Important R&D Tax associate entity payment rule considerations approaching end of the financial year

June 20th, 2024

The R&D Tax Incentive, includes a related party integrity provision whereby if a company incurs R&D expenditure to an associate, it must pay that amount in the same year to claim a notional deduction for that amount in that year (provided all other eligibility requirements for the R&D tax incentive are met).

Associates are those entities that, by reason of family or business connections, might appropriately be regarded as being associates of the R&D entity, and relevant examples of the scope of these provisions are included on the ATO website.

Paying an amount to an associate can include making a constructive payment, where an entity applies or deals with the amount on their behalf or as they direct. The ATO usually only accepts constructive payments for R&D Tax where there is a valid and documented charge going back the other way which can be netted off against the associate R&D entity charge.

The ATO has raised some issues on the associate entity payment provisions which R&D Entities should be mindful of leading into the end of the financial year, which is 30 June for most companies. 

The ATO have also published additional guidance on this recently, which indicates they consider it a problem area, and claimants and advisors must treat it carefully.

In particular, payments are not considered to be validly made under the R&D Tax associate entity payment rule when:

  • A payment is made via or converted to a loan
  • ‘Round robin’ payments are made where payment is returned so that a subsequent payment can be made in a cyclical nature. For example, where a company uses the same amount (e.g. $10,000) cycled multiple times as multiple payments and loans, the payments are NOT valid for the purposes of the R&D Tax Incentive
  • Loans are being used as contingent payments where payment is expected after an anticipated or possible future event
  • Payment is made by consideration including issuing of shares in the company. This is dealt with and disallowed by TR 2008/5.

Companies should ensure that they keep up to date with the  R&D Tax associate entity payment guidance on the ATO website.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.

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