AusIndustry R&D Tax Audit – What to Expect and How to Prepare
Facing an AusIndustry compliance review of your R&D Tax Incentive claim? This guide explains what triggers a review, what documents you need and how to prepare for a successful outcome.
An AusIndustry compliance review is the moment of truth for every R&D Tax Incentive claim. Whether you call it an audit, a review or a finding – the process can result in your R&D activities being confirmed, partially adjusted or entirely rejected.
The good news is that most compliance reviews are manageable if you have prepared properly. The bad news is that most businesses have not prepared properly, and they only discover the gaps when the letter arrives.
This guide explains exactly what happens during an AusIndustry compliance review, what triggers one, what documents you need to have ready and how to respond if the outcome is unfavourable. It is based on the Industry Research and Development Act 1986 and current AusIndustry compliance practices.
What Triggers an AusIndustry Compliance Review
AusIndustry conducts compliance reviews under its legislative mandate to assess whether registered R&D activities meet the definition of core and supporting R&D activities. Not every claim is reviewed, but certain factors increase the likelihood.
Random Selection
A proportion of reviews are selected randomly from the pool of registered R&D activities. There is nothing you can do to avoid random selection, but having well-organised documentation means it will be straightforward to respond.
Claim Size and R&D Intensity
Large claims attract attention. If your R&D expenditure is significant relative to your company’s revenue or total expenditure, AusIndustry may want to verify the activities genuinely qualify. Claims that represent a high percentage of total expenditure are more likely to be reviewed.
Industry Flags
Certain industries face higher scrutiny because they generate claims with higher rates of non-compliance. Software development, agriculture and food processing are industries where AusIndustry has historically found more claims that do not meet the legislative definition.
Red Flags in Registration
The way you describe your R&D activities can itself trigger a review. Common red flags include vague descriptions of technical uncertainty, activities that sound like routine development, claims for activities completed before registration and descriptions focused on commercial outcomes rather than technical challenges.
Referrals From the ATO
The ATO and AusIndustry share information. If the ATO identifies issues with the financial component of your claim – such as expenditure that appears inflated or incorrectly categorised – it may refer the matter to AusIndustry for a technical review.
Types of AusIndustry Reviews
AusIndustry conducts different types of compliance reviews depending on the nature of the concern and the complexity of the claim.
| Review Type | How It Works | Typical Duration |
|---|---|---|
| Desk Review | Conducted remotely. AusIndustry requests documentation and asks written questions. You respond in writing. | 3-6 months |
| On-Site Review | Assessors visit your premises to observe R&D activities, interview technical staff and examine documentation. | 6-9 months |
| Comprehensive Review | Covers all registered activities across one or more income years. The most intensive review type. | 6-12+ months |
What AusIndustry Looks For
Understanding AusIndustry’s assessment criteria is essential for both preparing your claim and responding to a review.
Evidence of Genuine Technical Uncertainty
The central question is whether there was genuine technical uncertainty at the time the activities were conducted. AusIndustry will assess whether a competent professional in the relevant field could have determined the outcome in advance. They look for clear articulation of the knowledge gap – what was unknown and why existing knowledge was insufficient.
Systematic Experimentation
R&D must follow a systematic progression of work. AusIndustry expects to see a hypothesis, an experimental approach, evaluation of results and iterative refinement. Ad hoc trial and error without a structured methodology does not meet the definition.
Contemporaneous Records
Records must have been created at the time the R&D was conducted, not retrospectively. AusIndustry checks metadata, timestamps and document properties to verify that records are genuinely contemporaneous. Retrospective documentation created after a review notification is a significant red flag.
Clear Separation of Core and Supporting Activities
AusIndustry will verify that you have correctly distinguished between core R&D activities (which involve technical uncertainty) and supporting R&D activities (which are directly related to core activities but would not have been conducted independently). Claiming supporting activities without clearly linking them to specific core activities is a common reason for adverse findings.
