Our take on the recent ATO Taxpayer Alerts

February 25, 2017

What has happened recently

The ATO has released four Taxpayer Alerts (TAs) concerning the R&D Tax Incentive program, highlighting the nature of incorrect R&D claims observed by the ATO and AusIndustry (joint program regulators).

The total annual program cost of the R&D Incentive is much higher than expected (~$4.7b). This, combined with companies/advisors not claiming appropriately or trivialising the scheme, has forced the regulator to apply even greater scrutiny.

TAs are linked for your reference as follows:

What this means:

The TAs highlight the regulator targeting aggressive R&D arrangements, broadly described 'whole of project' claims, and claimants/advisors that trivialise what qualifies as R&D. Misconceptions such as activities qualifying based on business risk, and that all software development qualifies as R&D, have been quite common.

The concepts covered are not new. They represent the legislative rules which have been in place since 2012.

The concepts covered align to how RSF view, prepare and have successfully defended all R&D claims reviewed over the recent 12 months.

Any responsible and experienced R&D specialist advisor should be aware of these rules and have experience in dealing with regulator audits.

It is highly likely that over the next 12 months, greater review and audit activity will ensue as greater focus is being placed on R&D claims.

This typically is in the form of an initial request for further information, clarifying aspects of the R&D claim, or a site visit. Over the last 12 months we have been involved in 5 such reviews, all of which have been cleared. Over the last decade, RSF Director, Tim Florea has been involved in over 50 reviews/audits, all successfully defended with positive outcomes.

Both the ATO and AusIndustry undertake regular reviews of claims to ensure compliance, and this should not be a cause of concern.

What we are doing about it:

Applying a greater focus on clearly defined R&D activity descriptions, and advising clients on rules and substantiating documentation required on a real time basis.
Liaising with the regulator to clarify areas of ambiguity.
Providing direct feedback and input as a part of the State Reference Group panel on policy and relevant issues.

We are confident in the integrity of the R&D claims we assist to prepare, and have critically challenged and rejected preparing claims with marginal merit.

Overall we welcome greater scrutiny applied in this area as it will help preserve the R&D Incentive program for the long term to support companies innovating in technology and science, aligned to the National Innovation and Science Agenda.

If you wish to discuss any of the above further, please contact our Director Tim Florea on 0432 401 222, or email tim.florea@rsfconsulting.com.

Evidencing your R&D claim

April 1, 2016

RECORD KEEPING

As the old saying goes, you don't get something for nothing.

Many companies accessing the R&D Tax Incentive often overlook one of the critical aspects of making a claim; record keeping.

So what is adequate record keeping for an R&D claim? What will put you in a strong position whilst minimising internal disruption?

AusIndustry and the ATO both view record keeping as an important part of any R&D project and also an important part of good business practice. If you register for the R&D Tax Incentive you need to keep records to demonstrate the work you register is eligible for support.

Not having adequate records to evidence the work undertaken and expenses incurred may result in a claim being dismissed and the company required to payback the benefit it has accessed over a number of years.

There are two types of record keeping required for the R&D Tax Incentive:

1. ACTIVITY BASED RECORD KEEPING

Activity based records show that activities were actually carried out, and show how they are eligible core or supporting R&D activities.

The type of records that might be kept for activity based records include:

Notes from meetings with project and technical staff.
Business plans and approvals.
Results of background research and scoping.
Technical project documents, including the results of testing on the product, idea or service.
File notations and updated records to track the progress of an R&D activity.

2. EXPENDITURE BASED RECORD KEEPING

Expenditure based records justify expenditure claims for eligible R&D activities.

The type of records that might be kept for expenditure based records include:

Timesheets to verify the amount of time spent on R&D activities.
General ledger entries and invoices to verify the amount incurred on R&D activities and that include sufficient detail to link them to the R&D activities.
Spreadsheet or template that allows for eligible R&D costs to be consolidated into a format that allows for direct input into the ATO R&D Tax Incentive Schedule.
Financial documents including records of expenditure that include sufficient detail to link them to the R&D activities.

HERE ARE OUR TIPS ON IMPROVING R&D RECORD KEEPING:

Hold prospective discussions with a specialist R&D Tax advisor to identify the key opportunities for the year ahead.
Capture staff time spent on the project, key role and tasks at least on a monthly basis. For software development staff, development tracking systems such as GitHub may serve well.
Ensure any contractor invoices reference the work undertaken as R&D, or supporting R&D.
Capture significant technical unknowns which will require experimentation, from the outset and throughout the project.
Capture any failed test outcomes, test procedures, and resulting design changes.

IF YOU ARE CONCERNED THAT YOUR R&D CLAIM RECORD KEEPING MAY NOT BE UP TO SCRATCH, CONTACT US TODAY FOR A NO OBLIGATION DISCUSSION.

What is R&D?

June 6, 2015

rESEARCH AND DEVELOPMENT

Outside of the R&D Tax Incentive definition, it is worthwhile considering the concept of Research and Development (R&D), and associated literature.

This article I came across from http://toolkit.smallbiz.nsw.gov.au/part/14/72/305 resonated with me. I found a lot of parallels with the R&D Tax Incentive definition.

"R&D plays a key role in the innovation process for many organisations. Research is a systematic approach to gaining new knowledge or building a better understanding of concepts. Development is the process of applying and using the research and knowledge to generate new ideas that can be applied in the market.

In the past, and to some extent still today, research and development has been used to overcome genuine technological problems. Technological problems are the issues that prevent you from taking an idea any further. For example, an employee in the past may have suggested an idea for a mobile telephone, however, at the time the facilities and technology may not have been possible to allow the product to be developed for the market. Over a period of time, research and development makes these types of ideas possible.

