How People Scam The R&D Incentive
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What We’ve Seen and What the ATO Spots
With over a decade of experience in R&D tax consulting, we’ve seen every variation on the “creative” R&D claim, from innocent misunderstandings to full-blown scams. Bulletpoint has helped businesses maximise the R&D Tax Incentive legally, but we’ve also seen how attempts to manipulate the system can bring companies undone.
The ATO has become highly sophisticated in identifying non-compliance, and the pitfalls of trying to stretch the rules can be serious: penalties, audits, and, at worst, full disqualification. Below are ten of the most common tricks we’ve seen companies try—and why they’re unlikely to go unnoticed. Understanding these traps is vital to making the most of your R&D claims without running afoul of the ATO.
1. Failing to Label Associate Payments Properly
Some businesses think they’ve found a loophole by not labelling payments made to associates—such as directors, family members, or entities owned by the same shareholders. They hope the ATO might not notice these transactions if they don’t label them as “associate payments.” The strategy is to slip these expenses in under the radar, counting on the ATO to miss the connection. But think again.
The ATO is particularly vigilant when it comes to payments involving related parties. They know that associate payments are high-risk areas for inflated expenses, and their systems are designed to detect these relationships, even if the payments aren’t clearly flagged. Unlabelled associate payments raise immediate questions about the legitimacy of other items in the R&D claim, drawing more scrutiny and often triggering a full audit.
When the ATO spots this omission, the consequences can be significant. We’ve seen companies whose entire R&D claims were questioned simply because one or two payments weren’t labelled as associate transactions. In some cases, this can lead to rejections of legitimate expenses, backtracking over previous years, and even fines. It’s a small corner to cut, but it’s one the ATO has seen before and won’t overlook.
2. Not Paying Providers (Or Having No Intention to)
One of the more audacious tricks we see is businesses claiming expenses for R&D work that’s invoiced but never actually paid. Sometimes, companies legitimately engage an R&D provider, receive services, and record the costs as payables on their balance sheets. But if there’s no intention to pay these invoices, the costs aren’t eligible for the R&D Tax Incentive. Yet, some businesses hope they can claim the expense by simply leaving it on the books.
The ATO scrutinises unpaid balances, especially those tied to R&D activities. When they see these payables sitting for extended periods without payment, it raises a red flag. The ATO may then investigate further to determine if there’s a genuine reason for the delay or if the business is simply using these “unpaid expenses” to inflate their R&D claim.
In practice, not paying providers can easily backfire. When the ATO finds R&D costs that haven’t been settled, they’re disallowed, and any associated deductions may be clawed back. In some cases, the ATO could review previous years to see if unpaid invoices have been claimed before. Attempting to claim unpaid expenses is a risky move that often ends up costing more than it’s worth.
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3. Inflating Timesheets and Claiming Excessive Staff Involvement
Another common tactic is overstating the number of employees involved in R&D work. Some companies report that large portions—or even their entire team—are engaged in R&D activities, hoping to inflate their claim. The ATO, however, is wise to this approach. They assess the reasonableness of staff involvement based on project size, industry norms, and job roles, quickly spotting when timesheets seem too good to be true.
Inflating timesheets can be particularly damaging if the ATO decides to dig deeper. An overstatement in one area can cast doubt on the whole R&D claim, potentially leading to disallowed expenses and a knock to the business’s credibility. A more honest, well-documented approach saves headaches down the line. For a deeper dive into the importance of tracking genuine R&D activity, check out our blog on How to Track and Report R&D Tax Incentive Activities.
4. Claiming Non-R&D Costs as R&D
Some businesses attempt to bundle non-R&D expenses—like marketing, office supplies, or general admin costs—into their R&D claim, thinking these costs can slip through unnoticed. But the ATO’s guidelines are clear: only expenses directly linked to eligible R&D activities count. The rest? Likely to be rejected.
When the ATO reviews claims, they analyse cost categories closely. Non-R&D costs stand out and can even trigger additional questions about the entire claim’s validity. Attempting to claim these expenses as R&D not only risks those costs being denied but can lead to more scrutiny on future claims. See our guide to What Counts as Eligible R&D Expenditure for further clarification on what’s truly allowable.
5. Round Robin Payments and Constructive Payments
Using round robin or “constructive” payments, where money circulates through an associated entity only to find its way back to the original company, is another risky method. Businesses might attempt this structure to inflate their expenses or to appear as if a third party is involved. However, round robin payments are easy for the ATO to spot, as they tend to have no real business purpose beyond inflating a claim.
When the ATO uncovers these setups, they disallow the costs involved, sometimes reviewing prior claims for similar patterns. Not only do these payments fail the eligibility test, but they can also taint the credibility of an otherwise legitimate R&D claim. If you’re unsure of the complexities around paying associated entities, see our Guide on Associate Transactions for R&D Claims.
