Small business hit by Tax Office delays on R&D payments

Small businesses are experiencing long delays in receiving payments for research and development from the Australian Tax Office and confusion continues to surround the new rules governing the payments.

CPA Australia is warning of delays of a month-and-a-half on payments and the ATO had admitted it currently has 400 company returns with R&D claims on hand that are more than 50 days old.

The delays come as the Business Tax Working Group recommends scrapping the R&D tax incentives all together.

The tax incentive scheme for R&D was effective from July 1, 2011 but the financial year ending June 30, 2012 was the first year the incentive could be claimed, leading to the delayed claims.

A spokesperson for the ATO told SmartCompany it has finalised 49% of tax returns and amendments that included an R&D offset within their relevant service standard.

“Tax returns which include a claim for the R&D tax offset need to be processed manually and most claims contain elements requiring verification with the taxpayer or their representative,” the spokesperson said.

“There will be some higher risk claims that require further validation before a refund is issued.

“As required by changes to the tax law, from June 27, 2012 those companies are being contacted within 30 days of lodgment if the refund will be delayed pending further validation of the details provided.”

The ATO is targeting taxpayers who make excessive incremental claims in the final year under the R&D tax concession; lodge large amendment claims that cannot readily be substantiated; fail to apply the new dominant purpose exclusion test to supporting activities; claim refundable offsets to which they are not entitled; and do not correctly apply feedstock provisions.

“Our validation and integrity processes have been designed to ensure that we reduce the impact on the majority of company tax returns and target higher risk claims,” the spokesperson said.

Paul Drum, CPA Australia head of policy, told SmartCompany the ATO’s scrutiny of transfer pricing, the general anti-avoidance rule and R&D had got “tighter and tighter”.

“Part of it is to stop revenue leakage and part of it is government driven to get a budget surplus so [the ATO] may have been encouraged to go harder,” says Drum.

“R&D is an area there has been leakage in the past. We have heard there is delays but we expect it is because their integrity and monitoring of this has been tightened up.

“There may be other imperatives that mean they are being more assiduous in their checking rather than doing a quick turnaround.”

Guidance on how the ATO would apply the new R&D rules was expected in May but has been delayed until August, which Drum says is also problematic for business.

“People actually don’t know what they are meant to be claiming. There has been some confusion, the rules have been tightened but the guidance is not out yet,” he says.

Stephanie Caredes, tax counsel at the Tax Institute, also raised concerns about the delay in publishing guidance.

“We would encourage the ATO to provide guidance to taxpayers as soon as they can which would allow taxpayers to determine if they are eligible,” she says.