The Australian Taxation Office (ATO) has recently issued two new taxpayer alerts aimed at addressing concerns about incorrect Research and Development (R&D) tax incentive arrangements.

These alerts specifically target issues related to expenditure incurred with associated entities and activities conducted overseas for foreign related entities. The ATO’s goal is to ensure that R&D tax offsets are claimed correctly and to prevent any artificial inflation of these claims.

Key Concerns and Recommendations

The ATO has highlighted two primary concerns with the current R&D tax incentive arrangements:

  1. Ineligible Claims: There are instances where entities are claiming the R&D tax offset in situations where it is not available, either entirely or for the specific income year in question.
  2. Artificially Increased Claims: Some arrangements are being used to inflate the amount of the R&D tax offset claimed.

To address these issues, the ATO strongly recommends that businesses review these alerts and consider if they need to contact the ATO or make a voluntary disclosure by amending their R&D tax incentive claims. The ATO also warns that penalties may apply to participants in these arrangements, but these penalties can be significantly reduced if the amendment request is treated as a voluntary disclosure. The reduction is generally greater if the disclosure is made before the ATO notifies the entity of an examination of its tax affairs.

Detailed Breakdown of the Alerts

Taxpayer Alert TA 2023/4: R&D Activities Delivered by Associated Entities

This alert identifies situations where an entity incorrectly claims the R&D tax offset for expenditure incurred under an agreement with an associated entity that conducts those activities. The ATO has found cases where the R&D activities, although claimed by one entity, were actually carried out by an associated entity. This can lead to improper claims if the expenditure is not correctly attributed.

Taxpayer Alert TA 2023/5: R&D Activities Conducted Overseas for Foreign Related Entities

The second alert focuses on concerns about Australian entities claiming the R&D tax offset for expenditure on R&D activities conducted overseas. The ATO has identified arrangements where an R&D entity purports that the activities were conducted for its own benefit, but in reality, these activities were conducted for a foreign entity connected with, or affiliated with, the R&D entity. The ATO stresses that R&D entities do not qualify for an R&D tax offset under Division 355 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenditure on activities conducted overseas if those activities were not for the R&D entity’s benefit or were significantly conducted for the foreign related entity that does not meet the statutory conditions for eligible R&D activities.

ATO’s Position and Penalties

The ATO has made it clear that they are scrutinising these types of R&D tax incentive claims to ensure compliance. The potential penalties for incorrect claims can be substantial, but the ATO offers a path for reduced penalties through voluntary disclosure. If a business identifies that it has made an incorrect claim, it is in its best interest to voluntarily disclose this to the ATO before any official examination begins. This proactive approach can significantly reduce the penalties involved.

Conclusion

The ATO’s new alerts serve as a crucial reminder for businesses to carefully review their R&D tax incentive claims and ensure they are in full compliance with the regulations. By understanding the specific issues raised in TA 2023/4 and TA 2023/5, entities can avoid potential pitfalls and penalties. It is advisable for businesses to consult with their tax advisers and consider making voluntary disclosures if there are any doubts about the validity of their R&D claims. Staying ahead of these issues not only ensures compliance but can also mitigate the financial impact of potential penalties.

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