R&D Tax Incentive Taxpayer alerts issued

Transcription

1 TaxTalk Insights Research and Develpment R&D Tax Incentive Taxpayer alerts issued 28 February 2017 In brief Recently, the Cmmissiner f Taxatin (the Cmmissiner), in cnjunctin with the Department f Industry, Innvatin and Science (AusIndustry), have issued fur Taxpayer Alerts addressing cncerns regarding taxpayers claiming the Research & Develpment (R&D) Tax Incentive. The fur Taxpayer Alerts (the Taxpayer Alerts) are as fllws: TA2017/2 Claiming the Research and Develpment Tax Incentive fr cnstructin activities TA2017/3 Claiming the Research and Develpment Tax Incentive fr rdinary business activities TA2017/4 Claiming the Research and Develpment Tax Incentive fr agricultural activities TA2017/5 Claiming the Research and Develpment Tax Incentive fr sftware develpment activities In detail Taxpayer Alerts are warnings abut activities f cncern fr the Australian Taxatin Office (ATO). Taxpayer Alerts are principally designed t target significant and emerging aggressive tax planning arrangements that the ATO has under risk assessment. Bradly, the recent Taxpayer Alerts utline the Cmmissiner s and AusIndustry s cncern that: Activities may nt fit within the stringent requirements f the laws that gvern the R&D Tax Incentive, Expenditure claimed may nt relate t eligible R&D activities, and Taxpayers may nt be applying adequate levels f gvernance and review t the activities registered and claims made fr the R&D Tax Incentive. The Taxpayer Alerts set ut the need t have adequate levels f crprate gvernance in place t review the registered R&D, as well as the claims subsequently made fr the R&D Tax Incentive. Each f the individual Taxpayer Alerts raise further specific cncerns in line with the fcus f that individual alert. An verview f the specific cncerns f each Taxpayer Alert is prvided belw. 2017/2 Claiming the Research and Develpment Tax Incentive fr cnstructin activities The ATO and AusIndustry are reviewing the arrangements f certain building and cnstructin industry participants that are claiming the R&D Tax Incentive.

2 The arrangements under review cncern claimants f the R&D Tax Incentive wh are invlved in either: acquiring buildings, r extensins, alteratins r imprvements theret (the acquirer); r whse business it is t cnstruct, extend, alter r imprve buildings (the builder). These types f arrangements exhibit sme r all f the fllwing features: A cntract is entered int between the acquirer and the builder t cnstruct, extend, alter r imprve a building r buildings (cnstructin). The cntract is a standard cnstructin cntract and is nt fr the prvisin f R&D services and des nt specify that R&D will be carried ut by the builder. The acquirer r the builder registers ne r mre activities assciated with the cnstructin f the building fr the R&D Tax Incentive, identifying the structure r cnstructin techniques as purprtedly invlving untested r nvel elements. Sme r all f the activities registered are bradly described and nn-specific. Fr example, whle cnstructin prjects may be registered rather than the specific activities which are being undertaken. Sme r all f the registered activities are rdinary cnstructin activities that are directed t fulfilling the requirements f the building r cnstructin cntract, r relate t expenditure that is expressly excluded frm being taken int accunt in calculating an R&D Tax Incentive. Frequently, the expenditure which is incurred relates t cnstructin methds r techniques that are already knwn within the building industry, r invlve the mere adaptatin r integratin f existing technlgy. The acquirer r the builder claims the R&D Tax Incentive fr expenditure that is nt n eligible R&D activities, r fr expenditure which is expressly excluded. TA2017/2 prvides examples f cases where ineligible activities r expenditure was claimed sme examples are prvided belw (please refer t the Taxpayer Alert fr the cmplete list): The activities are nt experimental but rather invlve slving issues by applying existing knwledge r methdlgies and a suitably qualified and cmpetent prfessinal in the building and cnstructin industry culd have knwn r wrked ut the utcmes withut cnducting an experiment. Fr example, using and applying existing (even if they are quite new) building materials, designs, prcesses r mdelling techniques t the lcal cnditins r custmer requirements. The activities are undertaken by the builder in the rdinary executin f the cnstructin cntract and are nt undertaken fr a significant purpse f generating new knwledge. The expenditure is specifically excluded frm the R&D Tax Incentive, n the basis that it is incurred t acquire r cnstruct: a building r part f a building, r an extensin, alteratin r imprvement t a building. The expenditure included in the calculatin f the R&D Tax Incentive is nt fr amunts incurred n eligible R&D activities; fr example prductin csts f prducts sld t the market in the rdinary curse f business. The activities are cnducted under cntract fr the acquirer r wner f the building, nt fr the builder itself, resulting in activities nt cnducted n the builder's wn behalf. Cnsequently, the expenditure incurred by the builder may nt be at risk, as is required under the legislatin. TA20017/3 Claiming the Research and Develpment Tax Incentive fr rdinary business activities The ATO and AusIndustry are reviewing arrangements f cmpanies claiming the R&D Tax Incentive where sme (r all) f the expenditure that is incurred relates t their rdinary business activities and nt t eligible R&D activities. The types f arrangements under review exhibit sme r all f the fllwing features: A cmpany registers ne r mre activities fr the R&D Tax Incentive. PwC Page 2

