The crackdown on research and development tax incentive claims has eased, with a more collaborative and fair approach to audits adopted and a number of recent successful appeals, according to specialist RDTI advisor Damian Smyth.
The ATO and AusIndustry’s “aggressive” approach to R&D tax incentive (RDTI) audits and compliance checks in recent years has been widely criticised. This has led to companies having to repay large sums of money they had previously claimed under the scheme, with regular claims that the definitions used to define eligible R&D activities had been shifted.
The issue came to a head in a number of high-profile cases involving the likes of AirTasker and the Commonwealth Bank.
But through a Federal Court challenge, Small Business Ombudsman report and the declining costs of the scheme overall, things are improving, Mr Smyth, the chief executive of Swanson Reed said.
“Things are starting to look a bit more balanced from where it was. Over the past few years if you did get a review it was almost an impossible task to reach an amicable or non-adversarial position, but they seem much more balanced in their approaches these days,” Mr Smyth told InnovationAus.
“Where they may have concerns they will look to potentially a warning scenario or something of that nature rather than the aggressive approach of trying to mitigate some of the mischievous behaviour that had gone on in some elements of the program in recent years. This is a more balanced approach.”
Issues emerged around compliance and audits of the RDTI following a review of the scheme in 2016.
Despite the review recommending the existing definition of what a R&D activity is, AusIndustry and ATO were later widely understood to have tightened the existing definition, with software claims particularly impacted.
This led to a rapid increase in the number of audits being completed on companies accessing the scheme. In the 2017-18 financial year, $200 million was clawed back from these companies, with double the number of audits conducted than the previous year.
But the situation has improved this year, Mr Smyth said, with the department looking to work with companies rather than punish them, and a number of firms successfully appealing decisions.
Publicly listed software company Xped Ltd won an appeal on the department’s decision last year to rule its $1.63 million claim under the scheme ineligible. The claim was in relation to Internet of Things-based software and hardware solutions, which was later ruled eligible as part of the appeal in December last year.
These decisions followed a federal court ruling in favour of Moreton Resources over its claims under the RDTI. The court rejected the federal government’s narrow interpretation of eligible activities, in a decision that had significant implications for software claims.
The Small Business Ombudsman also conducted an investigation into the enforcement of the scheme, with the final report criticising the conduct of the government agencies, saying it had had a “devastating impact” on companies.
The Ombudsman recommended that audits be conducted as close to possible to the first year of registration of a project, and that guidance material be comprehensive, clearer and up-to-date.
These developments, along with a general decline in the cost of the RDTI scheme overall, has led the government to lessen its crackdown on claims, Mr Smyth said.
“In previous years being able to successfully appeal a decision was nigh on impossible. The fact there have been some in a relatively short space of time, and that these are just the publicised ones, is encouraging to see,” he said.
“The Ombudsman’s report was a big enlightenment moment in reaching balance, and I think some of the bad eggs have been removed from the program. And there’s been a decline in the cost of the program, so that’s taken some budgetary pressure off to be so aggressive in their assessments.”
Mr Smyth warned that RDTI audits are still being undertaken despite the ongoing COVID-19 pandemic.
“The audits are still going on. Businesses can perhaps fall into a trap that with so much stimulus going on with COVID they may take their R&D claims for granted and look to beef it up with expectations that the chance of being audited has been mitigated. We are still seeing audits but they are much more balanced and reasonable than they have been,” he said.
Despite these positive developments around the RDTI scheme, the looming threat of legislation currently before Parliament, constituting a $1.8 billion cut to the program, is threatening for many local companies, Mr Smyth said.
“I can’t believe they haven’t taken it off the table yet. Hopefully sanity will prevail,” he said.
The legislation is currently the subject of a senate inquiry, with its reporting date expected to be pushed back until December.
The legislation currently applies a series of contentious changes to the scheme from the 2019-20 financial year but is unlikely to be applied retrospectively if it is passed by Parliament.