Documents You Need
Having the right documentation ready before a review begins is the single most important factor in achieving a successful outcome.
Hypothesis Documentation
For each core R&D activity: the technical question, why the outcome was uncertain, what known approaches had been considered and rejected, and what you expected to learn from the experimental work.
Experiment Logs
Detailed records of experiments conducted, including design, variables tested, methodology, results and conclusions. For software R&D, this includes git histories, pull requests and code review comments.
Technical Reports
Written summaries of R&D outcomes, including both successful and failed experiments. Reports should explain what was learned and how findings informed subsequent experiments.
Time Records
Records showing time spent by each person on R&D activities. This can be formal timesheets, project management tool records or weekly summaries distinguishing between core R&D, supporting R&D and non-R&D work.
Financial Records
Detailed expenditure records including salary breakdowns, contractor invoices with R&D scope, materials and consumables, and apportionment calculations for shared costs such as cloud computing and overheads.
The Review Process Step by Step
Understanding the process removes much of the uncertainty and allows you to prepare effectively at each stage.
- Notification – AusIndustry sends a formal notification letter advising that your registered R&D activities are being reviewed. It specifies which income year and activities are under examination.
- Information Request – A detailed request for documentation, questions about your R&D activities and sometimes a questionnaire. You are given 28 to 60 days to respond.
- Assessment – Assessors review your response. They may ask follow-up questions, request additional documents or schedule interviews with technical staff.
- Preliminary Finding – AusIndustry issues a preliminary finding. This can confirm all activities, partially confirm or reject all activities.
- Response Period – If the preliminary finding is adverse, you have typically 28 days to provide additional evidence or arguments.
- Final Finding – A final determination based on all evidence. If adverse, AusIndustry notifies the ATO, which reassesses your tax return.
- Appeal Options – Internal review by AusIndustry (28 days) or appeal to the Administrative Appeals Tribunal (60 days).
How to Respond to an Adverse Preliminary Finding
Receiving an adverse preliminary finding is not the end of the process. Many preliminary findings are revised or overturned after a well-prepared response.
- Understand the specific concerns – Read the finding carefully and identify exactly which elements the assessors found deficient. Your response must address the specific issues raised, not generic arguments.
- Provide additional evidence – Submit evidence you may not have included initially: additional technical reports, interview transcripts, external expert opinions, academic references and industry peer evidence.
- Consider expert support – An experienced R&D tax specialist understands how assessors evaluate evidence and can present your case effectively.
- Be professional and specific – Focus on clear, factual arguments supported by documentary evidence. Address each concern individually with specific references to your documentation.
Common Reasons Claims Fail on Review
Understanding why claims fail helps you avoid the same mistakes.
Activities Are Routine, Not Experimental
The most common reason. Applying known techniques to build products does not qualify, even if the products are commercially innovative. The outcome must have been genuinely uncertain to a competent professional.
Insufficient or Retrospective Documentation
Many companies conduct genuine R&D but fail to document it contemporaneously. Creating documentation after a review notification is a major red flag that assessors readily identify through metadata analysis.
Poorly Defined Technical Uncertainty
Stating “we had never done it before” is not sufficient. Technical uncertainty means a competent professional could not determine the outcome in advance based on current knowledge. The uncertainty must be technical, not commercial.
Failure to Separate Core and Supporting
Claiming all development as core R&D when much of it is supporting activity – or not R&D at all – is a common mistake. AusIndustry expects clear separation with supporting activities linked to specific core activities.
Overclaiming Expenditure
Claiming 100% of developer salaries as R&D when a significant portion of time is spent on non-R&D activities attracts scrutiny. Most companies find 30-70% of development time qualifies.
No Systematic Approach
Ad hoc trial and error is not R&D. AusIndustry expects a structured hypothesis-experiment-evaluation cycle. Without evidence of a systematic approach, the claim will fail regardless of the technical merit of the work.
How Professional Representation Helps
Engaging an experienced R&D tax adviser before, during or after a compliance review can materially improve the outcome.
