The ATO has issued its Compliance in focus 2013-14 document where it sets out what the ATO will do to manage the risks to and maintain the integrity of Australia’s taxation and superannuation systems for the next 12 months.

On page 14, we read the following with respect to Research and Development.

Research and development
We will work closely with Ausindustry to ensure
that the new definition of research and development
(R&D) activities is being appropriately applied.
Under the R&D Tax Incentive there are new
limitations around claiming software development
if the dominant purpose is for the internal company
administration, or administration of connected
entities or affiliates.
A business’s records must also clearly demonstrate
the necessary direct link between the registered
R&D activities and expenditure being claimed for the
purposes of the R&D offset. Where the expenditure
is between associates we will be looking to ensure
that the amounts have been paid and that any
mark-ups between connected or affiliated entities
have been excluded.

There are a number of key statements in the two paragraphs which need to be examined in a bit more detail.

First of all, we need to remember the division of responsibilities between AusIndustry and the ATO.

  • AusIndustry looks at the R&D activities; and
  • the ATO looks at the expenditure claimed.

Secondly, never forget that it is possible to:

  • submit an R&D application to AusIndustry,
  • get a registration number from AusIndustry,
  • lodge your tax return with the R&D Tax schedule,
  • get paid a refund from the ATO and
  • a couple of months later get  a compliance review request from AusIndutry.

Thirdly, and with reference to the first sentence above regarding the definition of R&D activities, it is interesting to note some common causes of non-compliance that AusIndustry has noted. These include:

  • Failure to correctly describe and register eligible R&D activities;
  • Failure to maintain records at the time that R&D activities were undertaken;
  • Failure to reflect changes in the status of R&D projects over time in R&D activity registrations; and
  • Failure to maintain expenditure records and/or evidence of acquittal of R&D activity costs.

If you need to go and refresh yourself on the definitions, this presentation is a good place to start.

Fourthly, if you are developing software for use internally – get advice as to whether it will qualify for the R&D Tax Incentive.

Fifthly, and finally, keep accurate expenditure records. If there are transactions between related parties, make sure they are paid by 30 June.