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Expenditure at Risk (TR 2021/5): Why Contracts & Invoicing Matter for R&D Claims | Link R&D Advisory

You are here: Home Practical Reflections Expenditure at RiskUnderstanding “Expenditure at Risk” Under TR 2021/5 – Why Contracts and Invoicing Matter for R&D Claims

Under the R&D Tax Incentive, companies can only claim expenditure that is genuinely “at risk.” This principle, legislated in section 355-405 of the Income Tax Assessment Act 1997 and clarified in ATO Taxation Ruling TR 2021/5, prevents claims where the R&D entity has already been compensated, guaranteed, or otherwise protected from loss.

The purpose is simple: the incentive rewards businesses that take on technical and financial uncertainty in the pursuit of new knowledge or technology, not those reimbursed regardless of outcome.

What does “at risk” mean?

According to TR 2021/5, expenditure is not at risk if the R&D entity, or an associate, has received or could reasonably expect to receive consideration:

as a direct or indirect result of incurring that expenditure, and
regardless of the results of the R&D activities.

This means the test must be applied at the time the expenditure is incurred, not retrospectively. If funding, contracts, or reimbursement are already assured at that point, the R&D expenditure may fail the test.

Why the timing of risk matters.

The ATO emphasises that risk can only be assessed at the point of incurring the expenditure.

If an entity expects to recover its costs (through a funding arrangement, milestone payment, or related-party reimbursement) it may not be bearing true economic risk.
Conversely, if funding or success payments are contingent on the results, the risk remains with the R&D entity until outcomes are achieved.

In practice, advisers should ensure that contracts, invoices, and cashflows reflect the reality of who carries the risk at the time each cost is incurred.

Contract structure being the deciding factor.

TR 2021/5 provides multiple examples illustrating how contractual terms determine whether expenditure is “at risk.”

Key principles include:

Fixed-fee contracts where payment is made regardless of R&D outcomes (e.g. Example 2 in the Ruling) will usually fail the at risk test.
Outcome-based or milestone-contingent contracts can preserve eligibility, provided the R&D entity only receives payment upon achieving technical outcomes.
Repayable prepayments or conditional funding may still be at risk if the R&D entity must refund amounts if results are not delivered (Example 8).
Related-party funding (Example 11) must be carefully reviewed — non-recourse or forgiven loans between group entities are often caught, as they remove genuine risk.

As a tip for R&D entities, ensure the contracts clearly document:

The nature of the technical uncertainty.
Which party bears the cost if results are unsuccessful.
That payments correspond to deliverables or milestones achieved.

Invoicing and commercial substance.
Invoices should align with the contractual reality. To demonstrate that expenditure was genuinely at risk:

Avoid invoices issued before results are achieved if payment is not yet due.
Show milestone triggers for payments tied to R&D outcomes or deliverables.
Record unpaid or contingent amounts transparently, they can evidence that the company had no guaranteed reimbursement when costs were incurred.

Where invoicing or cashflow is inconsistent with risk timing, auditors or the ATO may infer that expenditure was effectively reimbursed regardless of outcome.

Common risk traps to watch.
Group or associate arrangements where costs are reimbursed internally.
Third-party funding (government grants, investors, or customers) where payments are received before R&D outcomes are known.
Milestone contracts drafted too broadly, if payment is for undertaking the work, not achieving the result, the risk may already be removed.
In-kind or non-monetary consideration, such as equity or IP transfer, still treated as “consideration” under the Ruling.

Practical example.
A company develops an automated testing rig under contract for a customer.

The agreement states the supplier will receive $200 000 upon completion, regardless of whether the prototype meets the performance specifications.
At the time the R&D costs are incurred, the supplier can reasonably expect payment regardless of results, meaning the expenditure is not at risk.
If, instead, payment was contingent on the rig achieving a verified performance target, the expenditure would likely remain at risk until that result was achieved.

Managing risk in future R&D projects.
To protect R&D eligibility and demonstrate genuine risk:

Document the uncertainty and who bears it at project commencement.
Draft contracts carefully, consider clauses that guarantee reimbursement regardless of results.
Align invoicing and milestones to when risk is resolved.
Maintain contemporaneous records, such as correspondence, invoices, and payment schedules evidencing when and why costs were incurred.

Final thoughts.
The “at risk” rule is not just an integrity check, it defines what the R&D Tax Incentive is designed to reward: businesses investing in innovation where outcomes are uncertain. When in doubt, apply the risk test at the time of expenditure, review contracts for who truly bears that risk, and ensure your documentation tells the same story.

For tailored advice on structuring R&D agreements and demonstrating expenditure at risk, contact Link R&D Advisory.

References

ATO Taxation Ruling TR 2021/5 – Income tax: research and development tax offsets – the ‘at risk’ rule.

TD 2021/9EC – Income tax: JobKeeper payments and R&D expenditure

Income Tax Assessment Act 1997, s355-405.