3 Sme r all f the activities registered are bradly described and nn-specific. Fr example, prjects may be registered instead f the specific activities undertaken. Sme r all f the activities registered are rdinary business activities that are nt eligible fr the R&D Tax Incentive. Sme r all f the activities were undertaken in the curse f their rdinary business activities and recharacterised as R&D activities at a later time. The cmpany claims the R&D Tax Incentive fr expenditure that is nt n eligible R&D activities. TA2017/3 prvides examples f cases where ineligible activities r expenditure has been claimed sme examples are prvided belw (please refer t the Taxpayer Alert fr the cmplete list): N R&D activities are being cnducted at all; nly ineligible rdinary business activities are being cnducted. The scpe f claimed activities includes a mixture f eligible R&D activities and ineligible rdinary business activities. R&D activities which were being carried n have transitined int rdinary business activities but claims fr the R&D Tax Incentive are still being made. Activities may nt be eligible fr the R&D Tax Incentive because their purpse is nt sufficiently cncerned with the generatin f new knwledge. Expenses included in the calculatin f the R&D Tax Incentive claim are nt fr amunts that relate t eligible R&D activities, fr example, rdinary prductin csts f prducts sld t the market in the rdinary curse f business. Expenditure is being claimed under the R&D Tax Incentive even thugh n R&D activities are being cnducted. Expenditure is being apprtined between R&D activities and ineligible business activities in an unreasnable manner. TA2017/4 Claiming the Research and Develpment Tax Incentive fr agricultural activities The ATO and AusIndustry are reviewing the arrangements f entities claiming the R&D Tax Incentive in respect f agricultural activities where sme (r all) f the expenditure incurred is n activities which are nt eligible R&D activities. TA2017/4 extends the cncerns f TA2015/3 in relatin t bradacre farming and identifies cncerns that ther entities engaged in agricultural activities, such as thse perating rchards, vineyards, live grves, frestry peratins and fibre grwing businesses, may be inapprpriately claiming the R&D Tax Incentive under similar circumstances. The types f arrangements under review exhibit sme r all f the fllwing features: An agricultural business is being carried n, ften by an entity that is nt eligible fr the R&D Incentive, fr example a family trust. The peratrs f the agricultural business are apprached by a prmter/r&d cnsultant advising that the farming activities being carried n are eligible fr the R&D Tax Incentive. Where necessary, a new special purpse R&D cmpany may be incrprated in rder that the activities are cnducted by an entity that is able t claim the R&D tax ffset. A cmpany registers ne r mre activities fr the R&D Tax Incentive. The registered activities invlve the applicatin f farm prducts r practices acrss all r a significant part f a farm r farms. Sme r all f the registered activities have the character f rdinary farming activities whse main purpse is the prductin f crps. The cmpany claims the R&D Tax Incentive fr expenditure that is nt n eligible R&D activities. PwC Page 3

4 TA2017/4 prvides examples f cases where ineligible activities r expenditure has been claimed sme examples are prvided belw (please refer t the Taxpayer Alert fr the cmplete list): The activities frm part (r all) f the entity's rdinary business activities, such as the prductin f agricultural gds, and are nt fr the purpse f generating new knwledge r fr the dminant purpse f supprting cre R&D activities. The activities invlve the applicatin f established prducts and existing methdlgies and a cmpetent prfessinal in the field culd have knwn r wrked ut the utcmes withut cnducting an experiment. Fr example, applying different irrigatin r pruning methds, cmmissining new equipment r applying sil imprvers in different cncentratins. The activities are nt experimental and are nt undertaken t prve a hypthesis right r wrng. This is evidenced by the scale f the activities which is disprprtinate with the scale f any data cllectin, bservatin and evaluatin. The activities are replicated acrss several farms t test the suitability n different sil types and the activities invlve prducts and techniques that are knwn t wrk and are nt fr the purpse f develping new knwledge. Expenses included in the calculatin f the R&D Tax Incentive claim are nt fr amunts that relate t eligible R&D activities; fr example, rdinary prductin csts f prducts sld t the market in the rdinary curse f business. Other specific cncerns raised in the Taxpayer Alert relate t: Whether the activities are being cnducted by the cmpany n its wn behalf r fr the entity carrying n the agricultural business. Whether arrangements between related entities are cnducted n an arm's length basis. Whether amunts billed t the R&D cmpany by related entities are paid. Whether the dcumentatin between related entities adequately demnstrates wh is undertaking the activities, wh has paid fr the activities and wh benefits frm the results f the activities. TA2017/5 Claiming the Research and Develpment Tax Incentive fr sftware develpment activities The ATO and AusIndustry are reviewing the arrangements f cmpanies claiming the R&D Tax Incentive n sftware develpment prjects where sme (r all) f the expenditure incurred is n activities which are nt eligible R&D activities. The types f arrangements under review exhibit sme r all f the fllwing features: A cmpany undertakes a sftware develpment prject that invlves ne r mre f the fllwing: develping new sftware, mdifying, custmising r upgrading existing sftware, and acquiring and mdifying ff-the-shelf sftware. The sftware develpment prject includes ne r mre f the fllwing: undertaking activities that use existing sftware develpment knwledge and expertise t achieve the required technical utcmes, undertaking activities that invlve business risk rather than technical uncertainty, undertaking activities t replace manual wrk prcesses using sftware technlgies that are available in the market and adapted t the requirements f the cmpany, and using existing sftware technlgies as they were intended t be used. Sme r all f the registered R&D activities are bradly described and nn-specific. Fr example, they may describe prject bjectives r business and system requirements that the cmpany is seeking t design and implement. All f the prject, r a substantial part f it, is registered as R&D activities. PwC Page 4

