Australia

Details

  • Service: Tax, R&D Incentives
  • Type: Regulatory update
  • Date: 1/05/2014

Tax Insights

KPMG's analysis of tax issues and developments.

James Edwards

James Edwards
Director, Tax

+61 8 9263 7216

jedwards1@kpmg.com.au

Tier Toys case: a cautionary tale for R&D tax claimants 

by James Edwards, R&D Incentives Specialist

The Administrative Appeals Tribunal (AAT) recently affirmed the Commissioner’s decision to disallow a large portion of a taxpayer’s Research and Development (R&D) claim under the R&D Tax Concession. In 2007, Tier Toys claimed a refundable R&D tax offset of $369,999.90 for expenditure on an R&D project under the R&D Tax Concession. Upon review, the Commissioner reduced this to $24,916.50 and imposed a penalty for recklessness of $172,541.65.

The disputed expenditure included mould making costs, prototype costs, travel, and legal and consultancy fees amongst others, where the primary issue considered by the AAT was whether the costs were 'directly in respect of' eligible R&D activities.

 

Key Observations

Most of the key findings are equally relevant to the R&D Tax Incentive:

 

  • high value R&D claims are likely to receive greater scrutiny (Tier Toys R&D expenditure was only just shy of the maximum allowed at that time). Even when a company is in an intensive R&D phase, R&D expenditure does not extend to all expenditure of the business. There are limitations and exclusions which must be observed (such as. marketing, construction of assets, etc.)
  • successful receipt of a R&D tax offset is not proof of entitlement. Regulators can and do actively review R&D claims, sometimes years after the R&D tax offset has been received. Properly scoped and documented R&D claims, along with the retention of those records, is essential.

 

Correctly identifying R&D activities and justifying R&D expenditure at the time will help protect claimants.

 

The Tier Toys case highlights the importance of retaining accurate documents that directly relate to both eligible R&D activities and the nexus to claimed expenditure at the time of undertaking the activities.

 

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