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
- 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.
- Hire a specialist to make the claim. I am a tax professional and even I don’t do my own claims.
- 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.
- 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.
- 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.
- 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
- 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’.
- 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.
- 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.
- 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.
- (Here is how it works https://www.linkedin.com/pulse/20141017051323-120569036-business-licensing-arrangements/ )