Taxpayer alerts, such as TA 2023/5, do not constitute part of the tax law but serve as signals for potential high-risk tax planning arrangements identified by the ATO. In this alert, the ATO has raised concerns about overseas R&D activities conducted by Australian subsidiaries for foreign-related entities.
Key risks identified in the alert include
- There are circumstances whereby the ATO cannot determine from the facts whether the Australian subsidiary is conducting R&D activities on its behalf or whether the R&D activities are conducted for (or to a significant extent for) the benefit of a related foreign entity.
- Further to point 1, if the ATO deems that that R&D activities are conducted for the benefit of a foreign related party then the ATO will disregard existing overseas finding certificates that have been approved by AusIndustry. An entity that is deemed to be conducting R&D for the benefit of a foreign-related party would not be able to claim overseas R&D expenditure.
- Concerningly, the ATO has indicated that it may “look through” any intercompany contracts and agreements to determine the ‘economic substance’ of the arrangement between the Australian subsidiary and the related foreign entity.
Recommendations
To ensure compliance and mitigate potential issues during upcoming review activities, businesses are advised to consider the following recommendations:
- Ensure that there is an intercompany agreement in place between the Australian entity and the foreign parent company and that is signed.
- Ensure that the agreement covers all projects and activities conducted by the Australian entity from inception to now.
Where the R&D activities are being conducted on behalf of the Australian entity
- Hold semi-frequent board meetings (at least 3 times a year) to demonstrate that the Australian board controls the strategic decisions regarding the R&D activities conducted by the Australian entity in Australia and overseas.
- Hold board meetings in Australia, where possible.
- Ensure the intercompany agreement allows the Australian entity to potentially benefit from the commercial outcomes of the R&D project.
- Ensure that group commercial plans factor in the rights and commercial entitlements of the Australian entity and that these rights are considered by the board of the Australian entity.
- Ensure that the Australian entity is capitalised by way of equity (shares), as there is no requirement to repay equity funding and the Australian entity is free to commit the funds as it sees fit to the R&D project. Per example 11 of recent tax ruling TR 2021/5 | Legal database (ato.gov.au) the ATO have raised concerns with an Australian entity being funded via non-recourse intercompany loans.
- Re-consider the need to claim overseas R&D activities.
In the dynamic realm of R&D taxation, staying informed and proactive is crucial for businesses. To navigate these changes effectively and ensure compliance, we recommend reaching out to our experienced accounting and business advisory team at enquiry@primefinancial.com.au. We are well-versed in the intricacies of R&D tax claims and can provide personalised guidance tailored to your specific needs.
