ATO throws JobKeeper spanner in the works for R&D tax claimants

Companies accessing the R&D tax incentive may be forced to amend their income tax returns to omit wages supported by the JobKeeper program, advisors have warned.

In the latest JobKeeper integrity push to emerge from the Australian Taxation Office (ATO), a draft determination was published earlier this week outlining a prohibition on deducting R&D salaries paid out under the $86 billion wage subsidy scheme.

This means employers will be unable to claim JobKeeper wages under the tax incentive, including in cases where employees spend only a portion of their time on eligible R&D activities, up to the total value of the $1,500 fortnightly payment.

The draft determination has raised eyebrows among tax advisors, particularly because businesses which accessed JobKeeper payments from March 31 to June 30 may need to amend their tax returns for the 2019-20 financial year if they’ve already lodged.

Advisor Jeremy Worthington, who has several clients accessing JobKeeper and the tax incentive, tells SmartCompany the determination is added complexity for small business owners looking to claim R&D expenditure.

“JobKeeper was supposed to be additional — these are extreme circumstances where the government chips in to keep businesses going,” Worthington says.

“Whereas the R&D tax incentive is there to encourage those companies to invest in innovation, new ideas and grow businesses.

“They’re completely different agendas.”

Worthington, who emailed the ATO with a critique of the determination earlier this week, says SMEs and startups rushing to file their tax returns this year to bolster cashflow now risk being punished for lodging in good faith.

“They’re asking companies to have a crystal ball and expect what the ATO is going to decide,” he says.

What’s going on here?

The draft determination references a so-called “at-risk rule” within the Income Tax Assessment Act 1997, which prevents companies from deducting R&D expenditure in cases where a business could “reasonably be expected” to receive consideration, which according to the ATO, includes JobKeeper payments.

“The ATO’s position in the draft determination is that where salary and wages are reimbursed under JobKeeper, companies cannot double dip under the R&D tax offset scheme and get more than 100% reimbursement from Government,” an ATO spokesperson said in a statement.

“Expenditure that is “not at risk” includes expenditure incurred by a company with the expectation of getting something else back for it (such as a reimbursement, refund or other consideration as a result of incurring that expenditure),” the spokesperson said.

So essentially, the ATO is saying wages paid under JobKeeper cannot be classified as “at risk” for the purposes of the R&D tax incentive because the government is paying for it.

Here’s the ATO’s explanation in brief, taken from the draft determination:

“If you pay wages to an eligible employee undertaking eligible R&D activities, the JobKeeper payment is consideration received as a direct or indirect result of the R&D expenditure incurred.

“JobKeeper payments under Division 2 of the Payments and Benefits Rules are receivable regardless of the results of any R&D activities on which the wage (or other) expenditure is incurred.

“There are no eligibility criteria that would link the receipt of JobKeeper payments in any way to the results of the R&D activities that you may be conducting.

“Therefore, to the extent you receive the JobKeeper payment for your paid employees, you are not at risk for the wage expenditure and cannot get a notional deduction,” the ATO said.

The full set of reasoning behind the determination is available on the ATO’s website.

How would this determination apply to businesses?

The ATO proposes a final version of the determination would apply both before and after the date of its issue, meaning JobKeeper payments going back to the start of the program in late-March would be included.

It would cover JobKeeper pay periods between March 31 and June 30, which fall in the 2019-20 financial year, and those pay periods from July 1 to September 27 and beyond, which apply to the current 2020-21 financial year.

This is not the first time businesses accessing the R&D tax incentive have been warned about the retrospective changes in recent months, with the spectre of legislative changes to the entire scheme hanging over claims for the current financial year.

Proposed reforms, which would pare back Commonwealth spending on the R&D tax incentive, are still before parliament, subject to a Senate committee report due to be handed down in August.

Specifically, businesses are unable to claim the portion of wages allocated to R&D activities that are supported by JobKeeper. In practice, this means businesses only need to reduce their R&D deductions to the extent of the wage subsidy payments.

For instance, a JobKeeper worker that spends 75% of their time on eligible R&D activities would be required to reduce their deduction on those wages by three quarters. Any wages paid above and beyond the $1,500 fortnightly subsidy would be deductible as normal.

Could businesses “reasonably expect” JobKeeper payments?

Worthington has urged the ATO to reconsider the retrospective nature of the determination, arguing businesses could not have “reasonably expected” to receive JobKeeper payments until at least the first two weeks of May, when payments began to flow under the $86 billion program.

“Applying it retrospectively against all JobKeeper payments isn’t the right approach,” he says.

While businesses enrolled in JobKeeper from April 20, payments backdated to March 31 when the scheme was first announced by Treasurer Josh Frydenberg.

Worthington argues businesses could not have expected they would be accepted as eligible for JobKeeper, or that they would receive wage subsidy payments, until money began flowing in early-May, and even then, many participants have been audited.

More than 8,000 businesses have been sent letters from the ATO casting doubt over their eligibility for JobKeeper and raising the prospect they may need to undertake repayments.

“It would seem that this level of uncertainty means that ‘reasonable expectation’ is not met with regards to JobKeeper subsidies, the related salary expenditure is at risk when incurred, and can, therefore, be considered as eligible R&D expenditure subject to the normal assessment rules,” Worthington argued in an email to the ATO, seen by SmartCompany.

An ATO spokesperson said companies enrolled in JobKeeper, in most cases, could have reasonably expected to recieve the payment.

“Where a company had enrolled in JobKeeper prior to incurring its salary and wage expenditure, in most cases the company will have reasonably expected to receive the JobKeeper payment,” the spokesperson said.

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