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Australia Issues Additional Taxpayer Alerts on Ineligible Claims for R&D Tax Incentive — Orbitax Tax News & Alerts

On 20 February 2017, the Australian Taxation Office (ATO) and the Department of Industry, Innovation and Science jointly issued two additional taxpayer alerts concerning claims for the R&D Tax Incentive for agricultural activities and for software development activities. Related alerts for construction activities and claims for ordinary business activities were issued 9 February ({News-2017-02-15/A/2- previous coverage}).

TA 2017/4 - Claiming the Research and Development Tax Incentive for agricultural activities

The ATO and AusIndustry are reviewing the arrangements of entities that are claiming the R&D Tax Incentive in respect of agricultural activities where some (or all) of the expenditure incurred is on activities which are not eligible R&D activities.

These types of arrangements exhibit some or all of the following features:

  • An agricultural business is being carried on, often by an entity that is not eligible for the R&D Incentive, for example a family trust.
  • The operators of the agricultural business are approached by a promoter/R&D consultant advising that the farming activities that are being carried on are eligible for the R&D Tax Incentive.
  • Where necessary, a new special purpose R&D company may be incorporated in order that the activities are conducted by an entity that is able to claim the R&D tax offset.
  • A company registers one or more activities for the R&D Tax Incentive.
  • The registered activities involve the application of farm products or practices across all or a significant part of a farm or farms.
  • Some or all of the registered activities have the character of ordinary farming activities whose main purpose is the production of crops.
  • The company claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities.

TA 2017/5 - Claiming the Research and Development Tax Incentive for software development activities

The ATO and AusIndustry are reviewing the arrangements of companies that are claiming the R&D Tax Incentive on software development projects where some (or all) of the expenditure incurred is on activities which are not eligible R&D activities.

These types of arrangements exhibit some or all of the following features:

  • A company undertakes a software development project that involves one or more of the following:
    • developing new software;
    • modifying, customizing or upgrading existing software; and
    • acquiring and modifying off-the-shelf software.
  • The software development project includes one or more of the following:
    • undertaking activities that use existing software development knowledge and expertise to achieve the required technical outcomes;
    • undertaking activities that involve business risk rather than technical uncertainty;
    • undertaking activities to replace manual work processes using software technologies that are available in the market and adapted to the requirements of the company; and
    • using existing software technologies as they were intended to be used.
  • Some or all of the registered R&D activities are broadly described and non-specific. For example, they may describe project objectives or business and system requirements that the company is seeking to design and implement.
  • All of the project, or a substantial part of it, is registered as R&D activities.
  • The company includes the whole, or a large proportion, of their expenditure on the software development project in the calculation of their R&D Tax Incentive claim.

TA 2017/5 was also amended through an addendum (TA 2017/5A) published 24 February to further clarify when routine testing steps in software development projects are eligible for the R&D Tax Incentive.

Both tax alerts note that companies are expected to distinguish eligible R&D activities from ineligible ordinary business activities at the time of registration and throughout the conduct of the activities. Proper, detailed and contemporaneous records must be kept to support the registration application and the claim for the R&D Tax Incentive. The onus is on the taxpayer to ensure that the registration and claim for the R&D Tax Incentive are correct. Penalties may apply if the R&D Tax Incentive is incorrectly claimed, but will be significantly reduced if voluntarily disclosed.