ATO warns advisers against suspect R&D tax claims
Spending by associated entities or activities conducted overseas will be subject to increased scrutiny, the Tax Office says.
The ATO has released two taxpayer alerts warning about incorrect R&D tax offset claims involving spending by associated entities or activities conducted overseas for foreign-related entities.
Taxpayer Alerts TA 2023/4 and TA 2023/5 said taxpayers and advisers using either arrangement would be subject to increased scrutiny and possible penalties if the R&D tax incentives were being wrongly applied.
In a guidance update, the ATO said:
“We’re concerned these arrangements are being used to:
- claim the R&D tax offset in situations where it would not otherwise be available, either at all or in the income year claimed by the R&D entity.
- artificially increase the amount of the R&D tax offset claimed.”
Regarding TA 2023/4, “Research and development activities delivered by associated entities”, the ATO said: “We’ve identified arrangements where an entity incorrectly claims the R&D tax offset for expenditure incurred under an agreement with an associated entity who conducts those activities.”
Arrangements of concern included those where a “service provider”, which was usually an entity that conducted a group’s trading and research activities, operated as a contractor to provide R&D for the entity claiming the incentive. The service provider would not normally be entitled to claim the incentive and the body making the tax claim had little or no activity other than the specific R&D arrangements.
“In substance and effect, the refundable tax offset is the R&D entity’s only receipt and the only amount used to service the R&D entity’s payment obligations to the service provider,” the alert said.
Taxpayer Alert TA 2023/5, “Research and development activities conducted overseas for foreign related entities”, similarly outlines ATO concerns about arrangements where Australian entities claim the R&D tax offset for expenditure incurred on R&D activities conducted overseas.
“Arrangements of concern include 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,” it said.
“We are concerned that R&D entities do not qualify for an R&D tax offset under Division 355 of the ITAA 1997 for expenditure incurred by them on R&D activities conducted overseas as the R&D activities were:
- not conducted for the R&D entity, or
- conducted to a significant extent for the foreign related entity, and that entity does not satisfy the statutory conditions for eligible R&D activities.”
The ATO said penalties could apply to participants in these types of arrangements although they might be “significantly reduced if the amendment request is treated as a voluntary disclosure”.
18 December 2023