The Research and Development Tax Incentive (R&D program) is driving innovation and economic growth and the ATO is committed to ensuring it’s used with integrity. They have identified issues with the application of some R&D program integrity rules:
R&D expenditure to associates
conducted for
aggregated turnover
overseas expenditure
expenditure not at risk.
The ATO is urging tax agents and R&D consultants to review their clients’ claims and voluntarily disclose any errors.
R&D expenditure to associates
R&D expenditure to associates can only be claimed in the year they’re paid, unless the R&D entity makes an irrevocable election.
The ATO regards the following arrangements as not resulting in the expenditure being paid to the associate:
The amount owed to the associate is converted to a loan. This is not payment, and we consider the amount unpaid.
The R&D entity and the associate enter a licencing agreement where the licence fee payable by the associate is offset against the amount the R&D entity owes the associate for R&D services. In other non-arm’s length arrangements, the amount being transacted is often more than market value.
Circular, round robin type transactions that are artificial in nature and contrived to receive a taxation benefit.
For these arrangements, the R&D entity can’t claim an R&D notional deduction.
“Expenditure on R&D activities can’t be notionally deducted if they’re either: not conducted for the R&D entity [or] conducted ‘to a significant extent’ for another entity,” the ATO said.
The ATO will assess which entity has ownership, control, and the primary benefit associated with R&D activities when making that judgment.
Accountants and consultants must pay close attention to the aggregate turnover threshold rules, which provide refundable and non-refundable R&D tax offsets to entities with an aggregated turnover of below and above $20 million, respectively.
The ATO has strict rules over where the relevant activity is conducted, and will “consider the physical location of where the work is conducted”.
The warnings are designed to boost the integrity of the tax break, which can provide refundable tax offsets of 18.5% above a company’s base tax rate, meaning businesses on the 25% company tax rate can expect significant a refund of 43.5%.
The Research & Development Tax Incentive was expected to cost $3.2 billion through 2022-2023.
Find out more on the ATO website.