Expenditure Not at Risk

For expenditure to be eligible for R&DTI it must be ‘at risk’ at the time the activities are undertaken. That means that if the development was to fail, then some or all of the expenditure could be lost.

If work is being conducted in response to a contract (in the case of a software developer, or a product design company) then if the terms of the contract means that some of the cost of the development will be covered regardless of the outcome (of the experimental activities) then that compensation means the corresponding amount of expenditure is not at risk.

The rules state that the compensation only needs to be ‘reasonably expected’ at the time the activities are undertaken, and the examination of this is usually achieved through the contract of service.

As an example, if a software system is hypothesised to work with a specific data set and that experiment requires the connecting data flows and post-data analysis work to be conducted, then that development would be a supporting activity to the experiment in the target data integration (assuming that the data integration work meets the eligibility criteria for new knowledge and experimentation). If that work was conducted under contract and the target data was not able to be integrated but the supporting structure was still paid for by the customer, then even though it was an eligible supporting activity, the expenditure not at risk would mean that it was not eligible expenditure.

Note that this is a $ for $ deduction. If the contract invoice is reduced by 50% if a performance measure is not achieved, but this 50% covers 80% of costs, then the deduction will reduce the R&D expenditure by 80%. So only the $’s of eligible expenditure above the compensation expected to be received are eligible for R&DTI.

The ATO has published an extensive Taxation Ruling on this topic with examples of expenditure that would be affected – see TR2021-5. The ATO has also interpreted that JobKeeper payments are received in compensation for salary expenditure, so it expects corresponding adjustments to R&D expenditure.

Even if the compensation is received by an associate rather than the R&D entity itself, the expenditure not at risk requirement still applies.

If in doubt, send us copies of the contracts. We can also advise about standard T&C to ensure that generic terms do not inadvertently establish expenditure not at risk when that’s not the commercial reality or intent of the arrangement. Even better, talk to us when you set the contracts up.