Australia: Taxpayers held promoters of scheme to exploit research and development tax incentive (Federal Court decision)

The court imposed civil penalties totaling AU$13.6 million.

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December 18, 2024

The Federal Court of Australia on December 16, 2024, held that a Sydney business coach, along with a former tax agent, were promoters of a scheme to exploit the research and development tax incentive (R&DTI). The court imposed civil penalties totaling AU$13.6 million.

The case is: Commissioner of Taxation v Bakarich (No 2) [2024] FCA 1448

Key principles

The court examined the "promoter penalty provisions" under Division 290 of Schedule 1 to the Taxation Administration Act 1953, which prohibits entities from engaging in conduct that results in them being a promoter of a tax exploitation scheme. A promoter is defined as an entity that markets or encourages the scheme, benefits from these activities, and plays a substantial role in its promotion. The court found the individuals and their associated entities to be promoters under this definition and imposed penalties aimed primarily at deterrence.

Background

The Commissioner alleged that the taxpayers (two individuals and their companies) violated the promoter penalty provisions by promoting schemes with the primary purpose of obtaining R&DTI benefits without a reasonable legal basis. In 2014, a company was incorporated to offer business and marketing services, and later, accounting services were added. The respondents provided R&DTI services through a process involving client referrals, preparation of R&D applications, and filing tax returns, often without actual advice from a registered tax agent.

Court decision

The court identified 12 schemes involving claims under the Income Tax Assessment Act 1997 related to R&D activities, which lacked a reasonable legal basis. The entities promoting these schemes were found in violation of the promoter penalty provisions. The court considered several factors, including deterrence, the nature of the contravention, and financial circumstances, in determining the penalties totaling AU$13.6 million.

KPMG observation

The court emphasized the importance of deterrence in the promoter penalty regime, noting the financial risks to promoters and the significant compliance costs imposed on the Australian Taxation Office and the community. The decision highlights the increased scrutiny of R&D tax advisors and the need for companies to be cautious when engaging advisors for R&DTI claims. The federal government's strategic review of Australia's R&D system, including the R&DTI, is ongoing, with input from various stakeholders.
 

For more information, contact a KPMG tax professional in Australia:

Mukul Relan | mrelan@kpmg.com.au

David Vuong | dvuong1@kpmg.com.au

Melissa Bader | melissabader@kpmg.com.au

Georgia King-Siem | gkingsiem@kpmg.com.au

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