The Australian Taxation Office (ATO) has issued Taxpayer Alert TA 2023/5 to address concerns regarding R&D activities conducted overseas for foreign-related entities. This alert highlights potential issues and risks associated with claiming tax offsets under the R&D tax incentive rules.
Key Points
1. Concerns and Review — The ATO is meticulously reviewing arrangements where Australian-resident R&D entities claim tax offsets for overseas R&D activities. Instances have been identified where activities purportedly conducted for the R&D entity's benefit were, in reality, for a foreign-related entity.
2. Features of Concern — Arrangements of concern involve R&D activities primarily benefiting a foreign-related entity. Features include agreements resulting in ownership rights, financial risk assumption, and control by the foreign entity. Furthermore, the R&D entity may lack the capacity to exploit developed intellectual property without the support of the foreign-related entity.
3. ATO's Concerns — The ATO emphasises that R&D entities may incorrectly claim R&D tax offsets for activities not conducted for their own benefit, or that significantly benefit a foreign-related entity. This could lead to non-qualification for tax offsets or the potential application of anti-avoidance provisions.
4. ATO's Actions — The ATO is actively reviewing identified arrangements and developing further website guidance on technical matters related to this alert.
An Illustrative Example
A common arrangement of concern involves an Australian company performing R&D activities under a contract with a foreign parent. Under the agreement, all IP developed vests immediately in the foreign entity, which also bears no financial risk and controls the direction of the R&D work. In these circumstances, the ATO considers the activities are not being conducted for the benefit of the Australian entity and the R&D tax offset may not be available.
What Should You Do?
For those engaged in or contemplating such arrangements, the ATO strongly encourages:
- Contacting the ATO for guidance on your specific arrangement
- Seeking independent professional advice
- Making a voluntary disclosure to minimise penalties where appropriate
Penalties may apply for participants and promoters of non-compliant arrangements.
Conclusion
Taxpayer Alert TA 2023/5 serves as a warning to R&D entities engaging in overseas activities to carefully assess their eligibility for R&D tax offsets. Seeking professional advice and proactive engagement with the ATO are crucial steps to avoid potential penalties and legal consequences.
Source: ATO — TA 2023/5
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