Media coverage of AusIndustry reviews
Periodically, there is media coverage (sometimes considerable) concerning AusIndustry reviews (and sometimes reviews by the Australian Tax Office) of R&D Tax Incentive applications.
Increased compliance activity in the past has often been triggered by a ‘blow-out’ in the cost of the R&D Tax Incentive program. A key reason for this blow-out has been an abuse of the program by some consultants (big and small) who have produced non-compliant ineligible applications for their clients. For the most part, these consultants have closed down or have voluntary agreements with the ATO to no longer provide any further R&D Tax Incentive services.
However, the previously aggressive approach to reviews by the AusIndustry and the ATO has ‘softened’ in recent times (see R&D tax scheme crackdown has eased) with a more conciliatory approach being taken. Several factors contributed, including a report from the Australian Small Business and Family Enterprise Ombudsman.
What is AusIndustry checking?
AusIndustry ‘reviews’ each submitted application. However, is most cases this review will be cursory. Did you submit the application on time? Is the application complete? Do the activity dates look correct? Basically, this is an administrative review.
In most cases, AusIndustry will not check the technical detail of the claimed activities – AusIndustry will accept that the provided information is correct.
However, in some cases, AusIndustry will examine the claimed R&D activities in more detail. The term ‘review’ generally refers to these more detailed AusIndustry reviews.
Why do AusIndustry reviews happen?
The R&D Tax Incentive is a self-assessment program, which means applicants are responsible for ensuring their claimed R&D is eligible and compliant with the R&D Tax Incentive requirements. In fact, AusIndustry expects that you will have formally assessed your application as compliant before you submit it to AusIndustry. Consequently, AusIndustry often does not typically check applications in detail when they are submitted (see first-level reviews below),
An AusIndustry review is really an audit – AusIndustry is checking (sometimes quite carefully) that the application complies with the R&D Tax Incentive requirements. In the worst-case scenario, AusIndustry can then review previous applications (up to four years).
R&D Tax Incentive applications can be randomly selected for a review – nothing in the application triggered the review. You were just unlucky.
Reviews can also be targeted – something in the application raised concerns. Also, the applicant could be on a review list because of the consultant they used. If a consultant has been deemed guilty of systemic submission of non-compliant applications, AusIndustry or the ATO may (as a matter of course) review all applications by that consultant.
This is another reason for choosing a reliable R&D Tax Incentive consultant with a solid track record. See Using an R&D Tax Incentive consultant.
When can reviews occur?
Reviews can occur during AusIndustry registration (before you receive your R&D registration number) or afterwards – even after you have received your refund. In fact, a review can occur some years after your application was submitted.
The pre-registration review is to identify applications that have a ‘high risk’ of non-compliance. This generally means your application has triggered a ‘warning’ in AusIndustry – it isn’t normally the result of AusIndustry examining the detail of your claimed R&D.
The take-home message is that receiving your refund doesn’t mean that your application has been reviewed or approved by AusIndustry.
In fact, AusIndustry never approves applications as such – they are always subject to review.
What sort of reviews are there?
AusIndustry conducts the follow types of reviews:
- First level review (pre-registration)
- Second-level review
- Desk review
- Activity review
- Large company review
A first-level review is the same thing as a pre-registration review – AusIndustry is just looking for high-risk applications.
In a second-level review, AusIndustry will have a more detailed look at your application. This is usually behind the scenes and may take place without you being aware of it. AusIndustry will look at your history in the R&D Tax Incentive as well as examining the claimed R&D in your application. This sort of review normally occurs after your registration number is issued.
If issues are identified with your application that aren’t resolved in the second-level review, then a desk review will follow.
If AusIndustry conducts a desk review, they will provide you with a list of questions, concerns or a request for additional information. AusIndustry will expect a written response, usually within 30 days. AusIndustry may or may not request detailed supporting documentation at this stage.
An activity review (field review) will involve an onsite meeting with the AusIndustry reviewer and will be much more thorough, often taking some hours. AusIndustry will definitely examine supporting documentation in a field review.
The reviews discussed above are merely the first step in a potentially long process. If the result of the field review is unsatisfactory, then the review will be escalated further:
- Certificate issued by AusIndustry
- Administrative Appeals Tribunal
Ultimately, you may be directed to repay the R&D Tax Incentive benefit, possibly with penalties. Add to that your time, time of your staff and legal fees (which can be large) – it’s not a place you want to be. Even if you win, it can be expensive and stressful. You also want to be very sure of your position before you allow the review to escalate as far as the Administrative Appeals Tribunal Your application is likely to be scrutinised by experts brought in by AusIndustry, and any deficiency in your compliance will be exposed, especially in the documentation. For example, see Royal Wins Pty Ltd and Innovation and Science Australia.
How can you avoid reviews?
There is no way of guaranteeing that you will never be audited – no matter what you do, you can always be selected for a random review, but there are several things that you can do to greatly reduce the chances of being reviewed. AusIndustry publishes guidelines on compliance, which are a good resource for you. See The R&D Tax Incentive – Compliance Readiness.
It is not enough that your claimed R&D is eligible and compliant – your R&D Tax Incentive application to AusIndustry has to make that obvious to AusIndustry. The easiest way of achieving that is to engage a skilled R&D Tax Incentive consultant. They will ensure that your claimed R&D is demonstrably compliant. This really comes into its own if you are subject to a second-level review – your application should stand up to a second-level review.
If you are using a skilled R&D Tax Incentive consultant, desk review reviews and field reviews should be rare, and you may never experience one. If your consultant is not so skilled, a second-level review will invariably progress to a desk review because AusIndustry will not understand your application, much less see how it is compliant.
Advance / Overseas Findings
You can ask AusIndustry for a formal determination on the eligibility of your R&D activities before you claim them. This is called an Advance Finding and is entirely optional. You still need to register your R&D with AusIndustry in the usual way, but you have certainty that your R&D is compliant (an Advance Finding is binding on AusIndustry).
An Overseas Finding is similar and is where you ask AusIndustry to assess the eligibility of R&D conducted overseas that you intend to claim. An Overseas Finding is mandatory before you can claim R&D activities conducted overseas.
The best strategy is to submit a well-written and fully compliant application upfront. This is the strategy followed by TechAbstract. We draft our R&D Tax Incentives applications to stand up to a second-level review. Unfortunately, some consultants gamble on applications not progressing beyond a first-level review.
Many R&D Tax Incentive consultants are not confident (or competent) in dealing with a review, and almost certainly will have had limited experience with reviews.
Recently, clients have been referred to TechAbstract by their accountants and lawyers after being abandoned by their existing R&D Tax Incentive consultants during a review, by AusIndustry or the ATO.
These applicants were placed in the challenging situation where they needed to justify their application, as the starting position of AusIndustry (or the ATO) was that the application was non-compliant. The onus was on the applicant to prove otherwise.
Responding to a review requires specialist knowledge of the R&D Tax Incentive legislation, an injection of STEM (Science, Technology, Engineering and Math), and possibly a tax lawyer. TechAbstract are experts in the R&D Tax Incentive legislation, have extensive R&D experience and possess solid STEM qualifications. See Why TechAbstract?
To properly support clients under review/audit TechAbstract established in February 2019, a specialist division TechCheck to best serve and support clients in these circumstances.