Australia: ATO provides clarity on R&D tax incentive integrity rules

On 27 October 2023, the Australian Taxation Office (ATO) released a notice where it clarified the application of integrity rules for the R&D Tax Incentive.

The identified issues with the application of some R&D program integrity rules are:

  • R&D expenditure to associates
  • conducted for
  • aggregated turnover
  • overseas expenditure
  • expenditure not at risk

Aggregated turnover

  • To qualify for the refundable R&D tax offset, the R&D entity’s aggregated turnover must be below $20 million. If the turnover exceeds $20 million, they will be eligible for the non-refundable R&D tax offset.
  • R&D entities, regardless of their aggregated turnover, are eligible for the non-refundable R&D tax offset if they are 50% controlled by exempt entities.

R&D tax offset for expenditure

Under the R&D tax incentive, you can only obtain an R&D tax offset for expenditure incurred to an associate when that amount is paid. If you do not pay the amount until a later income year, you can choose to do either of the following:

  • claim a deduction under a normal income tax provision if that provision applies, for example, the general deduction provision, section 8-1 of the ITAA 1997, for the income year in which the amount was incurred
  • claim a notional R&D deduction in the income year you make the payment.

Taxpayers can’t notionally deduct expenditure under the R&D tax incentive if the . Expenditure is not at risk to the extent that when it’s incurred, the R&D entity could reasonably be expected to receive an amount of consideration:

  • as a direct or indirect result of the expenditure being incurred (the nexus to expenditure test)
  • regardless of the results of the activities on which you incur the expenditure (results test).

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