- Before a review – A specialist can conduct a pre-review health check, assessing documentation, identifying gaps and helping you prepare before AusIndustry contacts you.
- During a review – An adviser can manage the response process, presenting information in the format and language assessors expect. They understand the legislative tests and evidentiary standards.
- After an adverse finding – An experienced adviser can assess whether internal review or AAT appeal is likely to succeed and guide you through the process.
- Ongoing compliance – The most valuable role is helping you build processes that produce defensible claims year after year, so you are always ready for a review.
Frequently Asked Questions – AusIndustry R&D Tax Audits
How likely is it that my R&D claim will be reviewed by AusIndustry?
AusIndustry does not publish the exact percentage of claims reviewed, but industry estimates suggest 5% to 15% of registrations are subject to some form of compliance activity in any given year. Larger claims, claims from certain industries like software and claims with red flags in the registration are reviewed at higher rates. Even if your claim is not reviewed this year, records should be maintained for at least five years.
How long does an AusIndustry compliance review take?
Desk reviews typically take three to six months from notification to final finding. On-site and comprehensive reviews can take six to twelve months or longer, depending on complexity. The timeline depends on how quickly you respond to information requests, whether follow-up questions are needed and the assessors’ workload.
Can I continue to claim the R&D Tax Incentive while under review?
Yes. A compliance review of one income year does not prevent you from registering and claiming for subsequent years. However, if the review identifies systemic issues with how you define or document R&D activities, you should address those issues before lodging future claims.
What happens if AusIndustry issues an adverse finding?
An adverse finding means AusIndustry has determined that some or all of your registered activities do not meet the definition of R&D. AusIndustry notifies the ATO, which reassesses your company tax return to remove the R&D Tax Incentive offset for the affected activities. This creates a tax debt equal to the offset previously received, plus interest from the original date of assessment. Penalties may also apply if the ATO considers the claim was not reasonably arguable.
Can I appeal an AusIndustry finding?
Yes. You can request internal review by AusIndustry within 28 days of receiving the final finding. If the internal review upholds the adverse finding, you can appeal to the Administrative Appeals Tribunal (AAT) within 60 days. AAT proceedings are formal and typically require legal representation. The costs of an appeal should be weighed against the tax at stake.
Does engaging a specialist R&D tax adviser reduce the risk of a review?
Specialist advisers cannot prevent a random selection review. However, professionally prepared registrations and documentation reduce the likelihood of a review triggered by red flags. More importantly, if a review does occur, well-prepared documentation leads to better outcomes. AusIndustry assessors note that claims prepared with specialist assistance are generally better documented and more likely to withstand review.
What records should I keep and for how long?
Keep all R&D documentation for at least five years after the relevant income year. This includes hypothesis documentation, experiment logs, technical reports, time records, financial records, AusIndustry registration copies and any correspondence with AusIndustry or the ATO. Store records securely and ensure they are accessible – AusIndustry expects prompt responses to information requests.
Is there a difference between an AusIndustry review and an ATO audit?
Yes. AusIndustry reviews the technical eligibility of your R&D activities – whether they meet the legislative definition of core and supporting R&D. The ATO audits the financial aspects – whether the expenditure claimed is accurate and properly apportioned. The two agencies share information, and an issue identified by one may trigger action by the other. You could face an AusIndustry review, an ATO audit, or both simultaneously.
Prepare for Your AusIndustry Review
Prime Partners has a dedicated R&D Tax Incentive advisory practice that helps Australian businesses prepare for, respond to and defend their claims during AusIndustry compliance reviews. We combine deep tax expertise with technical understanding to build claims that withstand scrutiny.
Whether you have received a review notification or want to ensure your documentation is ready before one arrives, we can help.
This guide is current as at March 2026 and is based on the Industry Research and Development Act 1986 and current AusIndustry guidance. It is general information only and does not constitute tax or legal advice. Contact your adviser for guidance specific to your circumstances.