The Australian Tax Office (ATO) has released a clarification guideline on claims for Research and Development Tax Incentive (RDTI) on 27th October 2023. The tax office urging R&D tax consultants to review claims by R&D entities and disclose errors if any was made.
The ATO has identified the following issues with the application of some R&D program integrity rules:
- R&D expenditure paid to associates
- who the R&D has been conducted for
- aggregated turnover $20m
- overseas expenditure needing advanced findings
- expenditure not at risk by R&D entity
R&D Expenditure Paid to Associates
R&D expenditure to associates can only be claimed in the year they are paid, unless the R&D entity makes an irrevocable election. The following are NOT considered expenditure being paid to the associate:
- The amount owed to the associate is converted to a loan. This is not payment and the ATO considers the amount unpaid.
- The R&D entity and the associate enter a licensing 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.
Whom the R&D is Conducted For
Expenditure on R&D activities can’t be notionally deducted if they’re either:
- not conducted for the R&D entity
- conducted ‘to a significant extent’ for another entity
To determine if the conducted for rule is satisfied, the ATO makes an ‘on balance’ assessment of which entity:
- benefits from the R&D activities and requires consideration of who bears the financial risk
- has effective ownership of the results of the R&D activities
- has control over the conduct of the R&D activities
To be entitled to the refundable R&D tax offset, the R&D entity’s aggregated turnover must be less than $20 million. If it’s $20 million or more, they’re entitled to the non-refundable R&D tax offset.
R&D entities that are 50% controlled by exempt entities, regardless of their aggregated turnover, are entitled to the non-refundable R&D tax offset.
This expenditure can only be claimed for activities conducted overseas where the entity has an overseas finding from the Department Industry, Science and Resources (DISR). Without one, claimants must demonstrate the work was carried out in Australia and not subcontracted out or otherwise performed overseas. The ATO takes into consideration the physical location of where the work is conducted.
Expenditure Not At Risk
You can’t notionally deduct expenditure under the R&D tax incentive if the expenditure is not at risk. Expenditure is not at risk to the extent that when it’s incurred, the R&D entity could reasonably be expected to receive an amount of consideration.
- as a direct or indirect result of the expenditure being incurred (the nexus to expenditure test)
- regardless of the results of the activities on which you incur the expenditure (results test)
The expenditure is not at risk if the R&D entity has a grant or contract to undertake the activities.
Should you receive a letter regarding your R&D tax claims, feel free to reach out to us. You may also read our blog on How to Respond to AusIndustry Reviews for R0&D Tax.
Expert Assistance with R&D Compliance Reviews
Treadstone provides expert assistance with claims and compliance reviews for. R&D tax Incentive. If you uncertain or need assistance with responding to the ATO on matters relating to R&D tax we can assist you.
Working with us means your claim will be reviewed and you will minimise ATO penalties for your RDTI compliance reviews
Contact us and let’s discuss this more in detail.
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