The Australian Taxation Office has warned tax advisers and businesses about common errors in research and development tax incentive claims, flagging issues ranging from misclassifying ordinary business activities as eligible R&D work to inappropriate overhead apportionment and the use of aggressive schemes that may attract fraud penalties. 

RF Report

The Australian Taxation Office (ATO) has issued a notice to advisers and taxpayers on 14 May 2026 outlining its key areas of concern regarding research and development (R&D) tax incentive claims. The ATO has also updated its guidance on ensuring R&D claims are made correctly, including a list of specific areas of concern.

These are:

  • Ordinary business activities vs eligible R&D activities;
  • Apportionment of overheads;
  • R&D activities delivered by associated entities;
  • Expenditure that isn’t at risk;
  • R&D activities conducted overseas by related foreign entities;
  • Record keeping;
  • Concerning practices, and
  • Fraud.

What’s on the ATO’s radar for R&DTI claims?

With many companies preparing to make research and development tax incentive (R&DTI) claims, now’s a great time for tax professionals to ensure they’re across the areas of concern the ATO is focusing on this tax time. That way, clients’ R&DTI claims can be kept airtight and won’t result in amendments and repayments down the track.

Tax professionals should ensure they:

  • advise and educate clients on program eligibility requirements
  • rigorously examine accounting data to ensure only eligible R&D deductions are claimed
  • advise clients to identify and document a distinction between business-as-usual activities and R&D expenses
  • let clients know that receiving a receipt for registering R&D activities with the Department of Industry, Science and Research (DISR) doesn’t mean these activities are approved
  • check deductions aren’t being claimed for payments to associates that are incurred but not paid.

Report dodgy advice

The ATO values the role of tax professionals in supporting clients. But as tax time edges closer, there is concern about tax professionals and others providing tax advice who aren’t licensed, whose practices put both their clients and the integrity of the R&DTI at risk. Aggressive sales tactics remain on the ATO’s radar, and the support of the tax community is needed to stamp out this kind of behaviour.

If poor or misleading R&DTI advice is being promoted, tax professionals are encouraged to come forward and make an anonymous tip-off. This information helps the ATO take action and safeguard the integrity of the system for everyone. The ATO works closely with the Tax Practitioners Board to bring serious consequences to tax agents who mislead their clients.

Areas of concern

The areas of concern include:

Ordinary business activities vs eligible R&D activities

The ATO  and DISR have observed issues with R&DTI claims that include expenditure relating to ordinary business activities and are not eligible R&D activities. This includes where:

  • no R&D activities have been undertaken
  • the registered activities include a mixture of eligible R&D activities and ineligible ordinary business activities
  • the R&D activities being carried out have transitioned into ordinary business activities
  • the R&D activities are not concerned with the generation of new knowledge
  • the R&D activities do not involve the application of the scientific method (proving or disproving a hypothesis through experiments)
  • the R&D activities address commercial being rather than technical risks.

For more information, see TA 2017/3 Claiming the Research and Development Tax Incentive for ordinary business activities.

Apportionment of overheads

Apportionment methodologies may be used in some instances, but the company can only claim notional deductions under the R&DTI to the extent that the expenditure has been incurred on eligible R&D activities. For example, it may be appropriate to use R&D salary over total staff to apportion personnel costs, but not for utilities. It is commonly observed that the apportionment methodologies used by claimants can result in an unreasonable apportionment of overhead expenses to R&D activities over non-R&D activities.

The company must use a reasonable basis of apportionment. It must reflect the extent to which the expenditure has been incurred on R&D activities if there is no single apportionment method that can be used to apportion expenditure between R&D and ordinary business activities on a fair and reasonable basis.

The appropriate methodology to apportion an expense depends on the nature of the expense. The company should document the methodology adopted and the rationale for that methodology.

R&D activities delivered by associated entities

The ATO have observed claims that incorrectly include notional deductions in relation to R&D activities delivered by associated entities, where the amount has not been incurred or paid. Notional deductions can only be claimed in relation to expenditure incurred to associates of the company where the amount has also been paid.

The ATO have also seen incorrect claims where the R&D activities are not conducted for the claimant, but in substances are conducted for (or to a significant extent) for the associated entity.

For more information see R&D expenditure incurred to associates and Taxpayer Alert TA 2023/4 R&D activities delivered by associated entities.

Expenditure that isn’t at risk

Expenditure that isn’t at risk cannot be claimed. For example, if there is a guaranteed return (under a financing arrangement) on the expenditure, or an indemnity covers it, it isn’t at risk and cannot be claimed. Expenditure isn’t at risk if when it is incurred if the claimant or their associate can reasonably expect to receive an amount of consideration:

  • as a result of the expenditure being incurred
  • irrespective of the results of the related activities.

For more information, see Taxation Ruling TR 2021/5 Income tax: research and development tax offsets – the ‘at risk’ rule.

R&D activities conducted overseas by related foreign entities

The ATO has identified incorrect R&DTI claims where Australian companies have claimed the tax offset for expenditure incurred on R&D activities conducted overseas by foreign related entities. An Australian company can’t claim for expenditure incurred on overseas R&D activities if they weren’t conducted for them (and instead conducted for the foreign related entity).

Note that if the R&D activities are conducted for the Australian company, the offset can’t be claimed for expenditure that is not at risk.

Record keeping

It is a requirement that companies maintain contemporaneous records to support their R&D claims. This view is supported by AAT Cases (Tier Toys Limited v FC of T [2014] AATA 156 and Ozone Manufacturing Pty Ltd v FC of T [2013] AATA 420). In these cases, contemporaneous records were not maintained so the taxpayer could not demonstrate that the expenditure was anything more than normal business expenses.

The taxpayer’s business records must be sufficient to verify the:

  • amount of the expenditure incurred on R&D activities
  • nature of the R&D activities
  • relationship of the expenditure to the activities.

Self-assessment requires evidence that substantiates that each and every part of the legislative requirements are met. A taxpayer can’t succeed in establishing those requirements in the absence of detailed documentation recording the process of each activity as it develops.

The taxpayer has the responsibility to ensure that reasonable methods have been used to differentiate between expenditure on eligible R&D activities and other activities.

Documents created after the fact will generally not be adequate on their own without some contemporaneous records (that is, records of activities at the time they were conducted).

Concerning practices

Registered tax agents and advisors have an important role to play in providing R&D advice to taxpayers. However, we have concerns with some of the advice being promoted.

Concerning practices include:

  • cold calling taxpayers and advising them that their business activities are eligible R&D activities
  • using late registrations to amend claims to access the R&D refundable offset to provide funding for companies in financial difficulties
  • charging excessive commissions that are a large percent of the refundable R&D tax offset
  • advising companies to make incorrect R&D tax incentive claims. They may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009.

Promoter penalty laws may apply under Division 290 of Schedule 1 to the Taxation Administration Act 1953 for promoters of schemes to access the R&D tax incentive for ineligible activities.

Fraud

While most taxpayers and advisers generally do the right thing, the Australian Taxation Office (ATO) and DISR are working closely to identify those who may be involved in aggressive R&D arrangements. A coordinated approach is being taken to address these behaviours to ensure the integrity of the R&DTI program.

These arrangements:

  • are inconsistent with the requirements of the R&D regime
  • may have a feature of tax avoidance
  • may be fraudulent.