Research and development involved four key operations; basic research, applied research, development and technical service. Basic research generally involves fundamental activities that provide information and data to a wide group of people. Basic research is conducted mainly in laboratories and universities funded by government grants or private investment. Applied research involves the application of previously existing principles to solve specific problems, often resulting in new technology.

Development is an activity similar to applied research, using established principles and focusing them on new products and ideas. It involves overcoming technical problems and making the product a viable option. Technical service focuses on improving the efficiency and effectiveness of current products, processes and systems.

Research and development plays an important part in gaining a competitive advantage. Without investing in some form of R&D, you are relying on others to come up with new ideas, new products and new technology. This puts your organisation at a disadvantage as you are forever playing catch up with your competition, merely copying what works and not being innovative."

DO YOU AGREE?

THE R&D TAX INCENTIVE DEFINITION OF R&D IS REPRESENTED AS FOLLOWS:

TALK TO US TODAY ABOUT WHETHER YOU ARE UNDERTAKING R&D UNDER THE R&D TAX INCENTIVE DEFINITION, AND HOW TO MAKE THE MOST OF THE PROGRAM.

When software development becomes R&D

May 12, 2015

ELIGIBLE SOFTWARE DEVELOPMENT AS r&d

What is the difference between routine software development and that which qualifies as R&D?

This question is commonly posed by AusIndustry as a part of their compliance reviews, requesting further information.

Software development has long been a contentious area for R&D claims, and it is also the fastest growing area.

With the burgeoning start up ecosystem in Australia and internationally fuelled by seemingly endless online marketplaces and software as a service offerings, software development R&D claims are likely to continue to increase, as is the scrutiny which will be applied by regulators.

So, how do you know your software development activities qualify as R&D? And importantly, if you are already claiming, are you describing your activities appropriately to minimise the risk of audit activity.

IDENTIFYING R&D IN SOFTWARE DEVELOPMENT

Completion must be dependent on the development of a scientific or technical advance, and the aim of the project must be resolution of a scientific or technical uncertainty.

You may be undertaking R&D if:

The context in which a solution is sought makes the solution unique or adds complexity,
there is no reference solution or knowledge that can be leveraged, and
experimentation (testing of a number of prototype designs) will be required to achieve the solution, or certain aspects of the solution.

To summarise, any software development work where considerable scientific or technological challenges are faced should be considered, provided the solution is not available to, or readily deducible by a competent professional working in the field.

EXAMPLES OF R&D CLAIMS INCLUDE:

Development of new algorithms, theorems, architectures, protocols, rules engines.
Advancements to existing system capabilities in areas of performance, security, scalability, availability.
Redesigning existing systems using new/different technologies, e.g. a legacy monolithic application to decouple functionality, new architecture design to optimise cloud storage.
Systems integration that involves large scale and complexity of components not previously integrated in a similar manner.
Developing unique middleware layers for translating messages between differing systems/layers.

IMPROVING YOUR R&D NARRATIVE

In claims that we review, we often find that there is insufficient detail that would enable AusIndustry to ascertain the registered activities meet the legislative definition of R&D activities. Often companies will provide very brief narrative, or discuss commercial objectives and development outcomes.

Here are our top three tips for improving R&D activity descriptions:

Discuss the state of the art and available knowledge, emphasising how the scientific or technical knowledge you are seeking differs.
Outline research undertaken in an attempt to identify existing solutions that may be leveraged, and the scientific or technical unknowns which remain.
Describe the experiments that have been undertaken from a procedural perspective (hypothesis, process of testing, outcomes including observations and evaluations, further design revisions).

Using a R&D Tax consultant that specialises in software R&D claims can significantly improve claim outcomes and efficiency. They should be able to understand the technical terms, work undertaken, and ask the right questions to probe into the strongest areas. Using an interview process, they should be able to identify and document the R&D activities undertaken.

The R&D Tax Incentive, is it time for a Health Check?

April 20, 2015

The Balanced Risk

To kick off our blog, I thought I would discuss the balanced risk associated with accessing the R&D Tax Incentive program.

The R&D Tax Incentive program is a tax based program which companies are entitled to claim each year.

It is not a Grant. It is self assessment much like a company's income tax return or an individual's income tax return. A positive is that you have more short term certainty that any funding will be received. However, longer term, claims may be audited, and there is the risk that a company may have to pay back amounts received including interest and penalties, if applicable.

Just because you have been receiving funds under the R&D Tax Incentive for a number of years successfully does not mean that claims made have been accepted as valid. In fact, the longer you have been claiming under the program, the higher the risk of an AusIndustry or ATO review occurring.

AusIndustry reviews are common, with a company typically reviewed once every four years. Greater focus is typically placed on first year claimants, and particular claim types such as software development. ATO reviews are increasing. Key focus areas include refundable R&D Tax Offset claims, software development claims, and legislative integrity provisions such as "payment to associates".

Contemporaneous substantiating documentation is critical and sought by both regulators.

From successfully passing a review, comes greater comfort.

SO ARE YOU AUDIT READY?

At RSF Consulting, we offer claimants a no obligation, free "Health Check" review. This can provide you with peace of mind and comfort surrounding existing claims. The review will look at past claims focusing on:

claim risks and recommendations on how these may be reduced,
where additional value exists, which may be accessed, and
where the process of making a claim can be made more efficient.

This is carried out at no cost to you. The process does not require significant input from company personnel, and focuses on reviewing existing claim related documentation.

TALK TO US TODAY ABOUT HOW OUR “HEALTH CHECK” CAN WORK FOR YOU.

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