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.

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