The compliance landscape for R&D Tax Incentive claims in Australia has shifted dramatically. What was once a relatively low-scrutiny program – where claims were lodged and offsets received with minimal challenge – has become one of the ATO’s highest-priority enforcement areas. The change is not subtle. It is public, well-resourced and increasingly punitive.
At the centre of this shift is a specific type of adviser arrangement that the ATO has identified as a driver of non-compliant claims: the contingency-fee model. If your R&D Tax Incentive adviser charges a percentage of your refund rather than a fixed fee for their work, you need to understand what that means for your risk profile – because the ATO certainly does.
This guide explains what the ATO is targeting, why fee structures matter, what the penalty regime looks like in practice and how to choose an R&D adviser whose interests are aligned with getting your claim right.
What the ATO Is Targeting in 2025-26
The ATO publishes its compliance priorities each year, and the R&D Tax Incentive has featured prominently in recent cycles. For 2025-26, the ATO has explicitly named contingency-fee R&D advisers as a compliance focus area. This is not a general statement about programme integrity – it is a specific, named target.
The ATO’s concern is structural. In its public guidance, the ATO warns that contingency-fee arrangements “can indicate a refund claim is at higher risk of being incorrect.” The reasoning is straightforward: when an adviser’s fee is calculated as a percentage of the refund – typically 25% to 40% of the offset amount – the adviser has a direct financial incentive to maximise the claim. The larger the refund, the larger the fee. That incentive does not exist in a fixed-fee arrangement.
This is not the ATO being theoretical. It is responding to a pattern of behaviour it has observed over several years, where claims prepared under contingency arrangements have been found to include inflated expenditure, activities that do not meet the legislative definition of R&D, or both.
Specific ATO Compliance Focus Areas
| Focus Area | What the ATO Is Examining |
|---|---|
| Contingency-fee advisers | Claims prepared under percentage-of-refund fee arrangements, particularly where the adviser also prepares the AusIndustry registration |
| Overclaimed expenditure | R&D expenditure that is inflated relative to the company’s actual R&D activities, particularly staff costs and overheads |
| Activities that do not qualify | Registered activities that are routine development, commercial innovation or business-as-usual work dressed up as R&D |
| Associated entity arrangements | R&D conducted through related entities where the commercial substance does not support the claimed deductions (see Taxpayer Alert TA 2023/4) |
| Overseas R&D arrangements | Claims for overseas R&D activities that do not meet the additional requirements under the legislation (see Taxpayer Alert TA 2023/5) |
| Software development claims | Software claims where the described activities do not involve genuine technical uncertainty beyond the application of known techniques |
The combination of these focus areas paints a clear picture. The ATO is not conducting random audits and hoping to find problems. It is systematically targeting the business models and claim patterns that its data shows are most likely to produce non-compliant outcomes.
The Problem With Contingency Fees
The contingency-fee model for R&D Tax Incentive claims works like this: the adviser charges no upfront fee, or a minimal one, and instead takes a percentage of the refund once it is received. Rates typically range from 25% to 40% of the offset amount, though some arrangements go higher.
On the surface, this can seem attractive – particularly for businesses that are cash-constrained and uncertain whether they have a viable R&D claim. The pitch is usually some variation of “no refund, no fee” or “we only succeed when you succeed.” It sounds like aligned incentives. In practice, it is the opposite.
The Structural Misalignment
Consider a company with $500,000 in genuine, eligible R&D expenditure. Under the refundable offset (43.5% for aggregated turnover under $20 million), the tax offset would be $217,500. A contingency-fee adviser charging 30% would earn $65,250.
Now consider what happens if the adviser can characterise $800,000 of expenditure as eligible R&D – perhaps by including staff costs for activities that are borderline, or by allocating overheads more aggressively. The offset rises to $348,000. The adviser’s fee rises to $104,400. That is an additional $39,150 for the adviser, generated entirely by expanding the scope of the claim.
| Scenario | R&D Expenditure | Tax Offset (43.5%) | Adviser Fee (30%) | Net to Company |
|---|---|---|---|---|
| Conservative (genuine only) | $500,000 | $217,500 | $65,250 | $152,250 |
| Aggressive (inflated) | $800,000 | $348,000 | $104,400 | $243,600 |
| Difference | +$300,000 | +$130,500 | +$39,150 | +$91,350 |
The company receives more in the short term under the aggressive scenario – until the ATO reviews the claim. When it does, the company is liable for the full shortfall, plus penalties of up to 75% and interest. The adviser, in most cases, is not.
