Kristina Kipper (KPMG)
Research and development (R&D) is becoming an ever-present form of business activity that companies engage in to ensure they remain relevant and competitive in domestic and international markets.
The government's R&D tax incentive, introduced in 2011, continues to evolve and taxpayers will have observed an increase in communications with the regulators in recent years.
In October 2017, The Tax Institute's Research & Development seminar in Sydney delved into the taxation consequences, benefits and topical issues related to the R&D incentive.
At the seminar, KPMG's Kristina Kipper and Dr Renee Levings presented a paper entitled 'The R&D tax incentive – latest Developments', which we outline below.
Kristina is a partner in KPMG’s R&D Incentives group and is the National Sector Leader for Technology, Media and Telecommunications. Renee is Director, R&D Tax Advisory.
Since the R&D tax incentive began in 2011, registration numbers have increased by an average 12.6% per year. 2015 was a record year of program participation with more than 15,024 registered companies and R&D expenditure of $17.89 billion as at September 2016.
Innovation Australia (AusIndustry) and the Australian Taxation Office (ATO) have significantly increased their review and audit activity in recent years. A number of recent Administrative Appeals Tribunal (AAT) cases, ATO interpretive decisions (ATO IDs), taxpayer alerts, taxation determinations and tax rulings have highlighted the need for companies to reassess how they prepare and substantiate their R&D claims.
Dr Renee Levings (KPMG)
Within this evolving regulatory landscape, financial officers, heads of tax and general managers must work more closely with their R&D managers and technical teams to identify and substantiate R&D activities. To this extent, real time strategic planning, additional documentation and use of resources will be key for companies to continue to claim the R&D Tax Incentive.
On 28 September 2016, the Government released for comment the Review of the R&D Tax Incentive (the '3F' review). 
The review argues that the incentive falls short of meeting its stated objectives of "additionality" and spill over, and makes six recommendations aimed at improving the effectiveness and integrity of the program while encouraging additionality. The Federal Government is yet to respond to the 3F review and thus future changes remain on the table.
Recently, there have been multiple R&D Taxpayer Alerts and Specific Issue Guidances issued by the ATO and AusIndustry.
A number of common themes are evident across the guidance material, with key regulator concerns expressed in the following areas:
- normal business activities are being claimed as R&D activities
- companies are failing to adequately identify specific R&D activities
- contemporaneous documentation to support R&D claims is often lacking
- ineligible expenditure (whether ineligible by its nature or due to a specific exclusion) is being claimed.
Further, some industry specific guidance has raised a number of key issues in fields including software, farming, mining and construction, which are detailed further in the paper.
Notwithstanding that the R&D tax incentive program is designed to encourage innovation and provide financial support to companies, there has been an increase in regulator activity and the scrutiny of claims. This has added far greater focus on the ability of companies to evidence compliance with the program.
Several AAT decisions have been made in favour of the regulators. In addition, a number of Regulator Guidelines have been issued to support the regulator position.
The majority of case law in this area relates to the R&D tax concession, with new R&D tax incentive case law beginning to filter through. The existing case law demonstrates that there is a focus on the elements of the definition of core R&D activities, as well as the availability of evidence to support the undertaking of claimed R&D activities.
In the paper, Kristina and Renee detail a number of key learnings from case law that practitioners should be aware of.
1 The review was undertaken by Mr Bill Ferris AC (Chair, Innovation Australia), Dr Alan Finkel AO (Chief Scientist) and Mr John Fraser (Secretary to the Treasury), collectively referred to as the ‘3Fs’.