The Australian Taxation Office has put businesses on notice that it will be scrutinising claims for R&D tax incentives after spotting a batch of claims for run-of-the-mill software development activities under the scheme.
The ATO and AusIndustry have sent out an alert to businesses making it clear the taxman will not look kindly on organisations that claim tax offsets for things like bug testing, beta testing or user requirements testing of a new software product.
The R&D incentive scheme allows companies to apply for tax offsets for “experimental” software development activities, which seek to prove or disprove a hypothesis and generate new knowledge.
But the ATO said it has seen too many companies trying to bundle the cost of whole software projects under the incentive scheme, or claim for software activities they think are risky - but still don’t meet the government’s R&D test.
“While most do the right thing, we are seeing some businesses ... and their advisors improperly applying for the tax incentive where the activities and expenditure claimed don’t match with legislative requirements,” ATO deputy commissioner Michael Cranston said.
The ATO warned “it is extremely unlikely that all of the work involved in a software development project will meet the legislative criteria for eligible R&D activities".
"While a project may involve some experimental activities, that does not qualify the entire project as an eligible R&D activity," it said.
For example, a bank might development a new online banking app - based on current knowledge, information and experience about customer needs and the technical capabilities of software, it noted.
While there is a risk customers will still turn up their noses at the product “this risk is commercial in nature only and hence the relevant activities do not constitute eligible R&D activities."
The ATO is urging companies to fess up to any deliberate or accidental over-claims, and to double check what tax agents and consultants might be claiming on their behalf.
Any penalties will be significantly reduced for entities that make a voluntary disclosure, especially for those who own up even before the tax office initiates an audit.
However claims that are found to be deliberately fraudulent can attract criminal sanctions, the ATO added.