5 The cmpany includes the whle, r a large prprtin, f their expenditure n the sftware develpment prject in the calculatin f their R&D Tax Incentive claim. TA2017/5 prvides examples f cases where ineligible activities r expenditure has been claimed sme examples are prvided belw (please refer t the Taxpayer Alert fr the cmplete list): The sftware develpment prject was registered n a whle f prject basis, withut distinguishing eligible R&D activities frm ineligible activities. Fr example, develping and rlling ut a new nline custmer platfrm may be incrrectly identified as a single eligible R&D activity. The activities d nt have the purpse f generating new knwledge. The purpse f generating new knwledge must be substantial enugh t characterise the activity as being cnducted fr that purpse. There is n clearly identified technical uncertainty being addressed by the activity. The sftware develpment lifecycle can be cmplex and highly technical. While this cmplexity pses risks, it des nt mean that all activities invlve a specific technical knwledge gap that requires the frmulatin f a hypthesis and the undertaking f experimental activities t test that hypthesis. Prject management, cmmercial r ecnmic risks are mistaken fr technical risks. The activities invlve the purchase f 'ff-the-shelf' sftware and subsequent mdificatin t integrate it int the existing envirnment. Mst r all f the activities invlve the applicatin f existing knwledge and expertise rather than the generatin f new knwledge thrugh experiments. Expenditure incurred in acquiring, r in acquiring the right t use, technlgy cannt be claimed as a ntinal deductin. The expenditure included in the calculatin is nt fr amunts that are incurred n ne r mre eligible R&D activities; fr example prductin csts f sftware sld t the market in the rdinary curse f business. Expenditure is incurred n R&D activities that have, t a significant extent, been 'cnducted fr' anther entity. Where the cmpany undertaking the activity is recmpensed by anther entity under a cntract, the expenditure may als nt be at risk as required by legislatin. Expenditure is claimed twice, that is, it is claimed as a ntinal deductin under the R&D tax incentive and als as an actual deductin in the calculatin f taxable incme. The takeaway In light f the Taxpayer Alerts, if yu feel that yur previus r current R&D Tax Incentive claims are impacted, please reach ut t PwC. We als recmmend yu review yur internal R&D gvernance and ensure all prcesses are accurate, cmpliant and up t date. This includes yur crprate gvernance plicies, the prcedures in place t ensure claims are reviewed, the knwledgeable technical persnnel, and recrd keeping. Let s talk Fr a deeper discussin f hw these issues might affect yur business, please cntact: Richard Gregg, Brisbane richard.gregg@pwc.cm Amanda Gell, Perth amanda.gell@pwc.cm Sphia Varelas, Melburne sphia.varelas@pwc.cm Imelda Alexpuls, Adelaide imelda.alexpuls@pwc.cm Sandra Bswell, Sydney sandra.bswell@pwc.cm 2017 PricewaterhuseCpers. All rights reserved. In this dcument, PwC refers t PricewaterhuseCpers a partnership frmed in Australia, which is a member firm f PricewaterhuseCpers Internatinal Limited, each member firm f which is a separate legal entity. This publicatin is a general summary. It is nt legal r tax advice. Readers shuld nt act n the basis f this publicatin befre btaining prfessinal advice. PricewaterhuseCpers is nt licensed t prvide financial prduct advice under the Crpratins Act 2001 (Cth). Taxatin is nly ne f the matters that yu need t cnsider when making a decisin n a financial PwC prduct. Yu shuld cnsider taking advice frm the hlder f an Australian Financial Services License befre making Page a 5 decisin n a financial prduct. Liability limited by a scheme apprved under Prfessinal Standards Legislatin.