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6. Including Overheads that Don’t Qualify
Attempting to include general overheads like rent, utilities, or unrelated office costs is another way businesses overstate their R&D claims. These expenses can only be included if they directly contribute to the R&D project, like electricity specifically for a lab or specialised equipment.
The ATO checks these line items, and any overhead costs outside of R&D scope are swiftly rejected. For businesses, this often means that the total claim ends up reduced, and repeated rejections can raise concerns about compliance. For more on aligning costs accurately, our blog on Maximising Your R&D Claim: Dos and Don’ts covers how to avoid common pitfalls.
7. Misclassifying Non-Technical Work as R&D
Many companies try to pass off non-technical tasks—like project management or general IT work—as R&D. While these roles may support R&D projects, they don’t qualify as R&D activities. The ATO defines eligible R&D work strictly, focusing on experimental development and technological advances, not routine tasks.
This misclassification often leads to disallowed costs and a closer review of the entire claim. For those unsure if their activities fit the ATO’s definition of R&D, our article on What Qualifies as R&D Activity can provide clarity.
8. Using Overseas Subcontractors Through Local Firms
Outsourcing R&D overseas but paying an Australian firm that hires offshore subcontractors is another approach some companies use to lower costs. While this might look like a local expense on paper, the ATO is onto these tactics. They investigate subcontractor origins, especially if large chunks of work are done offshore, meaning this approach is high-risk.
The ATO’s stance on overseas work is clear: only certain cases qualify, and they require transparency. If the ATO flags this, expect portions of the claim to be denied and further scrutiny on related expenses.
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9. Stacking Unreasonable Project Estimates
Another tactic is inflating timelines or costs by claiming that R&D projects took longer than they did, sometimes stretching a few months of work into a “year-long project.” The ATO benchmarks projects against industry standards, and exaggerated estimates stand out immediately.
Overstating a project’s duration or cost can backfire, with the ATO disallowing these padded claims and raising red flags for future submissions. Transparency and reasonableness are crucial here, as even well-documented R&D claims can come undone if timelines don’t make sense.
10. Repeatedly Claiming the Same R&D Activities
Once an R&D project achieves its goal or resolves its technical uncertainty, ongoing work on that project no longer qualifies. Some companies, however, continue claiming the same R&D activities year after year. The ATO reviews ongoing claims for signs of novelty or progression, and repeated claims with no evolution in R&D activity are flagged.
Once the ATO spots repeated claims for the same activities, they’re likely to dig deeper, possibly leading to disqualified expenses and scrutiny on other projects. To better understand what qualifies as ongoing R&D, see our blog on Defining Technical Uncertainty in R&D.
Bulletpoint = Bulletproof R&D Claims
At Bulletpoint, we’ve been in business for over a decade for a reason: we make sure our clients stay out of the audit hot seat. Audits are long, drawn-out processes where the ATO digs into every detail—right down to asking, “Tell us about that $250 water bill. How exactly was it used in R&D?” It’s frustrating and time-consuming, and it’s the last thing we want for our clients.
That’s why we work to ensure every claim we lodge is audit-proof. From the start, we put all necessary records in place, so even if staff leave and an audit happens years later, you’re covered. It’s simply not worth the risk to cut corners on R&D claims.
With over 500 successful claims and an average 4.8-star rating from 250+ Google reviews, we take pride in delivering reliable, straightforward advice that saves businesses from the audit grind. Don’t just take our word for it; see what our clients have to say.
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Bulletpoint is a Melbourne-based consultancy specialising in guiding businesses through the complex process of the R&D tax incentive. With a decade of experience under our belt, we’re proud to be led by Australia’s highest-rated R&D tax consultant. We’ve successfully lodged over 500 R&D claims, demonstrating a proven track record.
Our approach is straightforward and personable, focusing on cutting through the jargon to help businesses truly understand the definition of R&D in government terms. We’re passionate about what we do, and our clients appreciate this, often commenting on the difference our expertise has made to their businesses. They’ve praised us for uncovering grants they wouldn’t have otherwise known about and for making the whole process less stressful for them.
We’re proud to have an average rating of 4.8 stars from over 250 Google reviews. Despite our success, we continue to strive for improvement, learning from every piece of feedback we receive.
At Bulletpoint, we excel in helping businesses navigate the complexities of the R&D tax incentive process, ensuring they reap the benefits they deserve. As experts in our field, we’re well-versed in what works and what doesn’t when it comes to aligning businesses’ perceptions of R&D with the government’s eligibility criteria.
So, if you’re looking for accessible expertise and a proven success rate, you’ll find it with us at Bulletpoint. We’re ready to guide you through the R&D tax incentive process with a blend of professionalism and personality, ensuring your experience with us is not just successful, but enjoyable as well.