The Research and Development Tax Incentive (R&D program) is driving innovation and economic growth and we’re committed to ensuring it’s used with integrity. We’ve identified issues with the application of some R&D program integrity rules:
- R&D expenditure to associates
- conducted for
- aggregated turnover
- overseas expenditure
- expenditure not at risk.
We’re urging tax agents and R&D consultants to review their clients’ claims and voluntarily disclose any errors.
R&D expenditure to associates
R&D expenditure to associates can only be claimed in the year they’re paid, unless the R&D entity makes an irrevocable election.
We regard the following arrangements as not resulting in the expenditure being paid to the associate:
- The amount owed to the associate is converted to a loan. This is not payment, and we consider the amount unpaid.
- The R&D entity and the associate enter a licencing 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.
Conducted for
To claim R&D notional deductions, the R&D activity must also be conducted for the R&D entity that has registered the R&D activities. 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, we make 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.
Aggregated turnover
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.
Overseas expenditure
This expenditure can only be claimed for activities conducted overseas where the entity has an overseas findingExternal Link 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. We consider the physical location of where the work is conducted.
We wrote an article about conducting R&D overseas in July 2023 and more information is also available on DISR’s websiteExternal Link.
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.
Use our R&D tax incentive schedule instructions for more information. If you need certainty about application of these rules, contact us.