Early this week, the Tax Institute of Australia (TIA) called for guidance material on the JobKeeper scheme in relation to the R&D Tax Concession and transfer pricing.
In an open letter from TIA president Peter Godber, the TIA made a submission to the ATO encouraging a more “considered approach … in relation to guidance being issued on the JobKeeper scheme”. This included giving “due consideration to the underlying policy objectives of the JobKeeper scheme”.
R&D tax incentive
The TIA argued that the ATO’s guidance under their Draft Tax Determination TD 2020/D1 would mean that taxpayers may be ineligible for the deduction.
When interpreting the TD 2020/D1, the TIA concluded that the notional deduction under the R&D tax incentive would depend on whether the JobKeeper subsidy was received directly or indirectly as a result of wages for an employee undertaking eligible R&D activities. Thus R&D activity subsidised by JobKeeper may not be tax deductible.
“The eligible employees were engaged by the taxpayer to perform at-risk R&D activities. They were not engaged by the taxpayer for purposes of being eligible to obtain JobKeeper payments. In our view, a taxpayer that is otherwise eligible for a notional deduction for the cost of employees engaging in R&D activity should not be denied that deduction because the funding for the employees is supplemented by the JobKeeper scheme,” Mr Godber wrote in the letter.
Moreover, TD 2020/21 may be counterproductive to R&D in Australia.
“Once an employee has been engaged, whether wholly or partly funded by JobKeeper, the employer may choose what work that employee is asked to undertake. If the employer chooses for that employee to undertake R&D, as is encouraged by the R&D tax incentive, then the employer should be entitled to the benefit of the R&D tax incentive.
“Alternatively, if the employer chooses for that employee to undertake ‘business as usual’ non-R&D work, then the employer will only be entitled to the ordinary deduction. It is the choice of what work is done by the employee which determines whether the R&D tax incentive is available.”
Transfer pricing arrangements and JobKeeper payments
The TIA is also concerned about the ATO’s guidance on JobKeeper payments and transfer pricing.
The TIA alleges that current ATO guidance may effectively make some taxpayers subject to transfer pricing because of the accounting method they choose.
A taxpayer who chooses to account for JobKeeper by deducting the grant from related expenses is treated as having engaged in non-arm’s length behaviour, thus making them subject to the transfer pricing rules. To avoid this, entities would be forced to instead report JobKeeper as income, removing their choice on how to report.
In addition, the TIA called for greater guidance and explanation on the ATO conclusion that “independent parties acting in a commercially rational manner would not be expected to share the benefit of the government assistance”. For instance, it was noted that this guidance does not take into account any amendments to legal arrangements between related bodies due to COVID-19 and does not explain arm’s length conditions.
There are also broader implications for other government grants.
“The relevant accounting standards provide entities with a choice as to how they report government grants related to income: either as income or by deducting the government grant from the related expense. The ATO’s approach in the transfer pricing guidance may have implications not just for transfer pricing purposes but also more generally in relation to reporting government grants,” Mr Godber said.