Because two agencies administer the incentive, a claim can be checked twice and in two ways. The Department of Industry, Science and Resources examines whether the registered activities were eligible R&D activities and issues findings that bind the ATO. The ATO reviews whether the expenditure was incurred on those activities and whether the offset was calculated correctly. This page covers both; the ATO and department reviews page goes into current practice in more depth.
How reviews start
Department examinations. The department can examine a registration at any time after it is made, including after the ATO has processed the offset. Selection is risk-based and draws on the registration itself: activity descriptions that read as whole projects or ordinary business work, sectors the department has flagged in guidance, large or fast-growing claims, and consultants with a history of poor registrations. An examination begins with a letter requesting information about specified activities.
ATO reviews. The ATO can review a return within the amendment period, generally 4 years, and may hold a refund while it checks a claim. Its R&D reviews start with a request for the expenditure records behind the schedule, and may run alongside a department examination or be referred to the department where eligibility of activities is in question.
What is requested
| Reviewer | Area | Typical requests | What satisfies them |
|---|---|---|---|
| Department | Core activities | The state of knowledge, the hypothesis, the experiments, the observations and conclusions, and the new knowledge generated | Dated technical records showing each element |
| Department | Supporting activities | How each supports a core activity; dominant purpose where production or excluded activities are involved | The activity register and purpose reasoning |
| Department | Who did the work and where | Staff, contractors, locations, any overseas component | Contracts, timesheets, findings |
| ATO | Notional deductions | Salary apportionments, contractor invoices, associate payment dates, asset use, overhead method | Payroll, timesheets, ledger, contracts |
| ATO | Entity and rate | R&D entity status, aggregated turnover, R&D intensity, A$150 million threshold | Group structure and financial statements |
| ATO | Adjustments | Feedstock, clawback for grants, expenditure not at risk | Sales records, grant agreements, contracts |
Each agency sets a period for the company to respond, and both will meet or speak with the technical staff who did the work.
Responding to a review
- Answer by activity. The department reasons activity by activity. Give each registered activity its own evidence pack in the order of the definition: knowledge gap, hypothesis, experiment, observation, conclusion. Cross-reference the pack to the registration text so the examiner can see that what was registered is what was done.
- Put the technical people forward. The examiner wants to hear from the scientist or engineer, not the consultant who wrote the registration.
- Reconcile the numbers for the ATO. Tie every notional deduction to a ledger entry and every apportionment to a record.
- Concede what cannot be evidenced. Asking the department to vary the registration to remove an activity, or amending the return to reduce the offset, is treated more favourably than defending it to a negative finding.
- Keep the correspondence file. Findings and assessments can be reviewed, and the file is the record. Note every call, including who attended and what was agreed.
Outcomes, penalties and appeals
Findings. An examination ends in a finding that activities were, or were not, eligible, in whole or in part. A negative finding binds the ATO, which amends the assessment to remove the offset on those activities and recovers any refund with interest.
Penalties. Where a claim results in a shortfall, administrative penalties apply as a percentage of the shortfall: 25% for failure to take reasonable care, 50% for recklessness and 75% for intentional disregard, with reductions for voluntary disclosure and increases for obstruction. Shortfall interest charge also applies. Promoters of schemes face separate penalties, and the ATO has pursued R&D consultants under those rules.
Review rights. A company can seek internal review of a department finding within 28 days, and then review by the Administrative Review Tribunal. A taxpayer may object to an assessment within the objection period, generally 2 or 4 years depending on the entity, and may seek review of the objection decision in the Administrative Review Tribunal or appeal to the Federal Court. Tribunal and court decisions on the incentive have turned on whether a hypothesis existed and was tested, and on whether the activities registered were ordinary commercial development.
Illustrative example
Illustrative example. Pilbara Sensing Pty Ltd, a hypothetical company, receives an examination letter about three registered core activities two years after claiming a A$260,000 refundable offset. For two activities the chief engineer's trial logs show hypotheses tested and abandoned, and the department's finding is positive. The third activity, described in the registration as "development of the customer dashboard", has no hypothesis and no experiment, and Pilbara asks to have it removed. The ATO amends the assessment to recover A$40,000 plus interest. Because the company cooperated and disclosed, no penalty is imposed. A company that defended all three to a negative finding could face the same recovery plus a 25% penalty.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.