ATO targeting construction R&D claims

The ATO and AusIndustry released Taxpayer Alert 2017/2 in February 2017, which highlighted R&D claims in construction activities as an area of emerging concern. The operators of some affected companies may believe (or have been advised) that their activities constitute eligible R&D activities, however, it was found that:

• Activities claimed did not fit within stringent requirements of the laws that govern the R&D Tax Incentive. Activities claimed as R&D are more ordinary business activities, or business problems that can easily be solved by qualified and competent professionals in the area.
• Expenditure claimed did not relate to eligible R&D activities or may be specifically excluded expenditure. Expenditure claimed may also include unreasonable apportionment between R&D activities and (ineligible) ordinary business activities.
• Taxpayers may not be applying adequate levels of corporate governance and review to the registered activities and claims made for the R&D Tax Incentive

Particular arrangements under scrutiny may contain the following: 

• A contract is entered into between the acquirer of the construction/building service and the builder to construct, extend, alter or improve a building or buildings (construction).
• The contract is a standard construction contract and is not for the provision of R&D services and does not specify that R&D will be carried out by the builder.
• The acquirer or the builder registers one or more activities associated with the construction of the building for the R&D Tax Incentive, identifying the structure or construction techniques as purportedly involving untested or novel elements.
• Some or all of the activities registered are broadly described and non-specific. For example, whole construction projects may be registered rather than the specific activities which are being undertaken.
• Some or all of the registered activities are ordinary construction activities that are directed to fulfilling the requirements of the building or construction contract, or relate to expenditure that is expressly excluded from being taken into account in calculating an R&D Tax Incentive.
• Frequently, the expenditure which is incurred relates to construction methods or techniques that are already known within the building industry, or involve the mere adaptation or integration of existing technology.
• The acquirer or the builder claims the R&D Tax Incentive for expenditure that is not on eligible R&D activities, or for expenditure which is expressly excluded.

 What should companies do?

If you have claimed R&D Tax Incentive in relation to building and construction activities, particularly if it may include one or more of the above arrangements, we recommend that you:

Revisit your R&D registrations to ensure only eligible R&D activities are registered
Revisit your R&D expenditure amounts to ensure only eligible expenditure are claimed
Ensure adequate records are kept to provide evidence of R&D activities registered and expenditure claimed
Seek independent professional advice to identify potential risks in your claims

For further information

• Contact Amanda Tirtadinata on [email protected]; or
• Attend EY Sundowner on 18 October 2017. Topics covered include new taxpayer alerts and case laws, ATO/AusIndustry compliance review process, and best practice corporate governance for R&D claims. 

About the author

Amanda Tirtadinata is a Senior Manager with Ernst & Young Perth Government Grants and Incentives Practice.