The research and development tax incentive (R&D tax offset) is the government’s main mechanism to support innovation.

The R&D tax offset has been in place now since 2011 and in 2015 the program participation was more than 15,024 companies and R&D expenditure of $17.89 billion was registered as at 30 September 2016.

The program is administered jointly by AusIndustry and the ATO and the level of review activity has become increasing evident over the last year. On the back of this review activity, both AusIndustry and the ATO have released guidance material on four industries/sectors where they consider there to be issues being: construction; software; agriculture; and more broadly activities which they think are ‘ordinary business activities’.

The most recent alert for the construction sector is Taxpayer alert 2017/2.  The issues which sector should consider and address before making an R&D claim are:

  • The expenditure does not fall under the building exclusion provisions
  • That the R&D claim focusses on activity objectives and not broad project objectives
  • That the purpose of creating new knowledge can be demonstrated. This will be aided by specific technical hypotheses which seek to resolve an issue which can be directly linked back to principles of established science
  • That the company claiming the R&D can show that they are doing the R&D for themselves and not for someone else
  • If overheads are being claimed, is the apportionment methodology reasonable and do all the costs being claimed have a nexus to the R&D

Other matters which the regulators are noting:

  • Whether the advisor who has assisted in the claim has precedence in applying high-risk practices when preparing R&D claims
  • Whether the company has moved away from broad descriptions to specifically identify R&D activities
  • Level of expenditure being claimed relative to the industry or stage of business

All the guidance reiterates the importance of corporate governance in the preparation of R&D claims, as well as the importance of keeping documents which support that R&D activities were undertaken and expenditure was incurred on these activities.

Next article: High Court decision highlights the importance of a diligent review of land tax assessments