This is the structural problem. The contingency-fee model rewards the adviser for making the claim larger. It does not reward the adviser for making the claim more defensible. The adviser captures the upside of a bigger claim and the client bears the downside when it fails.
What the ATO Has Said Directly
The ATO has not been ambiguous about this. Its published guidance states that contingency-fee arrangements are a risk indicator for incorrect claims. When the ATO receives an R&D claim and identifies that it was prepared under a contingency arrangement, that claim moves up the risk-assessment queue. It does not guarantee an audit, but it materially increases the likelihood of one.
For the client, this means that the fee structure of your adviser is not just a commercial decision – it is a compliance signal that the ATO actively monitors.
Promoter Penalties – What the Law Says and Recent Enforcement
The legislative framework for penalising tax scheme promoters is set out in Division 290 of Schedule 1 to the Tax Administration Act 1953. These provisions target entities that promote, market or otherwise encourage the use of tax schemes that result in incorrect claims or returns. The R&D Tax Incentive has become one of the primary areas where these provisions are being applied.
The Penalty Regime
From 1 July 2024, the maximum civil penalty for promoting a tax exploitation scheme increased to $780 million for body corporates. For individuals, the maximum is the greater of $7.8 million or three times the consideration received. These are not theoretical maximums – they are the statutory ceiling that courts can apply, and recent cases show that courts are willing to impose penalties in the tens of millions of dollars.
The threshold for liability is not limited to cases of fraud. An entity can be liable for promoter penalties if it promoted a scheme where it was reasonable to conclude that the dominant purpose of the scheme was to obtain a tax benefit that was not available under the law. In the R&D context, this means an adviser who systematically encourages clients to claim activities or expenditure that do not genuinely qualify can face promoter penalty proceedings even without evidence of deliberate dishonesty.
Recent Federal Court Enforcement
The ATO’s willingness to pursue promoter penalties in the R&D space is no longer speculative. Two significant Federal Court cases have resulted in substantial penalties:
In one case, the Federal Court imposed a penalty of $22.68 million against a Sydney-based business adviser who had promoted inflated R&D Tax Incentive claims to multiple clients. The court found that the adviser had systematically overstated eligible R&D expenditure and encouraged clients to claim activities that did not meet the legislative definition. The penalty reflected both the scale of the conduct and the number of clients affected.
In a second case, a penalty of $13.6 million was imposed against another adviser found to have promoted arrangements that resulted in significantly overclaimed R&D offsets across a portfolio of clients. The court found that the adviser had been aware – or should reasonably have been aware – that the claims were not supportable under the legislation.
These are not outlier results. They represent the ATO’s stated enforcement strategy of pursuing the advisers who drive non-compliant claiming behaviour, not just the taxpayers who lodge the claims.
Big Four and Professional Standards Enforcement
The enforcement activity is not limited to boutique advisers or R&D consultancies. The Tax Practitioners Board has taken action against practitioners at the highest levels of the profession.
A former partner at a Big Four accounting firm was terminated by the firm and subsequently banned by the TPB for four years after an investigation found that the partner had made false and misleading statements in connection with R&D Tax Incentive claims. The tax shortfall across the affected clients was approximately $11 million. The case demonstrated that seniority and institutional affiliation provide no protection when claims do not stand up to scrutiny.
In a separate matter, a former partner at a Big Four firm is facing Federal Court proceedings brought by the Commissioner of Taxation in relation to R&D Tax Incentive arrangements. The matter was listed for hearing in March 2025. The outcome of those proceedings will provide further guidance on the boundaries of adviser liability in the R&D space.
The TPB has confirmed that R&D concession abuse is a 2026 compliance priority, signalling that further enforcement actions against registered tax practitioners are likely.
DISR’s “One-Strike” Policy From 1 July 2025
The Department of Industry, Science and Resources – which administers the AusIndustry registration side of the R&D Tax Incentive – has introduced what is effectively a one-strike policy for compliance failures from 1 July 2025.
Under this policy, if AusIndustry finds that registered R&D activities do not meet the legislative definition, the consequences are more immediate and more severe than under the previous approach. Where previously a company might receive an opportunity to amend or withdraw the registration, the revised approach means that a single finding of non-compliance can result in the activities being deregistered entirely, with flow-on consequences for the associated tax offset claim.
This policy change has particular significance for businesses whose claims have been prepared by advisers using aggressive interpretations of what constitutes eligible R&D. Under the previous regime, there was some tolerance for claims that were borderline. Under the new policy, borderline claims are more likely to fail outright.
