A briefing note from Grant Thornton on the ATO's recent R&D Tax Incentive Alert
FinTech Australia’s Accounting Partner Grant Thornton have provided the below commentary and guidance for our Members on the ATO’s recent ruling on what might be claimed as part of the R&D Tax Incentive.
FinTech Australia members have also been offered the opportunity to take advantage of a special flat-fee consultation with Grant Thornton to undertake a high-level review of their current R&D activity claims, provide feedback on areas of potential concern and ways to mitigate these concerns. Please get in touch with Sukvinder Heyer, Tax Advisory Partner at Grant Thornton, on (03) 8663 6056 or by email [email protected].
The release of TA 2017/5 signals to the tech sectors that they should not take for granted the R&D tax offset (and for many companies, the accompanying cash back into the business). It is a tax offset and companies should be aware of all the eligibility requirements. This is not limited to just the definition of R&D, but also contracts and structures which may be related to how the R&D is undertaken.
In TA 2017/5 and also in the Software guidance released by AusIndustry last year, eligibility under the R&D Tax Incentive is based on specific R&D activities not on entire projects. Companies undertaking software development projects sometimes assume or assert that software development activities are by their nature eligible R&D activities. However, the ATO says it is extremely unlikely that all of the work involved in a software development project will meet the legislative criteria for eligible R&D activities. In the ATO’s view, a test or trial that does not set out to test causal relationships between technical variables to experimentally resolve an outcome that cannot be determined with existing knowledge or expertise, will not be an eligible core R&D activity under the R&D Tax Incentive. Examples of these types of activities include, but are not limited to: Bug testing, Beta testing, System testing, Requirements testing, User Acceptance Testing.
Concerns noted by the ATO include:
- Activities may not fit within the stringent requirements of the laws that govern the R&D Tax Incentive. Expenditure claimed may not relate to eligible R&D activities. The ATO has the following concerns here:
- A software development project has been registered on a whole of project basis, without distinguishing eligible R&D activities from ineligible activities. For example, developing and rolling out a new online customer platform may be incorrectly identified as a single eligible R&D activity.
- The activities do not have the purpose of generating new knowledge.
- There is no clearly identified technical uncertainty being addressed by the activity.
- Project management, commercial or economic risks are mistaken for technical risks. For example, a bank develops a mobile banking application and the delivery of the application is quite certain on the basis of current knowledge, information and experience. There is, however, a risk that existing or future customers may not embrace the application. The ATO says this risk is commercial in nature only and hence the relevant activities do not constitute eligible R&D activities.
- The activities involve the purchase of “off-the-shelf” software and subsequent modification to integrate it into the existing environment.
- Taxpayers may not be applying adequate levels of governance and review to the registered activities and the claims made for the R&D Tax Incentive. In relation to this the ATO have flagged that they will be contacting companies if advisors who may apply high risk practices in the preparation of R&D claims.
TA 2017/5 is a timely reminder for companies to make sure their house is in order in relation to their R&D claims, particularly in relation to record keeping related to the R&D activities (noting that this may not be addressed by current project documentation) and how costs are determined to be related to R&D.
Should this focus on tech sector R&D claims raise particular questions for your business, our Accounting Partner Grant Thornton are offering FinTech Australia members the opportunity to have an independent review conducted of your current R&D activities and claim practices. As an outcome of the review you will be provided with a summary of any potential areas of concern and recommendations for addressing those concern areas.
Grant Thornton are offering this review for a flat fee of $1,000 plus GST. Should you be interested to know more, please contact Sukvinder Heyer, Tax Advisory Partner at Grant Thornton, on (03) 8663 6056 or by [email protected].