit hypothesis and test it out, do so. And document that you did.
  4. It probably doesn’t encourage that much net new innovation. Most people who are going to claim it were going to do the R&D anyway. It is just a case of when, where and how.
  5. It is actually a pretty (small-l) liberal way of giving money to companies. The Government doesn’t have to ‘pick winners’ (which it is bad at) it just gives extra money (up to 45% of funds spent) to companies that can already raise it on R&D.
  6. It competes with R&D incentives overseas and encourages development in Australia. It is part of the cost analysis in making an investment decision. Maybe it is a great way of getting companies to move to Australia? Maybe it is an expensive way of subsidising Australian tech employment? It is currently hard to tell
  7. Most of the high profile R&D clawbacks have arisen because there were/are some R&D advisors who submitted some very low quality claims on the basis that the ATO could only audit a small percentage of them and most would get through (and they got paid a % of the claims they submitted). Bad news: there are some advisors that the ATO is now auditing EVERY claim they submitted for a client. It is actually not the ATO ‘hating innovation’ but more ‘enforcing rules where advisors tried to scam the system’.
  8. How can you avoid hiring the ‘wrong’ expert? A. Sniff test – is it ‘too good to be true’? B. Read up on the area – good business operators have their specific expertise plus are 80% knowledgeable across marketing, HR, accounting, law, tax etc. C. Incentives matter – if you only pay someone when they make a claim guess what they will err on the side of.
  9. The ATO reviewing 4 years of claims isn’t retrospective, they have 4 years to amend most business tax returns. Indeed, if the claim is fraudulent there is an unlimited period of time the ATO can amend it.
  10. A clawback by the ATO of a R&D claim shouldn’t lead to a Startup going under, provided that you have followed Asset Structuring 101. You must claim R&D in a limited liability company. That will most likely be making losses. Structuring 101 says you have your passive assets (e.g IP, plant and equipment, land) owned in a separate entity to your trading entity. Your trading entity is going to make the claim. If the ATO demands a refund then you will wind up your trading entity, and then re-licence your passive assets to a NEW trading entity and continue on the business.
  11. (Here is how it works )