The DISR and ATO will continue their strong focus on the integrity of the R&D Tax Incentive right across FY 2026-27. If your claim involves any of the following, it might be worth giving this one a read.
While every R&D claim is assessed on its own merits, the following areas have remained in the sights of regulators in recent years. Take this as your sign to get the right advice and pay attention to your documentation and supporting evidence.
1. Software development activities
Software remains one of the most closely reviewed sectors under the R&D Tax Incentive. And the message to businesses is to ensure that eligibility is assessed at the activity level rather than at the project level.
This means R&D tax incentive can only be claimed on particular components of the software development process that involved experimentation.
The ATO and DISR will also look for evidence that a project involved genuine technical uncertainty, systematic experimentation and the creation of new knowledge—rather than just solving a commercial problem.
For instance, the new application you developed may meet all other eligibility criteria, but will still be deemed ineligible if it was developed exclusively for internal admin use.
Based on the conversations our team has with clients every day, we find that many businesses are still not aware of this.
2. 'On own behalf' arrangements
One of the most misunderstood eligibility requirements is whether R&D is being conducted on your own behalf.
When reviewing ‘on own behalf’ arrangements, the ATO and DISR consider factors such as who controls the project, who bears the financial risk, and who ultimately owns or can commercially exploit the resulting intellectual property.
For instance, if you're developing a solution primarily for a customer, parent company or another related entity, regulators may question whether your business—not someone else—is the real beneficiary of the R&D.
Conversely, when you carry out R&D activities, it is possible for a parent company to also benefit from the output. While you don’t have to be the sole beneficiary as the R&D claimant, you do have to show that your organisation truly benefits from the output of the claimed activity.
Where contractual arrangements contradict the principles above, otherwise legitimate R&D activities may not qualify for the incentive.
3. Foreign-owned R&D
Claims involving overseas parent companies or multinational groups often receive additional attention because of the complexity surrounding ownership, control and benefit.
Simply undertaking R&D in Australia for a foreign-related entity doesn't automatically make expenditure eligible.
Businesses should ensure their contractual arrangements clearly demonstrate who is conducting the R&D, who owns the results, who controls the activities and whether the relevant legislative requirements have been satisfied.
For multinational groups, it's particularly important that legal agreements reflect the commercial reality of how the R&D is being undertaken.
4. Expenditure eligibility calculations
Even where R&D activities are eligible, the associated costs may not always be eligible.
The ATO continues to review whether businesses have correctly identified and apportioned expenditure relating specifically to eligible R&D activities.
Common issues include claiming costs that relate to ordinary business operations, acquiring existing technology, or using unreasonable methods to allocate overheads between eligible and non-eligible activities.
Maintaining a clear methodology for calculating eligible expenditure is often just as important as demonstrating the R&D itself.
This is where R&D advisors with special taxation knowledge and visibility of your holistic tax footprint can be really valuable.
5. Adequacy of supporting documentation
Strong documentation remains one of the biggest differentiators between claims that withstand regulatory scrutiny and those that don't.
The ATO expects businesses to maintain detailed, contemporaneous time-tracking for both employees and sub-contractors to show what activities were undertaken when, and how the expenditure relates to those activities.
In the eyes of R&D tax incentive regulators, a simple invoice by a contractor is proof of payment, not proof that R&D was conducted.
The invoice should include a detailed breakdown of services rendered or a breakdown of their timesheet.
General one-line descriptions of services or simply saying 'Consulting services' will be deemed insufficient evidence.
Secondly, attempting to reconstruct evidence after the fact is challenging and unlikely to hold up on its own, highlighting the importance of having good documentation processes set up at the very start of the project.
Good records don't just make the annual process easier; they also provide confidence that your claim can be defended if questioned.
Final thoughts
Rather than being discouraged by the DISR and ATO’s increased and continued scrutiny, businesses should take the time to understand the requirements and adjust their R&D tax incentive approach accordingly.
It can be argued that getting good R&D advice is invaluable in FY27.
Working with an R&D advisor can help you:
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Set up good documentation processes at the start of the process to avoid last minute scrambles.
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Identify the specific parts of your project that involve genuine technical uncertainty.
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Articulate how you created net new knowledge using systematic experimentation.
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Correctly identify and apportion expenditure relating to eligible R&D activities.
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Ensure that the legal agreements reflect the commercial reality of foreign owned and ‘on own behalf’ R&D activities.
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Ensure adequacy of supporting documentation.
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Identify potential risks early and maximise the strength of your application.
Need guidance?
Our R&D specialists have deep expertise on everything covered in this article and work with Australian businesses across a range of industries to assess eligibility, strengthen documentation, and prepare defensible R&D claims.
If you want more information on anything related to R&D tax incentives or have specific questions, email us here.
This article is intended to provide general information only and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances and assumptions, and its accuracy may be affected by changes in laws, regulations or market conditions. Accordingly, neither Azure Group Pty Ltd, nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.
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