Australia: Taxpayer alerts regarding artificial inflation of R&D tax incentive claims

The Australian Taxation Office (ATO) on 14 December 2023 released two taxpayer alerts regarding concerns about certain arrangements resulting in artificial inflation of research and development (R&D) tax incentive claims.

• Taxpayer Alert 2023/4 pertains to arrangements under which R&D activities are performed by associate entities that would not qualify for an offset if they conducted the activities for their own benefit. The specific arrangements of concern to the ATO have some or all of the following hallmarks:
  • The R&D entity is a special purpose or non-trading company that is controlled by the associate entity.
  • The associate entity conducts R&D activities as a contractor to the R&D entity (generally under a service agreement).
  • The associate entity effectively controls the strategic decisions regarding R&D activities and has primary rights to commercially exploit the intellectual property arising from the R&D activities.
  • The R&D entity conducts limited or no other business activity (i.e., it has few employees and lacks the economic capacity to conduct the R&D activities itself or commercially exploit the IP developed).
  • The R&D entity satisfies its payment obligations to the associate providing the R&D services by way of a loan from the associate or set-off against a license or other agreement for exploitation of the intangible property (IP) developed through the R&D activities.
• Taxpayer Alert 2023/5 focuses on R&D activities conducted overseas for foreign related entities. The ATO is primarily concerned about inappropriate claims for overseas R&D activities, either due to the lack of an Advance Finding for Overseas R&D Activities or non-compliance with the “on own behalf” and “at risk” rules.