The ATO has released 2 taxpayer alerts flagging incorrect R&D tax offset claims where expenditure is incurred by associated entities or activities are conducted overseas for foreign related entities.
TA 2023/4 and TA 2023/5 outline the ATO’s concerns about arrangements that lead to incorrect R&D offset claims.
The ATO is concerned about arrangements that:
- 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.
R&D activities delivered by associated entities
The ATO will review claims made by R&D entities for a tax offset for expenditure incurred under an agreement with an associate of the R&D entity (the service provider), which conducts the R&D activities.
In TA 2023/4, the ATO has identified arrangements where an R&D entity incorrectly claims the R&D tax offset for expenditure incurred under an agreement with an associated entity that conducts those activities on its behalf.
R&D activities conducted overseas for foreign related entities
TA 2023/5 outlines the ATO’s 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 it is “connected with” or is an “affiliate” of.
Impact on entitlement to the R&D tax offset
Entitlement to the R&D tax offset may be impacted for the R&D entity, if the following conditions exist in a service provider arrangement:
- there is no definite obligation to pay the service provider and thereby actually incurring relevant expenditure that gives rise to a notional deduction
- although the expenditure on R&D activities is incurred, it wasn’t paid by the R&D entity to the service provider in the relevant income year
- if expenditure is incurred on R&D activities conducted overseas and they were either not conducted for the R&D entity. Or secondly 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 is currently reviewing the arrangements discussed above and if you have entered, or are planning to enter, into similar arrangements, you may be subjected to increased scrutiny by the ATO.
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Please note that this information is not specific and is general in nature and cannot be relied on as advice. Please contact us for advice specific to you and your circumstances.