Since the research and development tax incentive (RDTI) was introduced to Australia in 2011, the Australian Tax Office (ATO) has managed an influx of businesses claiming all manner of expenses – both eligible and ineligible.

Some R&D expenses can be claimed on tax because they are considered beneficial to your country’s development in your chosen field and many big industries take hold of this advantage with both hands.

In Australia, for example, professional, scientific, and technical services was the top spending industry on R&D with over $6.1 billion in the 2020 financial year. This was followed by manufacturing at $4.7 billion.

These figures have grown steadily over the past 10 years which has correlated in an increasing number of companies claiming their R&D on their tax return.

OECD found that the number of R&D tax relief recipients in Australia between 2012 and 2019 increased from around 7,900 to 10,800 with a peak of 12,920 in 2016.

The Worst-Case Scenario

Unfortunately, the statistics on failed applications aren’t released, but occasionally the horror stories on those that receive penalties for disingenuous claims are reported. 

In 2018, a Queensland tax advisory company was fined $4 million for encouraging its customers to lodge incorrect claims through the R&D Tax Incentive.

The dodgy advisory misled eight businesses to receive $3 million in tax refunds which they weren’t entitled to based on overstated or ineligible claims.

Another culprit was sentenced to 29 months in prison for their involvement in two unlawful R&D claims worth more than $500,000.

There are several key case studies that can be reviewed via the AAT where there have been appeals lost for erroneous claims. This can result in repayment as a best case or penalty interest and jail time as a worse case scenario for deliberate fraud.

Fixing Your Mistakes

Thankfully, prison or hefty fines aren’t the only result of an incorrect tax claim, and there are ways to reverse any wrongdoing – assuming you had the best intentions.

If you’d like to correct your claim or dispute a result, the ATO will facilitate an amendment process within a certain time limit, as will AusIndustry. This is generally up to two years for small businesses and up to four years for other taxpayers. For further details, contact the ATO or get in touch with Global Research Institute (GRI) to learn about the intricacies of the RDTI.

Know Your Entitlements

To avoid disputes in the first place, and to make sure you’re not pouring funds into R&D you can’t claim, it’s important to be familiar with what you can and can’t claim with the RDTI.
This will differ between jurisdictions around the world, so do your research and consult with a trusted advisor ahead of time.

To give an example, the Australian RDTI entitles companies to claim on things such as wages and salaries, contractor costs, consumables, software costs, and rent

If the research leads to findings that have already been discovered, the costs, in the most part, are not able to be claimed. Likewise, the tax is only able to be claimed in the case that it leads to new materials, products, devices, processes or services. Some exceptions do apply.

Unfortunately, for many companies who would no doubt be hopeful to write-off some technological improvements, the ATO has cracked down on such claims.

“The processes of developing, modifying or customising software can appear superficially similar to the process of performing eligible R&D activities,” the ATO has stated.

“They are by definition systematic and can be iterative and cyclical and almost always involve testing.
“However, the application of a software development lifecycle does not automatically mean that eligible experimental activities are taking place, nor that the outcome of any technical issues being solved are not using existing knowledge, information or expertise.”

The RDTI hardly appears black and white on the face of it, and this blog only touches the surface, so further reading is highly recommended to avoid any penalties or disputes.

Still Unsure?

The Global Research Institute has built a foundation of education to keep industries up to scratch on the RDTI. The most important step in R&D is planning your strategy and understanding your tax entitlements is a vital part of that strategy.

Sign up with us and get on the right path to effective R&D.