What is the ATO up to now?
A couple of weeks ago, the Innovation Segment of the Australian Taxation Office (ATO) circulated a consultation paper regarding the operation of Section 73CA ITAA 1936 (”Guaranteed returns to investors”) in the research and development (R&D) tax concession.
Background
Section 73CA was introduced in 1990 to principally deal with R&D claims made by companies involved in R&D syndication arrangements. Claimant companies entered into syndicated R&D arrangements that removed most of the commercial risks to investors by guaranteeing a minimum return. The section operates to deny the concessional component to deductions based on expenditure related to R&D activities where the company is not at risk in respect of the whole or a part of the expenditure
Implications
The paper proposes scenarios beyond syndicate arrangements where it suggests that claimed R&D expenditure may not longer be considered to be at risk. The areas discussed include arrangements relating to the subsequent sale of the results of R&D activities, potential insurance payouts, guarantee/warranty agreements and grants/recoupments. However, no guidance as to how such a view could be reached is provided. Nor are any concrete examples put forward for discussion.
Our Concerns
We are concerned with the overall quality of the consultation paper in that it does not state the objective or direction of the potential tax ruling nor does it provide any examples of how the ATO believes that the provisions could operate to restrict claims made with respect to certain R&D arrangements.
MJA’s Planned Submission
In responding to the paper, MJA will be submitting that the intent of the legislation is to prevent a taxpayer from getting a concessional deduction where the expenditure is truly not at risk and the return is fully guaranteed such as was the case in the old R&D syndication arrangements. Expansion of the interpretation of the legislation into the four areas highlighted above should be vigorously resisted.
And what about the timing?
Finally, our eyebrows have been raised by the ATO opening up a discussion on a restrictive view of this aspect of the R&D tax concession some 16 years after the provision was legislated! And just when the National Innovation Review (NIR) is looking at sprucing up the support offered by the R&D program. We’re reminded of the draft ruling on the old exclusive use of plant provisions that appeared 14 years after the R&D tax concession began. It appeared just prior to the Prime Minister’s Innovation Action Plan. It died a quiet death and we look forward to this view of Section 73CA doing the same as the results of the NIR emerge.
Your reactions?
If you would like your concerns included in our response, please contact Kris Gale, Managing Director, MJA on (02) 9810 7211.
