As we start the calendar year 2024, it is important to reflect on some of the Australian Taxation Office’s (ATO) latest guidance relating to the Research & Development Tax Incentive (RDTI) program.

The ATO has shown it is dedicated to upholding the integrity of the RDTI program as its latest guidance release marks its first commentary on R&D issues in quite some time. The focus is particularly noteworthy, given the pivotal role the RDTI plays in fostering innovation and R&D within Australia.

To provide valuable assistance, the ATO has issued additional clarification and guidance regarding some R&D integrity rules, directed towards addressing recurrent issues that regulatory bodies have identified in RDTI claims. These include concerns related to:

Associate expenditure

Claiming R&D expenditure with associates involves specific considerations. Generally, such expenditure can only be claimed in the year of payment, unless the R&D entity opts for an irrevocable election. Notably, certain arrangements are viewed as not constituting payment to associates, including converting the amount owed into a loan or offsetting a licensing fee against R&D service fees in non-arm’s length transactions.

Contract R&D arrangements

The “conducted for” rule mandates that R&D activities must be conducted for the registered entity seeking R&D notional deductions. Expenditure can’t be claimed if the activities are not conducted for the entity or are conducted ‘to a significant extent’ for another party. Assessments consider factors like financial risk, ownership of results and control over R&D conduct.

Aggregated turnover

Aggregated turnover is a crucial factor in R&D tax offset eligibility. Entities with an aggregated turnover below $20 million are entitled to a refundable offset, while those at $20 million or above receive a non-refundable offset. Exemptions apply to R&D entities 50% controlled by exempt entities, ensuring eligibility for the non-refundable offset, regardless of turnover.

Overseas expenditure

Overseas expenditure claims require an overseas finding from the Department of Industry, Science and Resources (DISR). Without this, the work must be conducted in Australia, not subcontracted overseas. Physical location helps determines overseas expenditure validity.

Expenditure not at risk

Expenditure is ineligible for notional deduction if it’s ‘not at risk’. The nexus to expenditure test considers whether the entity could reasonably expect consideration as a result of the expenditure, while the results test assesses whether the entity is entitled to consideration regardless of activity outcomes. Having a grant or contract for the activities can make the expenditure not at risk under the R&D Tax Incentive.

The ATO’s focus in these areas, highlight its commitment to maintaining the effectiveness of the R&D Tax Incentive programs, so it is important to ensure that your R&D Tax consultant understands and recognises these issues to ensure the right claims are made.

Please contact your HLB Mann Judd adviser if you have any questions, require clarifications or would like our assistance.