The ATO and the Department of Industry, Innovation and Science (DIIS) on 9 February 2017 released two new Taxpayer Alerts – TA 2017/2 Claiming the Research and Development Tax Incentive for construction activities and TA 2017/3 Claiming the research and Development Tax Incentive for ordinary business activities – as a warning to those who are not careful enough in their claims or seek to deliberately exploit the Research and Development (R&D) Tax Incentive program.
The R&D tax incentive encourages companies to engage in R&D that benefits Australia, by providing a tax offset for eligible R&D activities. ATO Deputy Commissioner Michael Cranston said the new alerts relate to particular issues identified in the building and construction industry, where specifically excluded expenditure is being claimed as R&D expenses. The alerts provide clarification for a wide range of businesses that had been incorrectly claiming ordinary business activities against the R&D tax incentive.
The alerts are designed to clarify what can and cannot be claimed, and help businesses to avoid mistakes, Mr Cranston said. He said that while "most do the right thing, we are seeing some businesses in these industries and their advisors improperly applying for the tax incentive where the activities and expenditure claimed don't match with legislative requirements".
For example, Mr Cranston said, the ATO has seen an increase in claims for ordinary business activity expenses, or for large parts of projects that do not correspond to the scale or scope of experimental activities. Ordinary business activities are not generally carried out with a purpose of generating new knowledge. He said the ATO often sees issues including claims that encompass whole of projects (where project, management, environmental and commercial risks are mistaken for technical risks) and where the activities use existing knowledge and expertise.
Mr Cranston warned that the ATO is undertaking "a range of compliance activities to address businesses and advisors deliberately doing the wrong thing and will take legal action against those who wilfully misuse the R&D tax incentive".
Taxpayer Alert TA 2017/2 deals with claiming the R&D tax incentive for construction activities. The alert says the arrangements under review concern claimants of the R&D tax incentive who:
- acquire buildings or extensions, alterations or improvements to buildings (the acquirer); or
- whose business it is to construct, extend, alter or improve buildings (the builder).
These types of arrangements exhibit a number of features, including the following:
- A contract is entered into between the acquirer and the builder to construct, extend, alter or improve a building or buildings (construction).
- The contract is a standard construction contract and is not for the provision of R&D services and does not specify that R&D will be carried out by the builder.
- The acquirer or the builder registers one or more activities associated with the construction of the building for the R&D tax incentive, identifying the structure or construction techniques as purportedly involving untested or novel elements.
- Some or all of the activities registered are broadly described and non-specific. For example, whole construction projects may be registered rather than the specific activities which being undertaken.
Taxpayer Alert TA 2017/3 deals with claiming the R&D tax incentive for ordinary business activities. The ATO says the types of arrangements under review exhibit some or all of the following features:
- A company registers one or more activities for the R&D tax incentive.
- Some or all of the activities registered are broadly described and non-specific. For example, projects may be registered instead of the specific activities undertaken.
- Some or all of the activities registered are ordinary business activities that are not eligible for the R&D tax incentive.
- Some or all of the activities were undertaken in the course of their ordinary business activities and recharacterised as R&D activities at a later time.
- The company claims the R&D tax incentive for expenditure that is not incurred on eligible R&D activities.
The ATO has observed a number of cases where a company's ineligible ordinary business activities have not been distinguished from any eligible R&D activities. Often, some of the expenses included in the calculation of a R&D tax incentive claim are not for amounts that relate to eligible R&D activities; for example, ordinary production costs of products sold to the market in the ordinary course of business.
The ATO will be contacting companies directly to advise them of concerns about their registered activities and/or their R&D tax incentive claims if:
- "advisors who may apply high risk practices" are involved in the preparation of the registration application and/or claim;
- the registration of R&D activities continues with the use of broad descriptions that fail to distinguish them from ordinary operational business activities; and/or
- the level of expenditure claimed for the R&D tax incentive is high for the industry or stage of the business.
Source: ATO, Early warning for taxpayers making R&D claims, 9 February 2017, https://www.ato.gov.au/Media-centre/Media-releases/Early-warning-for-taxpayers-making-R-D-claims/; Taxpayer Alert TA 2017/2, 9 February 2017, https://www.ato.gov.au/law/view/document?DocID=TPA/TA20172/NAT/ATO/00001;
Taxpayer Alert TA 2017/3, 9 February 2017, https://www.ato.gov.au/law/view/document?DocID=TPA/TA20173/NAT/ATO/00001.