As part of a
Research & Development (R&D) Tax Program overhaul in 2011, the definition of what constitutes R&D was tightened. As a result, more small businesses began to lodge applications, which drove demand for R&D advisers.
Throughout the last month, the media – including Fairfax’s
Australian Financial Review – has published stories of ineligible R&D tax refund claims. In one case,
Rosco McGlashan is described as a ‘naïve victim’ of a dodgy adviser who was looking to cash in on the Incentive.
Sadly, McGlashan’s case is just one of many botched R&D applications at the hands of a disreputable consultant. So how can you ensure your business’ claim for the
R&D Tax Incentive doesn’t fall into the hands of a crooked adviser? Here are five red flags to look out for:
1. A lone wolf
While there are instances when a one-man band is advantageous, preparing an R&D Tax Incentive application is seldom one of them. Not only do these individuals lack colleagues to troubleshoot with, they’re often blindsided by the lure of a larger fee as they don’t have to split the profit.
A reputable professional services firm will work through an assessment method. At CharterNet, we call it the ‘six-eye review’ process. As it sounds, a client’s application travels through a pipeline that includes an R&D consultant, a manager and a partner. And, of course, the process involves a client review, to make sure you’re happy before it’s lodged. A transparent and well-structured process like this, which a one-person arrangement doesn’t afford, eliminates errors and integrates the experience and skillsets of a team.
2. General tax compliance firms
The ability of a general tax accountant to assist an R&D application shouldn’t automatically be discredited. But, much like in the medical world – think physios and dermatologists – specialist knowledge is invaluable. The R&D Tax Incentive program comprises a specific area of tax legislation. Knowing the ins and outs of regulation gives specialist R&D personnel the upper hand.
For example, eligibility under the Incentive is based on specific R&D activities rather than entire projects. If this is overlooked – and the
Australian Tax Office (ATO) is alerted – your business could suffer. What’s more, a general tax accountant may not be fully aware of the governing structure of the Incentive, which is overseen by AusIndustry and the ATO. Accordingly, your R&D claim must comprehensively document your activity, as auditing can be carried out by
both departmental bodies. AusIndustry reviews the activities, while the ATO audits figures. The daily exposure R&D experts have to the structure of the Incentive helps keep clients stay on the right side of the law.
3. Including all your expenses as part of the R&D application
If including all your costs in your R&D claim sounds too good to be true, it’s because it is. The ATO states you can’t declare
all expenses. Marketing and sales costs for example, generally aren’t authorized for inclusion. Contrary to what some ill-informed accountants might say, you can’t simply include all expenses captured in your profit and loss statement. Prior to factoring in costs as part of your application, you need to be able to substantiate you carried out the activities, provide evidence of the cost incurred and link the activities to the costs, all within the financial year in question. On top of this, you must be able to link
particular tax invoices to your R&D activities.
4. Lack of legislative know-how and use of outdated terminology
Since the 1980s, Australia has had an R&D program. In 2011, a massive revamp took place, resulting in the program we know today, the
R&D Tax Incentive. In its previous iteration, the terminology and criteria were markedly different, so it’s vital to engage a consultant that uses the updated vocabulary and principles.
The importance of language can’t be overlooked. The previous R&D program, known as the Tax Concession, used ‘innovation’ and ‘technical risk’ to assess the legitimacy of a claim. This has been superseded by terms including ‘from hypothesis to experiment,’ ‘observation and evaluation’, ‘logical conclusions’ and ‘new knowledge generation.’ If your adviser hasn’t updated their vernacular to reflect the change in legislation, the validity of your claim could be jeopardized.
5. Disregard for efficient record keeping
The R&D Tax Incentive process requires diligent record keeping. When it comes to choosing an adviser, a good way to separate the wheat from the chaff is if they’re not transparent or informative about the magnitude of systematic records. Your accounts must demonstrate a cost was incurred, substantiate financial and technical aspects of a claim, and create a link between the two.
Every financial year, a reputable adviser – such as CharterNet – asks clients for documentation kept. A good consultant should also use this occasion to alert clients to risk areas if their record keeping isn’t up to scratch. It should be a collaborative process and records should be kept in real-time, rather than after the fact. Because, if either AusIndustry or the ATO requests information, it may be difficult to find the documentation two years after the R&D activity took place.
A highly regarded consultant is often the difference between your claim’s success or failure. If you’re concerned that your adviser might be unreliable,
get in touch with CharterNet to see how we can help your business with your R&D Tax Incentive claim.
