TAX insight: ATO focus on software development R&D claims

10 December 2018

Last week the Australian Financial Review covered an article on the challenges faced by Australian businesses due to the stringent enforcement of various research and development tax incentives and grants (R&D Tax Incentives). In particular, the Australian Taxation Office (ATO) and the government body responsible for the management of the R&D Tax Incentives, AusIndustry, have been targeting what appears to be a list of high profile Australia technology start-ups that have received R&D Tax Incentives as far back as 2014, notwithstanding that these applications were prepared by the tier-one accountancy firms in Australia.

On the radar since early 2017

Early last year, the ATO released a “Taxpayer Alert” (TA 2017/5) stating the intention of the Commissioner of Taxation (Commissioner) to “review the arrangements of companies that are claiming the R&D Tax Incentives on software development projects where some (or all) of the expenditure incurred is on activities which are not eligible R&D activities.” Although, the intention was clear, it was widely accepted in both the venture capital and start-up ecosystem that such a review would result in the ATO and AusIndustry targeting fraudulent activity and not necessarily taking a different interpretation of the law.

Further, the Federal Government announced changes to the research and development tax incentive scheme (R&D Scheme) in the most recent Federal Budget, mainly to reduce the grant levels and introduce new thresholds. In that budget the Federal Government also handed Innovation & Sciences Australia (ISA) the same powers as the ATO, including allowing the ISA to make public releases and make binding rulings in relation to the R&D Scheme.

What are the consequences?

If the ATO and AusIndustry review a company’s R&D Tax Incentive application and consider the R&D Tax Incentive to have been wrongly provided, the ATO will:

  • Request for the repayment of the R&D Tax Incentive received by the company in all of the relevant years (Repayment); and
  • Levy interest and a penalty of (up to) 75% of the Repayment.

Currently, high profile start-ups Airtasker and Digiviser are both reportedly facing the repayment of millions of dollars as well as potential penalties of more than a million dollars in respect of R&D claims in their applications. It is widely anticipated a large number of companies, both mature companies and start-ups, will be targeted if they have received R&D Tax Incentives in respect of software development.

What should you do?

It is prudent, given the cash flow impact and significant penalties that may apply, to review your R&D applications and where relevant, make a voluntary disclosure. Where a voluntary disclosure is made, the ATO is likely to remit penalties and interest.

HWL Ebsworth can assist you in reviewing your R&D applications and in dealing with the ATO.

Please contact us to discuss any aspect of the above.

This article was written by Nima Sedaghat, Partner and Paul Lee, Solicitor.

Nima Sedaghat

P: +61 2 9334 8291

E: nsedaghat@hwle.com.au

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