Intangible asset arrangements we review
We review international arrangements that:
- don't recognise intangible assets developed in Australia or
- incorrectly characterise either;
- intangible assets,
- activities or conditions connected with intangible assets.
Taxpayers may engage in operations that require the use or enjoyment of intangible assets developed, maintained, protected or owned in a foreign jurisdiction. We're concerned when these taxpayers fail to pay, or recognise payment of, a royalty under Australia’s tax treaties and laws.
We're also concerned with migration of intangible assets. Migration refers to any transactions that allows an offshore party to access, hold, use, transfer, or obtain benefits in connection with, Australian intangible assets or associated rights.
In these circumstances, there is typically a significant mismatch between the substance of the relevant parties' operations and the form of their legal agreements. There is also generally an incorrect characterisation of the relevant assets and activities performed in connection with such assets.
Our concerns
We're concerned that:
- parties to arrangements of this type may not comply with Australian royalty withholding tax obligations associated with consideration for the use of intangible assets, under Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953
- the analysis or methodology used to determine the arm's length conditions or profits connected with these arrangements may result in parties getting a transfer pricing benefit for the purposes of Division 815 of the ITAA 1997
- the Australian entity disposes of their intangible assets to the offshore related party or the Australian associate of the offshore related party for nil or low consideration on non-arm’s length terms, minimising its CGT liability – the Australian entity may have also inappropriately utilised other CGT concessions, such as the rollover in subdivision 126-B ITAA 1997
- such arrangements may be entered into or carried out for the dominant or principal purpose of obtaining a tax benefit – this may attract the application of Part IVA of the ITAA 1936 or the diverted profits tax or both
- intellectual property arrangements involving inadequate reward for either
- value contributed by the Australian entity
- non-arm's length migration of rights in property created by the Australian entity.
Guidance on activities and non-arm's length arrangements
For more information on mischaracterisation of activities and non-arm's length arrangements, see:
- PCG 2024/1 Intangibles migration arrangements
- TA 2018/2 Mischaracterisation of activities or payments in connection with intangible assets
- TA 2020/1 Non-arm’s length arrangements and schemes connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets.
- Draft Taxation Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights.