1.1 This is a report on the case study of the Australian Taxation Office’s (Tax Office) handling of research and development (R&D) syndication. It is a case study within a broader review conducted by the Inspector-General of Taxation (Inspector-General) on the Tax Office’s handling of major, complex issues. Two other case studies form part of this review. They are the case study on service entity arrangements and the case study on living away from home allowances. Separate reports have been prepared for those case studies. A further report drawing together consistent themes from the three case studies (the fourth report) will be prepared in due course.

1.2 The review was conducted pursuant to subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act 2003). It was initiated by the Inspector-General. The decision to undertake this review was prompted by concerns raised by industry and tax practitioners.

1.3 On 11 August 2005, the Inspector-General announced his forward work programme which included this review as a potential review. On 17 August 2005, he met with the Tax Office to discuss his forward work programme. Terms of reference for the review were announced on 31 October 2005. A copy of the terms of reference is reproduced in Appendix 1 of this report. The review team comprised Rick Matthews, Deputy Inspector-General of Taxation, and David Pengilley, Senior Adviser.

1.4 In relation to the R&D syndicates case study, the Inspector-General received 37 submissions from a range of investors and researchers in research and development syndicates, tax practitioners and representative organisations. A summary of the issues raised by these submissions was provided to and commented on by the Tax Office. Inspector-General staff visited the Tax Office’s National, Sydney, Waymouth and Casselden Place offices to interview Tax Office staff and access documents. Staff also visited private sector offices, conducted reference groups in Melbourne and Sydney and visited the offices of AusIndustry and the Treasury. The Inspector-General did not look at all 245 syndicate cases. He viewed Tax Office files for a sample of cases to understand what had happened during the Tax Office’s handling of the issue. Inspector-General staff also discussed issues relating to a case the Tax Office mediated with the mediator involved.

1.5 During the course of the review, the Inspector-General was made aware of several public documents. These are cited in Appendix 2.

1.6 In accordance with section 25 of the IGT Act 2003, the Commissioner of Taxation was provided with a reasonable opportunity to give submissions on any implied or actual criticisms contained in this report. A submission was received on 16 April 2007. This submission, incorporating the Inspector-General’s comments, is reproduced in Appendix 3.