You’ve lodged your R&D claim as part of your company’s tax return. Months pass, and then a letter from the Australian Tax Office (ATO) lands on your desk... “your claim is under review”. This will quickly become a high-stakes and time-consuming process. In this article expert R&D consultants explain what an audit might entail, and how to avoid it in the first place.
The Research and Development Tax Incentive is co-administered by the ATO and the Department of Industry, Science and Resources (DISR). DISR is responsible for assessing the technical eligibility of R&D activities , while the ATO reviews the financial aspects - examining how costs have been claimed, how they’ve been substantiated, and whether the record-keeping stacks up.
Factors that trigger an audit of an R&D Tax Incentive claim
By law, the ATO maintains the authority to audit any company’s submitted tax return, including the notional deductions claimed under the R&D incentive . Consequently, an audit can be initiated for any company and does not necessarily mean that an error has been made. Audits can and do happen at random.
However, certain factors might change a company's risk profile in the eyes of the ATO, and those companies are audited at higher rates than others. These factors include:
- receiving large refunds through the tax offset, with refunds of over $1M attracting more attention
- claiming expenditure incurred to associated or related entities, including founders, shareholders or related companies
- complex financing arrangements which fund the R&D
- errors made elsewhere in a claimant's tax affairs, such as incorrect GST claims
- ongoing R&D projects over 3+ years which do not show any material signs of knowledge progression
- receiving grants during the year from other government funding programs
How an R&D tax consultant helps avoid ATO audits
An experienced R&D tax consultant plays an important role in helping companies understand and manage these risk indicators. By reviewing a claim through the lens of audit exposure, an advisor can identify red flags early by analysing risks such as related-party transactions or overstated cost allocations. A good advisor will recommend adjustments before your submission.
They also help ensure that R&D expenditure is substantiated by consistent, well-documented evidence that can stand up to ATO scrutiny. This proactive approach can significantly reduce the likelihood of an audited claim resulting in adverse findings.
The progression of an audit and the RFI
While an audit can be the first action taken by the ATO, it more commonly follows a ‘review’ of a company’s claimed deductions, where the ATO is not satisfied by the findings of the review.
The audit beings when the R&D entity receives a notification letter from the ATO stating that a specific financial year is to be audited. The most common year to be audited is the most recent year for which the tax return has been submitted. However multiple years may be audited simultaneously, and as the audit progresses the scope may increase to include additional years.
The notice informing the taxpayer that they are being audited is accompanied by a request for information (RFI) that interrogates various aspects of the claim and requests detailed records and evidence. The RFI can be complex and highly detailed, often containing technical language and assumptions about the company's record-keeping systems. A qualified R&D advisor can assist in interpreting the request, identifying exactly what evidence is required, and ensuring the response aligns with the ATO’s expectations.
During the audit, the ATO’s inquiries focus almost exclusively on the claimed costs of the R&D activities. They seek to understand how the R&D costs were calculated and require the company to justify the ‘nexus’ between the expenditure and the registered technical activities. To respond to the RFI, the company must provide evidence, such as general ledger extracts, payroll records, supplier invoices, and timesheets. The ATO often cross-references this evidence with external data sources to verify the authenticity of the records.
Preparing for an ATO audit
The most effective strategy for managing an audit is to ensure your company is audit-ready at the moment the R&D application is lodged. The company should aspire to be in a position to respond to an RFI immediately, without the need to retrospectively gather evidence or reconstruct project timelines months or years after the fact.
Establishing an internal system for real-time documentation is the cornerstone of audit readiness. This begins with educating technical staff on capturing R&D specific evidence, such as experimental results, as the activities occur. By maintaining a digital repository, companies can store contemporaneous records that justify both project activities and expenditure. Periodic reviews by an advisor help identify documentation gaps early, preventing the need for stressful retrospective reconstruction.
Consequently, engaging a qualified R&D tax consultant during the initial application phase can significantly improve your preparedness. An advisor assists by identifying only the eligible costs, assessing the quality of existing records, and compiling a documentation suite of relevant evidence that can be produced if an audit is initiated.
Records must be contemporaneous
The ATO requires 'contemporaneous' records, meaning notes, meeting minutes, photographs, and data logs must be created at the time the work is performed.
The ATO now checks digital timestamps (metadata) on files. If they find that evidence was created or edited shortly before a claim was filed, they may reject the deductions on the basis that the records were not kept contemporaneously.
The high cost of mistakes
If an audit concludes that a claim was ineligible or overstated, the company will be required to repay the resulting tax shortfall. These repayments are typically backdated to the original lodgement date, triggering the application of the General Interest Charge (GIC) from that time.
If the ATO determines that the R&D Entity was reckless or showed intentional disregard for the rules, the financial penalties are severe. Penalties can reach 75% of the tax shortfall. As of July 1, 2025, GIC amounts are no longer tax-deductible.
Talk to an expert R&D Tax Consultant
An ATO audit of your R&D claim doesn’t necessarily indicate wrongdoing—but it does demand robust, contemporaneous documentation and clear financial justification.
Working with a specialist R&D advisor can help to ensure your claim is defensible, accurate, and supported by the right evidence. In a self-assessment program, it’s not just what you declare—it’s what you can prove. Submit the form below to speak to an expert.