The Client Always Carries the Risk
This is the point that many businesses do not fully appreciate until it is too late: regardless of who prepared the claim, advised on the claim, or promoted the arrangement, the taxpayer remains liable for the full amount of any shortfall, plus penalties and interest.
If your R&D Tax Incentive claim is found to be incorrect, you are liable for repayment of the offset amount that should not have been claimed, administrative penalties of up to 75% of the shortfall amount, and the General Interest Charge on the shortfall from the date the offset was originally received.
The fact that your adviser told you the claim was sound, that they prepared the documentation, or that they are themselves facing promoter penalty proceedings does not reduce your liability. You may have a separate claim against the adviser for professional negligence, but that is a civil matter between you and the adviser – the ATO will pursue you for the tax, penalties and interest regardless.
This asymmetry is why fee structures matter so much. Under a contingency-fee arrangement, the adviser captured a percentage of the inflated offset as their fee. When the claim fails, the adviser keeps the fee (or has already spent it) and the client bears the full cost of the shortfall. The risk was always on the client’s side of the ledger.
Taxpayer Alerts – Associated Entity and Overseas R&D Arrangements
Two Taxpayer Alerts issued in 2023 remain highly relevant and signal areas where the ATO expects continued non-compliance:
Taxpayer Alert TA 2023/4 addresses arrangements where R&D activities are conducted through associated entities – typically a structure where a company claims the R&D offset but the actual work is performed by a related entity under a service agreement. The ATO’s concern is that these arrangements can be used to inflate the expenditure base or claim offsets on activities that the claiming entity did not genuinely conduct. Where the commercial substance of the arrangement does not support the claimed deductions, the ATO will challenge the claim.
Taxpayer Alert TA 2023/5 addresses overseas R&D arrangements, where Australian entities claim offsets for R&D activities conducted outside Australia. The legislation imposes additional requirements for overseas R&D – including that the activities cannot be conducted in Australia and that an advance finding from AusIndustry may be required. The ATO has identified a pattern of claims where these additional requirements are not met, or where the characterisation of the overseas activities as R&D is not supported by the evidence.
Both alerts are directed at arrangements that the ATO considers to be promoted by advisers – particularly advisers operating under fee structures that incentivise maximising the claim rather than ensuring its accuracy.
What to Look for When Choosing an R&D Tax Incentive Adviser
Based on the ATO’s stated compliance priorities, the enforcement actions taken to date, and the structural analysis of different fee models, there are clear indicators that distinguish a compliant, professional R&D adviser from one that may put your claim at risk.
Fee Structures That Protect You
The right fee structure aligns your adviser’s interests with accuracy, not claim size. Look for these characteristics:
- Fixed fee based on scope of work. A fixed fee means the adviser earns the same amount whether your eligible expenditure is $200,000 or $2 million. This removes the incentive to overclaim and focuses the engagement on getting it right.
- Fee quoted before work begins. A professional adviser can scope the engagement and provide a fee estimate after understanding your business. You should know what you are paying before the claim process starts.
- No success fee or bonus component. Any arrangement where the adviser earns more when the claim is larger introduces a structural conflict of interest, regardless of the base fee.
By contrast, the following fee arrangements are the ones the ATO has specifically flagged as compliance risk indicators:
- Percentage-of-refund fees. Any arrangement where the adviser’s fee is calculated as a percentage of the R&D tax offset. This is the single clearest risk indicator, and it is the one the ATO has explicitly named.
- “No refund, no fee” marketing. This is the consumer-facing version of the contingency model. It sounds low-risk but creates the same structural misalignment.
- Success fees or bonus structures. Any arrangement where the adviser earns more when the claim is larger, regardless of the base fee structure.
- Fees that seem disproportionately low upfront. If the upfront fee does not reflect the genuine cost of preparing a compliant R&D claim – including proper documentation, contemporaneous records review and technical assessment – the adviser is likely recouping the difference through the contingency component.
Qualities of a Professional R&D Adviser
Beyond fee structure, these are the hallmarks of an adviser who will prepare a defensible claim:
- They assess what is eligible based on your activities. A competent R&D adviser starts by understanding your work and then determines what qualifies. They do not arrive with a target number or a claim estimate before reviewing your operations.
- They ask detailed questions about your technical documentation. The quality of an R&D claim depends heavily on contemporaneous evidence of technical uncertainty, hypothesis formation and systematic investigation. An adviser who prioritises your technical records is building a defensible claim.
- They are honest about uncertainty. No legitimate adviser can guarantee the outcome of an R&D claim. The eligibility assessment involves judgement, and AusIndustry and the ATO can – and do – reach different conclusions. A professional adviser explains the risk, not just the upside.
