ATO clamping down on misuse of R&D tax incentive scheme
The Australian Tax Office (ATO) is making research and development (R&D) tax incentive misuse a top priority for cross-agency investigations that in some instances are involving the Serious Financial Crime Taskforce.
Misuse by individuals and businesses may vary. There is misuse that is abuse. For instance, Macks Advisory is aware of a case where a tax agent was imprisoned for 29 months for his role in fraudulent R&D claims totalling $550,000.
The ATO also confirms that a man, working as an in-house professional for an unnamed company in 2013, was jailed in September this year for at least 18 months by Victorian County Court. He’d admitted transferring to his personal bank account $380,000 of $549,719 derived from false R&D claims he’d made on behalf of the business. Perhaps a case of “deliberate scamming”.
However, misuse of the incentive is often inadvertent because of the scheme’s complications, which is why it’s important to apply for incentives on the basis of professional advice.
How the incentive scheme works
Individuals can’t claim incentives. They can only be claimed by incorporated entities that in most instances are undertaking research work for their own businesses rather than third parties.
Eligible activities for R&D funding under the scheme are those where “the outcome cannot be known or determined in advance on the basis of current knowledge”, or, they are activities “genuinely being undertaken for the purpose of generating new knowledge”.
While many organisations prepare their own incentive claims, it’s Mack Advisory’s advice that given the complicated nature of what precisely meets the scheme’s requirements, it’s wise to at least have proposed claims checked professionally, if not actually formulated professionally.
To our knowledge it’s not just common, but very common, for small businesses and so-called “start-ups” to have misconceptions about projects for which they can make viable claims.
It should be noted, for example, that such businesses, while undertaking genuine research projects, may not necessarily be eligible for 100% claims.
Funding of all elements involved in a particular project may not be claimable.
Some common stumbling blocks
Common stumbling blocks to legitimate incentive claims include the use of computers and a variety of other office plant, personnel and equipment.
What plant and what equipment are working to what extent, on the particular project for which incentives are sought?
Are all staff working on the project for which claims are being made? If not, which people are, and for how much of their time? Has the business needed to hire extra staff to work exclusively on the project?
Software companies tend to come unstuck by assuming claims they’ve made relative to new programs they’re developing, will be successful automatically. It’s not so.
What pre-existing tools and codes are being used on programs claimed as being “new”? How much work on these programs can only be advanced by development of entirely new tools and codes?
Rationale for the clamp-down
Because the tax incentive scheme is a refundable offset – that is the government is in effect funding businesses in part with taxpayers’ money – the ATO is obliged to have a care for it.
It is hardly surprising therefore in the face of increasing misuse of the R&D tax incentive scheme that ATO Deputy Commissioner Will Day has instigated cross-agency investigations involving in some instances the Serious Financial Crime Taskforce.
He’s also issued a statement warning that “people who deliberately do the wrong thing and claim incentives to which they are not entitled, will be caught and held to account for their actions”
Minister for Revenue and Financial Services Kelly O’Dwyer says that “people who believe they can game the system for their own advantage will be caught and will have to face consequences”.
She says a task force is “actively pursuing” companies believed to be claiming R&D funds when not entitled to them.
