Research and Development Arrangements Explained

The ATO has released various taxpayer alerts this year in relation to arrangements that seek to exploit the Research and Development (“R&D”) tax incentive. The ATO is closely reviewing such arrangements to disallow incorrect R&D claims relating to expenditure or arrangements in construction, ordinary business, agricultural and software activities.

The R&D tax incentive provides a tax offset for eligible R&D activities:

– a refundable tax offset for certain eligible entities whose aggregated turnover is less than $20 million.

– a non-refundable tax offset for all other eligible entities.

Eligibility is based on a self-assessment basis whereby you assess whether your entity is eligible to register R&D activities and claim R&D tax offsets in any given year.  Broadly speaking, eligibility to claim R&D tax offsets will depend on whether or not your entity is an R&D entity and, if it is, whether or not it has incurred notional deductions of at least $20,000 on eligible R&D activities.

The ATO has observed a number of cases and raised concerns about arrangements where:

– The activities do not have a purpose of generating new knowledge or for the dominant purpose of supporting core R&D activities.

– The project management, environmental, commercial or economic risks are mistaken for technical risks.

– The activities are not experimental but rather involve solving issues by applying existing knowledge or methodologies.

– R&D activities which were being carried on have transitioned into ordinary business activities but claims for the R&D Tax Incentive are still being made.

In light of the ATO’s focus in this area and for the purpose of minimising your entity’s exposure to an audit, taxpayers should seek legal advice in relation to whether their activities qualify as an eligible activity for the purposes of the R&D Tax Incentive scheme.

Need Help?

If you are concerned about incorrectly registering an activity or require advice about your entity’s eligibility for the R&D Tax Incentive, please contact our team of tax lawyers at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.