By Alan Baghdasarayan, Senior Manager, R&D Services
Research and Development (R&D) Tax Incentive audits have become more common in recent years – particularly since the R&D Tax Incentive Program was overhauled in 2011, transitioning from additional deductions to tax offsets and cash refunds.
Along with those changes came a more stringent definition of what really constitutes an R&D activity. As a result, the two governing bodies — AusIndustry and the Australian Tax Office (ATO) — increased its auditing efforts to ensure companies lodging applications are participating in eligible R&D activities and, in turn, claiming only eligible expenditure. Many organisations have responded by enlisting R&D advisers to ensure compliance from the very start, not just when they’re ready to submit a claim.
Why are some applications audited?
R&D audits have increased in recent years. No organisation is immune to auditing, and every company needs to be prepared to defend itself in case the ATO or AusIndustry comes knocking. Here are just a few of the main reasons why your company’s R&D application may be audited:
- You’re due a large refund. The ATO may get nervous and want to ensure your organisation is accurately linking its spend with R&D activities.
- You own several companies that are all claiming R&D expenses separately. The ATO’s data analytics system will pick this up and flag it. AusIndustry and ATO may do a tax review on you as well.
- The R&D adviser you used to submit the claim is inexperienced or has a history of disproven claims.
- No reason at all. Sometimes, the ATO audits claims at random based on risk filters.
Who gets audited the most?
We’ve seen all types of companies get audited – from large ASX listed organisations to start-ups. While it mainly comes down to the refund amount being claimed, the ATO does target some industries and geographic locations a little more than others.
For example, technology companies in Sydney see a higher rate of auditing than other sectors. This is because most of Australia’s tech start-ups are based there. In technology, it’s often harder to delineate between the R&D and non-R&D elements of a project.
The ATO also tends to investigate mining and construction industries more often than others, particularly those in Perth. Legislation has been worded to prevent mining and construction industries from claiming R&D because they may claim millions upon millions in supporting activities some of which may not be eligible.
What happens in an audit?
There are three potential ways an audit could go, and it largely depends on the R&D adviser you’ve chosen and their reputation with the ATO.
- If you get a voluntary disclosure email, it may be a red flag that your R&D adviser is in hot water. The ATO will search against the name of the adviser and issue emails to all of the companies that have been affected. It will basically say “are you sure you’re happy with your claim?”
You’ll then be given a chance to voluntarily disclose further information and amend your claim to avoid penalties. If you say yes, you are satisfied with your claim, you will need to provide proof to back up all your expenditure, and you could be penalised for filing false or misleading claims if they can’t all be verified. In these cases, it’s often not possible to ask your adviser to defend the claim, as they may already be in liquidation and untraceable. Sadly, it happens more often than you think.
- If you’ve had your claim handled by a reputable company, the first step of the audit will usually be a high-level email with a few questions in the body. They’ll ask very general questions that, if you answer thoroughly enough, may end the auditing process altogether.
- If the email comes with an attachment, it means that those higher up at the ATO and/or AusIndustry have reviewed your claim, and it’s a little more formal. The attachment will include questions that dive into specifics of your claim.
How we handle R&D audits
At CharterNet, we defend all of our claims and always work with our clients to answer questions contextually and with supporting records. On most audits, you have two to four weeks to respond.
For ATO audits, if our client runs their business(es) through Xero, it’s usually quite easy to access the preliminary information needed to defend an ATO audit. In the end, though, it comes down to practical R&D record keeping. We always provide our clients with clear record keeping guidelines from the outset to protect their company in the event of an audit.
Once we’ve accessed the records, we prepare responses, giving context and providing evidence for each line item, and we send it to the client for review. If it’s approved, we send the email and supporting documentation to the ATO.
The ATO may come back and ask for more supporting information on an official letterhead attachment in an email, or they may simply send a position paper: a 20 to 30-page document detailing their decision. The office will give you a set time frame in which you must respond. No extensions are granted at this time. You can, however, counter the decision, but you should always weigh up the costs of doing so – especially if it’s only a small portion of your claim. As a general rule, an ATO audit may take up to nine months to complete, from start to finish.
AusIndustry reviews follow a similar path, but with one exception – the review is focused on the technical merit of the R&D activities. As such, we assist companies in presenting contemporaneous documentation that substantiates the technical merit of the R&D claim by illustrating:
- The technical objective of the project;
- The elements of new knowledge generation;
- The areas of technical uncertainty that prevented the project from being known or determined in advance; and
- The design, development, testing, etc. undertaken during the project lifecycle.
This review process can sometimes take up to six months to complete from start to finish.
Tips for defending yourself in an R&D audit
Keep R&D records
No matter what industry you’re in or how large your claim is, the key to surviving an R&D audit is simple: be proactive. Defence starts early – even before you’ve thought about submitting a claim. In fact, you shouldn’t consider filing a claim at all if you won’t have the proper documentation to back it up – and back it up thoroughly.
That’s why thorough record keeping is crucial. Make sure to read our blog for more on how to keep your records clean in the event of an audit.
Choose a reputable adviser
Choosing the right R&D adviser is also vital to both preventing and surviving an R&D audit. We recommend avoiding general tax compliance firms or a one-man band. Follow these tips to avoid dodgy advisers, and always fully vet yours before moving forward with a claim.
Ask for evidence
Ask how many successful R&D claims the company completed in the last financial year. If they say, it’s not really their forte or they give you a low number, consider it a bad sign. Ask, “can you describe your working relationship with the ATO and AusIndustry?” Here at CharterNet, we have a good working relationship with the ATO and AusIndustry via our membership on the invitation-only State Reference Group.
Get help with your R&D claims now
Want to ensure your organisation is on the right path in claiming its R&D refund(s)? Contact us today for a complimentary initial discussion. Our experienced, knowledgeable and trusted R&D advisers are here to help.