Don’t get caught out on R&D claims

KPMG's James Edwards

The R&D Tax Incentive, jointly administered by AusIndustry and the Australian Tax Office (ATO), is an Australian Government initiative that provides a tax offset to support companies to be more innovative, productive and competitive and has been in place since 1985.

Broad based rather than industry specific, the incentive provides sizeable tax savings and even cash refunds to eligible companies.

This incentive is particularly valuable for the mid-market. Companies with turnover of less than $20 million can access the 43.5 per cent refundable offset which reduces their tax liability by 13.5 cents in the dollar or, if they are in tax losses, result in a cash refund of 43.5 cents in the dollar.

Larger companies with a group turnover of $20 million or more, can access the 38.5 per cent non-refundable offset which reduces their tax liability by 8.5 cents in the dollar.

Mining is rich with innovation – just think of the progress the industry has made over the last two decades around deep cover exploration technology, driverless trucks and the continued improvement of processing techniques to realise higher and higher recoveries.

This is reflected in the large number of mining companies accessing the program – in fact, the mining industry is the third largest claimant of R&D Tax Incentives behind the services and manufacturing industries.

While the program has been very beneficial to many mining companies, the industry as a whole has been targeted for potential non-compliance, along with agriculture, software development and construction, resulting in an increase in both review and audit activity by AusIndustry and the ATO.

In January, AusIndustry released specific issue guidance material focusing on the mining industry and raised the following areas of concern that mining claimants need to pay particular attention to:

  • Claiming activities or tests that are standard to the industry and not hypothesis driven – especially in the development of process flow sheets and mine designs
  • Claiming activities where no test or experiment is undertaken (only modelling or simulation)
  • Confusing project or commercial risk with technical risk
  • Failure to adequately demonstrate the new knowledge that is being generated from the experimental activities
  • Whole of project claims rather than discrete R&D activities
  • Lack of substantiation documentation
  • R&D claims in the exploration phase of a project that potentially excluded under the legislation.

In addition, other areas of focus by the regulators include companies claiming ineligible expenditure and also R&D advisors who apply high risk practices such as, according to AusIndustry, providing advice that is not consistent with the legislation, either in its intent or in its letter.

The penalties for non-compliance can be significant, including penalty payments and interest charges.

While this sounds like a minefield, and daunting in terms of complexity and potential risk, companies in the mining industry should continue to access the savings afforded by the R&D Tax Incentive, however they should be readily prepared to justify their claims upon a review.

KPMG recommends the following actions to help you prepare and defend your R&D claim:

  • Identify your R&D activities and associated expenditure contemporaneously – don’t wait until the end of the financial year
  • Ensure an adequate internal governance process in place for your R&D claim process. For example, a robust framework around the timing, identification and approval of R&D activities to be claimed. Companies can improve their R&D claim process by using claim management tools, which track activities in real time across the team responsible for compiling a claim
  • Always ensure you have appropriate, contemporaneous substantiation documentation to support your claim
  • Given the complexity of the legislation and current regulatory environment, seek advice from trained, registered tax agents.

Need to find out more?

If you would like to learn more on how your company may be eligible to claim the R&D Tax Incentive, please don’t hesitate to contact our R&D Incentives team in your state.

The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity.

James Edwards is the partner, R&D Incentives Tax for KPMG. He is based in Perth, Western Australia.

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