The R&D tax incentive program is the Government’s largest program designed to support business innovation. The program has been reviewed multiple times, with each review concluding that the R&D tax incentive program provides significant additional benefits to the Australian economy, far beyond the cost of the program. Ausindustry does have a robust review process to safeguard the program. If you have claimed or intend to, the more you know of the review process the less likely you are to be stung by it. The Federal Budget in May 2018 indicated that review activity was likely to increase. We have observed an increase in the intensity of information requested, particularly by the ATO, since the Budget.
The review process is typically fairly transparent. The first level of review will involve the superficial identification of high risks of non-compliance based on the application form submitted by the claimant. The review may also involve a phone call with the claimant. This review is undertaken before annual registration is granted. If this review is passed a registration number is issued to the claimant company.
The second level of review is also superficial; it involves AusIndustry staff conducting a more detailed behind the scenes review of the claimant company’s history in the program, followed by an evaluation of the R&D activities based on the information provided in the application form. This is typically undertaken after registration has been issued.
Both these levels of review may be undertaken without the claimant being aware of it. The majority of these reviews result in no further action. However, in some cases a desk review will follow if concerns are not addressed based on these first and second level reviews.
In a desk review, AusIndustry will provide a list of questions and other specific information to claimants, seeking written responses, typically within a month. The issues will be concentrated on the issues identified in the first and second level reviews. AusIndustry may also ask for samples of records, such as contracts or trial reports. The review process may end at this point,or lead to the instigation of an activity review.
An activity review involves an in person and on site meeting with the claimant to discuss the R&D activities and to review records of the activities. An activity review will take several hours. AusIndustry will want to meet with research and finance staff and may request further documentary information on the day. If the outcome is unsatisfactory Ausindustry will provide a post registration finding. These outcomes may conclude, for example, that certain claimed activities are ineligible. A finding such as this is likely to require an amendment to the claim and penalties may apply.
What you should do if you are being reviewed:
- AusIndustry and the ATO are increasing review activity, particularly of large value claims, agriculture, software and construction. If your R&D is in these industry areas then review activity is more likely.
- Australian Taxation Office (ATO) review processes are fairly similar to AusIndustry however they will more focus on R&D expenditure. If you identify an issue in either, consider whether amendment of the tax return is appropriate before review activity commences.
- Be diligent about providing specific information about the experimental activities, the hypothesis, and the new knowledge being generated. Failure to address these key criteria will make it difficult for AusIndustry to pass the initial review process. Don’t make it hard work for them – be transparent and detailed in the registration form and a review is far less likely.
- To avoid poor review outcomes, ensure that you have documentation that supports both the conduct of the R&D activities described and the incurring of the expenditure associated with the project. Documentation might include contracts, project timeline charts, progress reports, internal project management system extracts, prototype diagrams, photos, test plans, and trial results. Documentation of the outcome of experimental activities is critical. There is more on documentation methods below.
- If you do not have this level of documentation then you need to be aware that you are vulnerable in the event of a review. Work with your consultant to consider the type of information you do have that would be audit suitable and make sure you retain them. Review activity can take place several years after the registration was lodged.
- Finally, applicants have some powers under the Industry, Research and Development Act 1986 to seek an internal review or AAT review of findings by AusIndustry. Time limits apply to such applications. See advice if you intend to tread this path.
A good consultant can assist with each stage of this review process to ensure that your case is well presented.
A summary of the review process
|R&D tax incentive review steps summarised||Information used in review||Outcome of unsuccessful review|
|Level 1 – Review prior to registration||Application form lodged by claimant||Annual registration number issued if review successful|
|Level 2 – Post registration review||Application form lodged by claimant||Desk review initiated|
|Level 3 – Desk review||Written question responses provide by claimant||Activity review initiated|
|Level 4 – Activity review||Meeting notes taken by AusIndustry
Information provided by claimant in the source of the meeting and thereafter
|Amendment required to claim, penalties may apply.|
|Any stage – Expenditure review by the ATO||Expenditure documentation (bank statements, invoices, contracts, etc)||Amendment required to claim, penalties may apply.|
Documentation is critical
indicates that records are required to demonstrate the eligibility of the activities and the amount of expenditure incurred on the activity. Where an apportionment method has been applied, it is the responsibility of the taxpayer to satisfy the ATO of the method used to allocate and calculate the proportion of expenditure on R&D activities. Most clients will allocate staff time between R&D and non R&D activities, and in this case the company must have records that support that allocation of time. In this scenario timesheets that track time on R&D and other activities by hours by staff/contractor and that are generated in real time are ideal. Here are a few methods that you may consider adopting if you do not have rigorous systems for determining the allocation of R&D time. The following are set and forget methods we are aware of:
- Wisetime: WiseTime is an automated time capture tool that also integrates with Jira and other platforms. It sits in the background recording time and keystrokes and will automatically allocate time in a day to pre-set project codes and provides a printable audit report that could be used to justify time in the event of a review. We understand the system works well for R&D staff that spend most of their time on a computer, or if their time is mostly meetings and those meetings times are kept in the electronic calendar. The company have generated some information regarding use of the system for R&D projects. Currently fees range from $9 per month for a single user to $95 per month for unlimited users.
- Dragon Anywhere App: The app will use speech recognition to record a meeting and then convert that into a text document. This may be a useful tool for recording R&D meetings and when combined with attendee list and dates will go some way to proving who worked on what. Makes sure that you secure the permission of those being recorded! We have done some experimentation with the system ourselves with mixed results. May work best with face to face meetings of small groups.
- Other: Date stamped photos of prototypes, trials, videos, progress reports to the board or investors, test results etc will all help. (Prime does not recommend these products in particular – these are illustrative of the types of products that are available).
It is possible to secure insurance for audit activity. Prime offer it through Audit Shield and the cover is typically around $300 annually. In the event of a review or audit by the ATO, the cost of securing assistance with audit response is covered by the insurance. This can reduce the strain of audit considerably. Many office management insurance policies will also provide some limited audit coverage. We not that these insurance policies do not cover a review by AusIndustry. We are not aware of an insurance product of this type. Consider assessing your level of coverage in the event of an ATO review. Get in contact with Prime or your regular tax agent if you have no insurance coverage.
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