R&D tax incentive deadline looms

With the April deadline for claiming the R&D tax incentive is fast approaching, businesses should reassess their R&D tax incentive position and talk to their advisers following some recent high profile court cases and re-released Government guidelines, says Mariana von Lucken, tax partner at HLB Mann Judd

“Any business considering making a claim should ensure they have reviewed the recent updated Government guidelines from the Department of Industry, Innovation and Science, particularly in light of increased tension around R&D in the area of software, including a prominent case with the CBA.”

Von Lucken added, “However, although we have seen some clients ceasing their software claims through external consultants, this response may not be necessary. While the guidelines seek to clarify which software development projects qualify for the R&D Tax Incentive, it’s important to keep in mind that the rules have not, in fact, changed.”

“Rather, the guidelines are a reminder of what kinds of projects are appropriate for the R&D Tax Incentive, and which ones are not. For any practitioner already operating in the R&D area, the Guide to Common Errors should already be known and come as no surprise,” she said.

The guidelines say that common mistakes include:

  • Claiming for whole projects, not individual activities.
  • Assuming that activities are automatically eligible because they follow a software development lifecycle.
  • Failing to identify a specific technical knowledge gap.
  • Claiming for activities related to the development of internal administration software.
  • Not keeping contemporaneous documentation.

If any of the above are identified as issues by Australian Taxation Office or AusIndustry , von Lucken said that the business should expect to be challenged on review by either party.

“All guidelines are welcome, but it would perhaps be more useful to also have some real life examples, highlighting existing software development projects that have been reviewed and that clearly identify what AusIndustry expects from applicants.

“Perhaps more concerning is the fact that companies are now being expected to repay millions of dollars in tax incentives that have since been deemed to be incorrect,” Ms von Lucken said.

“The Government had proposed a number of changes as part of its Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018. The Bill was not passed last year and, while it is has been referred to the Senate Economics Legislation Committee, it is now unlikely it will pass in its current form. Indeed it is impossible to know whether R&D will be a priority for the Government in power following the Federal election. However I think it likely that any government will introduce a cap on the amount of cash refundable. This is currently proposed to be a cap on R&D refunds of $4 million for companies with a group turnover of less than $20 million.

“It’s also probable that the ‘R&D Intensity’ measures (which look at how much a company spends on R&D as a proportion of its total expenditure) will be simplified for large businesses. In their current format, they are too complex and I could foresee plenty of errors in the calculations,” Ms von Lucken concluded.

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