What is “Expenditure Not at Risk” under the R&D Tax Incentive?

It refers to R&D spending where the company is not genuinely exposed to financial risk—such as when funding is guaranteed regardless of the R&D outcome—making such expenditure ineligible for the R&D tax incentive.

Why should you care?

If your R&D is funded through arrangements like non-recourse loans, guaranteed reimbursements, or pre-arranged IP licensing, the ATO may determine that your expenditure isn’t “at risk,” potentially disqualifying your claim under section 355-405 of the Income Tax Assessment Act 1997.

What do you need to do?

  • Review your funding arrangements — Ensure they don’t guarantee reimbursement regardless of R&D outcomes.
  • Assess your contracts — Check for clauses that might transfer risk away from your company.
  • Document financial exposure — Maintain clear records showing your company bears the financial risk of R&D activities.treadstone.com.au+2thegildgroup.com+2ato.gov.au+2

Unsure if your R&D expenditure is truly “at risk”?
Speak with an expert today – call Bulletpoint on 1300 658 508.

 

ATO compliance R&D tax incentive

Background – What the law says

Section 355-405 of the Income Tax Assessment Act 1997 stipulates that R&D expenditure is not eligible for the tax incentive if, at the time it’s incurred, the company or its associate:

“Could reasonably be expected to receive consideration as a direct or indirect result of the expenditure being incurred, regardless of the results of the activities.”ato.gov.au+4ey.com+4pwc.com.au+4

This means if you’re assured of compensation regardless of whether your R&D succeeds, that expenditure isn’t “at risk” and can’t be claimed.

How do you ensure compliance?

  • Structure funding appropriately — Avoid arrangements that guarantee returns irrespective of R&D outcomes.
  • Clarify IP rights — Ensure your company retains rights to the R&D results, indicating you bear the risk
  • Maintain thorough documentation — Keep detailed records of R&D activities and funding sources to demonstrate genuine financial risk.

Hypothetical examples

To illustrate, here are four hypothetical scenarios:

  1. TechNova Pty Ltd: Receives a non-repayable grant to develop a new app. Since the funding isn’t contingent on R&D success, the expenditure may not be “at risk.”
  2. AgriGrow Ltd: Enters a contract where a partner agrees to purchase any developed technology. If the purchase is guaranteed regardless of R&D outcomes, the expenditure might not qualify.
  3. BioHealth Inc.: Conducts R&D funded by a parent company with an agreement to reimburse costs irrespective of results. This setup could render the expenditure ineligible.
  4. EcoEnergy Solutions: Uses a convertible note that converts to equity only if R&D succeeds. Since there’s no guarantee of reimbursement, the expenditure is likely “at risk.”

Want confidence that your claim won’t be disqualified?
Get clarity before you lodge – message Bulletpoint.

ATO compliance R&D tax incentive

Case Studies

The ATO’s Taxation Ruling TR 2021/5 provides guidance on the “at risk” rule, emphasizing that expenditure is not at risk if there’s an expectation of consideration regardless of R&D outcomes. For instance, if a company receives a government grant that doesn’t depend on the success of the R&D, that expenditure may not be eligible for the tax incentive. thegildgroup.com

Need help with the R&D tax incentive?

Navigating the complexities of the R&D tax incentive requires careful planning and documentation. At Bulletpoint, we’ve assisted over 500 companies in preparing robust, compliant claims. Our experience includes:

  • Handling ATO and AusIndustry audits
  • Structuring intercompany agreements
  • Ensuring eligibility under “at risk” provisions

Bulletpoint is Australia’s highest-rated R&D tax consultancy, with over 280 five-star reviews.

Bottom line? If your R&D funding arrangements shield you from financial risk, your claim might not hold up under ATO scrutiny. Let’s ensure your expenditure is genuinely “at risk” and your claim is solid.

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