- They are a registered tax agent with relevant professional qualifications. R&D Tax Incentive claims involve tax law. The person or firm lodging the claim should be a registered tax agent, and ideally a qualified accountant bound by professional standards such as those of Chartered Accountants Australia and New Zealand.
- They welcome the audit question. A confident adviser has a clear process for ATO and AusIndustry reviews, includes audit defence in their engagement and prepares your claim to withstand scrutiny from the outset.
Adviser Assessment Checklist
| Question to Ask | What You Want to Hear | Concerning Response |
|---|---|---|
| How is your fee calculated? | Fixed fee based on scope of work | Percentage of refund or success fee |
| What documentation will you need from us? | Detailed list including technical records, timesheets, project logs | Minimal documentation or “we handle everything” |
| How do you determine what qualifies as R&D? | Reference to legislative definition, technical uncertainty test | Vague or overly broad criteria |
| What happens if the claim is audited? | Clear process, support included, audit defence experience | Deflection, reassurance that audits are rare |
| Are you a registered tax agent? | Yes, with registration number provided | Not registered, or registration held by a third party |
| What professional body are you a member of? | CA ANZ, CPA Australia, or equivalent with current membership | No professional body membership |
| Have any of your clients’ claims been adjusted or rejected? | Honest answer acknowledging that outcomes vary | Claims of 100% success rate |
What a Defensible R&D Claim Looks Like
A defensible R&D Tax Incentive claim is one that can withstand scrutiny from both AusIndustry (on the technical side) and the ATO (on the expenditure side). The hallmarks of a defensible claim are well established and do not require aggressive interpretation of the legislation.
Technical Documentation
The registered R&D activities must be supported by contemporaneous records that demonstrate genuine technical uncertainty existed at the outset. This means documentation created at the time the work was conducted – not reconstructed after the fact for the purpose of the claim. Key records include hypotheses or research questions formulated before the work began, experimental or development logs showing the systematic progression of the investigation, records of outcomes including failed approaches and iterations, and evidence that a competent professional in the field could not have predicted the outcome.
Expenditure Records
The claimed expenditure must be directly attributable to the registered R&D activities. This requires time records that show which staff worked on which activities and for how long, a clear methodology for allocating overheads and shared costs, separation of R&D expenditure from production, commercial development or business-as-usual costs, and supporting documentation for any third-party contractor costs claimed.
Alignment Between Registration and Claim
One of the most common points of failure is a disconnect between the activities described in the AusIndustry registration and the expenditure claimed with the ATO. The activities registered must correspond precisely to the expenditure claimed. If an activity was registered as core R&D but the expenditure includes costs for work that is clearly supporting or production activity, the claim will not survive review.
For a deeper examination of the mistakes that most commonly lead to failed claims, see our guide to five common R&D tax claim mistakes. If you are preparing for a potential AusIndustry review, our AusIndustry R&D tax audit guide covers the process in detail.
Fixed-Fee R&D Advisory – How It Should Work
The alternative to the contingency-fee model is straightforward: a fixed fee for the work required to prepare and lodge a compliant R&D Tax Incentive claim. The fee is based on the scope and complexity of the engagement, not on the size of the refund.
Under a fixed-fee arrangement, the adviser’s financial incentive is to get the claim right – not to get it large. The adviser earns the same fee whether the eligible expenditure is $200,000 or $2 million. That removes the structural pressure to include borderline activities, inflate expenditure allocations or adopt aggressive interpretations of the legislation.
At Prime Partners, we charge fixed fees for all R&D Tax Incentive advisory work. Our engagement covers an initial assessment of whether your activities are likely to qualify, preparation of the AusIndustry registration including detailed activity descriptions, review and quantification of eligible expenditure, preparation of the R&D tax schedule for inclusion in your tax return, and ongoing support in the event of an AusIndustry or ATO review.
We are chartered accountants and members of Chartered Accountants Australia and New Zealand, bound by the CA ANZ Code of Ethics and professional standards. That means our professional obligations run to getting the claim right, not to maximising the refund. It is a distinction that matters when the ATO comes looking.
If you are considering an R&D Tax Incentive claim for the first time, or if you are reviewing your existing adviser arrangement in light of the ATO’s increased compliance focus, we are happy to discuss your situation. You can also use our R&D tax incentive calculator to estimate the potential offset for your eligible expenditure, and explore our specialist advisory for export market development grants if your R&D has an export dimension.
Contact Prime Partners to discuss fixed-fee R&D Tax Incentive advisory.