Small businesses and startups are being warned to be wary of advisers who claim they can get them a great deal on the research and development tax incentive, after a Queensland business was fined more than $4 million this month for encouraging clients to lodge overstated or ineligible R&D tax incentive claims.
The Australian Taxation Office confirmed on Tuesday it had secured the fines in the Federal Court against a company known as International Indigenous Football Foundation Australia Pty Ltd, and its director, for breaching promoter penalty laws relating to financial services.
The tax commissioner took action against the business alleging that it had been involved in 10 “schemes” that led to eight business clients receiving more than $3 million in refunds through the R&D tax incentive scheme which they were not entitled to.
The company, which is now in liquidation, was found to have encouraged these clients to lodge claims about their R&D activities that made them appear eligible for offsets that they should not have been receiving.
SmartCompany understands some of the eight business clients involved in the case have also been penalised, however, the amount of penalties has not been disclosed. The ATO is now working with these clients to recover the R&D offsets that were wrongly claimed.
“The ATO is continuing to take action to recover the R&D tax incentive amounts which were incorrectly claimed. In addition to paying back money that was claimed incorrectly, penalties have been applied, proportionate to the behaviour and actions of the taxpayers,” a spokesperson for the ATO told SmartCompany.
ATO assistant commissioner Michael Hardy said in a statement the ATO had pursued the case to help stop businesses being “unwittingly” caught up in tax exploitation schemes.
“If you think you have been approached by a scheme promoter or are inadvertently involved in a tax avoidance scheme you should contact us right away,” he said.
The tax office says that since the launch of the R&D tax offset scheme in 2011, $6.1 billion in claims have been received from more than 13,000 Australian businesses.
However, potential rorting of the scheme has been highlighted by the office and the federal government over the past year, with fraudulent R&D offset claims even resulting in prison sentences.
Speaking to SmartCompany, Australian Small Business and Family Enterprise Ombudsman Kate Carnell says this case highlights how vulnerable SMEs are to consultants and advisers promising them deals that are “too good to be true”.
“There are some pretty unscrupulous people running around at the moment, offering deals to small businesses to get them money. This includes R&D grants, as well as promises that they can save them tax dollars by taking a particular action,” Carnell says.
She believes businesses are also being subjected to widespread cold-calling from potentially unscrupulous providers promising them everything from bigger tax refunds to comprehensive web design services. There’s a misconception that a small business can hide behind an adviser if they accidentally do the wrong thing in an area like tax law, but this isn’t always the case, says Carnell.
“The reality is … just because somebody is advising you, doesn’t mean you’re not guilty,” she says.
Take care when engaging a consultant
For those businesses that do want to submit a research and development claim, it’s essential to understand the key elements needed to ensure a claim genuine. According to Lior Stein, managing director of business development at Rimon Advisory, this is an area that too few small businesses have knowledge in.
“The first thing is new knowledge, you need to be filling a gap in the market. The second is experimentation you need to be doing to achieve that,” he says.
Stein says R&D projects “don’t need to be like Elon Musk and a spaceship to the moon”, but they do need to be something new to market, which has a fundamental difference in its development or characteristics compared with other products in the market.
Stein believes many businesses think regulation of R&D tax claims fall outside of the general tax legislation, but companies should take just as much care in compliance for these claims as they do when preparing the rest of their annual tax statements.
He says this area of tax law is complicated, and warns businesses to be wary of any consultants promising they can get the highest rebate possible, or those who don’t ask questions about the technical elements of a project.
“If a consultant is not asking technical questions, that’s one thing,” he says.
“If you’re seeing a quick ‘techinical’ being done and they’re just focusing on the figures [instead of how the project works], well, I don’t see that marrying to what’s needed [for a legitimate claim].”
SmartCompany was unable to contact International Indigenous Football Foundation Australia Pty Ltd or its director prior to publication.