6.1 On 3 May 2007, the IGT released his report on the case study of the ATO's handling of research and development (R&D) syndication. This case study was within a broader review conducted by the IGT on the ATO's handling of major, complex issues.

6.2 The R&D tax concession was introduced in the late 1980s as part of a package of measures to encourage innovation in Australian companies. Claimants needed to be registered to be eligible to claim. This registration process involved complete taxpayer transparency as to the facts of the arrangements and the resulting tax effects. Eligibility for registration was considered by the Taxation Concession Committee, which drew on ATO advice.

6.3 The ATO was aware that core technology valuations were a potential compliance issue at least as early as 1991 when the specific anti-avoidance provisions were introduced. It commenced an audit project specifically on R&D syndication in 1994. In 1996 amid widespread concerns of exploitation, particularly through inflation of core technology values, the then government closed the concession to new syndicates. Until late 2004, the ATO stuck to an approach that led to zero or negative core technology values, which would effectively wipe out syndicates.

6.4 Following an unsuccessful lead case litigation strategy, the ATO entered a mediation agreement on 30 July 2003 with a purpose of producing guidelines for the review of other R&D syndication cases. On 10 December 2003, the ATO entered into settlement with a taxpayer without informing them of the mediation or its purpose.

6.5 The mediation process concluded in July 2004 and guidelines were published which signalled a settlement offer in September 2004. The ATO looked into the various settlement options and decided to target the 40 investors with the largest claims, the remainder of investors were not pursued. In late 2004, the ATO offered a general settlement to those investors: settle on a 50 per cent basis with no questions asked, or prove to the ATO's satisfaction compliance with the ATO's recently issued guidelines. For 19 of these investors, it was the first time that the ATO advised them that they had to prove that they were compliant and had to evidence that compliance in order to retain their claims which were made 8 to 12 years prior. If they did not settle, the ATO would review the claim made with the possibility of full general interest charges, penalties and the application of Part IVA. As the ATO did not disclose the mediator's full guidance on the approach to determining the reasonable value for the arm's length amount (the mediator had rejected the ATO's prior approach which led to zero or negative core technology values) taxpayers were not disavowed of their belief that the ATO would adopt its prior approach in this regard.

6.6 The IGT concluded that not only had the ATO taken far too long to deal with the issue, it had acted unfairly. In relation to the some investors who had entered into settlement prior to (and on less favourable terms than) the September 2004 offer, this was because they had entered into settlement without being informed by the ATO of the mediation process that was occurring. In relation to the above mentioned 19 investors, apart from not contacting them earlier, the ATO had been aware of all the relevant facts before the arrangements in question had been entered (including the details of the syndication arrangements and their tax effect). Furthermore, the ATO were aware that there had been a significant compliance issue for 12 to 14 years and also that losses had been utilised by these investors at least 8 years prior.

6.7 The IGT therefore recommended that the ATO fully reconsider whether it had fairly struck settlements with both groups of taxpayers.

Key Recommendation 1

The Inspector-General recommends that the Tax Office fully reconsider whether it has fairly struck settlements with:

  1. the 19 investors that the Tax Office did not formally advise that their investments made more than 8 years previously would be subject to review; and
  2. those investors with whom the Tax Office negotiated settlements without telling them that at the same time it was mediating a case to develop guidelines for the resolution of R&D syndicate cases.

ATO position


ATO response

6.8 The Tax Office agreed to consider whether it should review certain cases. The Tax Office has fully reconsidered its position and concluded that the settlements in question should not be disturbed. The review covered all settlements that were made prior to the making of the general settlement offer in late 2004 and concluded that it was not appropriate to re-open any of these settlements. The taxpayers in question were advised of this review and the outcome (copies of letters available on request).

6.9 The Commissioner was informed on 1 November 2007 of the approach proposed in considering whether these settlements should be revisited. The Commissioner approved this approach on 7 November 2007.

6.10 The Second Commissioner Compliance on 30 November 2007 made the decision that the settlements should not be revisited. This decision was made after receiving a minute from the Deputy Commissioner S&ME and a supporting document containing information and options for consideration in reaching a decision as to whether equity concerns warrant re-opening of certain settlements in relation to R&D syndication arrangements.

6.11 The relevant documents are available on request.

IGT Conclusion - Partly Implemented

6.12 The recommendation above is directed at instances where the IGT concluded that taxpayers were treated unfairly by reason of the ATO's excessive timeframes and handling of various aspects of the disputes. The recommendation had two components being part (a) and (b).

6.13 The ATO did not agree to implement part (a) of the recommendation.

6.14 In a more recent IGT review,1 the underlying systemic tax administration issue that recommendation part (a) sought to address, being early ATO communication of its compliance concerns and the extent of retrospective application has been considered further. Specific recommendations were made in that report that, if implemented, should address these underlying systemic issues.

6.15 The ATO agreed with part (b) of the recommendation undertaking to review and reconsider those cases that were settled on less favourable terms than the general settlement offer made towards the end of 2004. As a result, this would ensure that the cases falling within the scope of part (b) of the recommendation would be reconsidered.

6.16 The IGT in conducting this follow up review requested copies of all the ATO's review materials. The ATO review consulted a specialist panel2 made up of senior tax officers on the proper application of the ATO's own guidelines3 for the settlement of widely-based tax disputes. The panel advised that it is generally not appropriate to re-open settlements entered into by 'fully informed' investors in good faith, unless warranted by subsequent exceptional events. In concluding that some investors were fully informed, the ATO relied on the recollection of a tax auditor that an advisor of these particular taxpayers had said that he was aware of the mediation.

6.17 The IGT is concerned that such an approach, based on the limited evidence and corroboration, is difficult to reconcile with the notion that a taxpayer is fully informed. Another concern may be the notion of what should be considered a 'subsequent exceptional event'.

6.18 The overall experience for the majority of taxpayers in this context was a very unhappy one. However, as taxpayers have not invested in these particular arrangements for some considerable time, the IGT will conclude the follow up review process at this point.

6.19 In addition this recommendation's underlying systemic tax administration issues are also considered in more detail in a recent IGT report4 that outlines a range of changes that, if implemented, should minimise the potential for unfair settlements.

1 Review into the Implications of any Delayed or Changed ATO Advice on Significant Issues (publicly released March 2010).

2 The Widely-Based Settlement Panel.

3 PS LA 2007/6 Guidelines for settlement of widely-based tax disputes.

4 Review into Aspects of the Tax Office's Settlement of Active Compliance Activities (publicly released December 2009).