Home » News » New ATO Alerts on R&D Tax: 1: Activities Delivered by Associated Entities AND 2: Activities Conducted Overseas for Foreign Related Entities

New ATO Alerts on R&D Tax: 1: Activities Delivered by Associated Entities AND 2: Activities Conducted Overseas for Foreign Related Entities

On 15 December 2023, the ATO has released two new taxpayer alerts:

Taxpayer Alert TA 2023/4 Research and development activities delivered by associated entities. This relates to arrangements identified by the ATO where an entity incorrectly claims the R&D tax offset for expenditure incurred under an agreement with an associated entity who conducts those activities.

Taxpayer Alert TA 2023/5 Research and development activities conducted overseas for foreign related entities outlines ATO concerns about arrangements where Australian entities claim the R&D tax offset for expenditure incurred on R&D activities conducted overseas. This is related to arrangements identified by the ATO where an R&D entity has purported that R&D activities were conducted for its own benefit, but those activities were instead conducted for a foreign entity that is ‘connected with’, or is an ‘affiliate’, of the R&D entity.

TA 2023/4 appears to be focused on:

• Arrangements involving service agreements between associate entities;
• Concerns around mechanisms for sufficing associate entity payment provisions, including set-off against license fees or intragroup sales;
• Intra Group arrangements that have little actual commercial substance;
• Arrangements whereby the claimed R&D Entity is not the entity that controls the strategic decisions regarding the R&D activities nor has primary rights to commercially exploit for the purposes of its own trading business any developed intellectual property (IP);
• Reductions for intragroup markups.

TA 2023/5 appears to be focused on:

• Arrangements where Australian-resident  R&D entities  claim a tax offset under the R&D tax incentive  for expenditure incurred on R&D activities conducted overseas, but those activities were instead being conducted for (or to a significant extent, for) a foreign entity that is ‘connected with’, or is an ‘affiliate’ of the R&D entity (foreign related entity);
• Where the R&D entity is an Australian resident and the R&D activities are conducted for that R&D entity’s own benefit, the R&D entity might not qualify for an R&D tax offset as the expenditure incurred by them might not be ‘at risk’ for the purposes of the at risk integrity rule in the R&D provisions, or
• Where the conditions for entitlement to an R&D tax offset are satisfied, if viewed objectively that one or more parties to the arrangement has entered into or carried out the arrangement for the purpose of obtaining either a refundable or non-refundable tax offset, the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to cancel that tax offset.

Previous ATO alerts on the R&D Tax incentive for software and other issues marked the beginning of a heightened period of compliance, so companies and advisors should be aware of the issues in these alerts.