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Harsh R&D promoter penalties

Harsh R&D promoter penalties

Ross Hocking, Melissa Bader and Tass Kourkoulis discuss the outcomes of a recent decision in regarding to R&D promoter penalties.

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Football on ground

Recently, the Federal Court of Australia (FCA) (Logan J) handed down its decision in Commissioner of Taxation v International Indigenous Football Foundation Australia Pty Ltd [2018] FCA 528. Logan J ordered a civil penalty of $4.25 million to a company for acting as a promoter of a tax exploitation scheme (promoter penalties).

Promoter penalty provisions were introduced in 2006, aimed at imposing penalties on entities (including individuals) that promote taxation exploitation schemes.

The respondent company was found to have provided research and development (R&D) Tax Incentive advisory services through ‘separate’ and ‘bespoke’ schemes to a range of clients through a common business model (the decision addresses the imposition of penalties in detail but barely addresses the nature of the promotion of the scheme). His Honour also held that the company’s director had contravened the promoter penalty provisions, however, the director entered into a statutory undertaking with the Commissioner of Taxation and therefore, no civil penalties were imposed.

This is the first R&D promoter penalty decision (the first promoter penalty decision was the Ludekens decision) and reflects a climate of increased scrutiny by the Australian Taxation Office (ATO) of promoters of tax exploitation schemes. Logan J was particularly mindful of the precedential value of the case and stated that it was “necessary to fix penalties at a level which would make it a form of economic suicide to engage in such activities”. His Honour highlighted that as well as civil penalties, entities engaged in the promotion of tax exploitation schemes at a severe level also risked the imposition of criminal sanctions, which includes imprisonment for culpable individuals (though they were not applied in this case).

In his judgment, Logan J observed that “[t]he range of research and development activities is limited only by the bounds of human ingenuity” and that the R&D Tax Incentive is currently “uncapped”. His Honour asserted that there was a very real and corresponding need to send a loud and clear message of general deterrence by the imposition of a penalty for entities who purport to exploit the R&D Tax Incentive.

The FCA found that:

  • in six of the 10 claims, amounts were claimed that had not been expended
  • in one claim, an R&D amount was claimed and calculated for the 2013 year even though the expenses related to R&D activities conducted between 2008 and 2010
  • in one claim, a draft R&D claim represented 88 percent of the client’s aggregated turnover, which, if formally lodged and assessed, would have constituted an unsubstantiated and excessive amount
  • in one claim, a client lodged an R&D expenditure claim of $1,176,330, despite the client not conducting any eligible R&D activities in that financial year.

Logan J has clearly signalled that the courts will strive to uphold the integrity of incentives within the Australian tax system through the imposition of heavy civil, and potentially criminal, penalties upon entities found to engage in the promotion of tax exploitation schemes.

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