The reference to 'supply of goods and services' in paragraph 2 of the final Ruling has been changed to 'products or services' for clarity. That paragraph addresses the purpose of the Ruling, being to provide certainty to taxpayers on the application of the 'at risk' rule in a broad range of situations. It provides the example of where research and development (R&D) activities are carried out in the context of commercial contracts for the supply of products or services, as this is a common scenario where the 'at risk' rule applies and mistakes in its application may occur. It does not define or limit the view in this Ruling on the meaning of 'consideration'.

The reference in the final Ruling to footnote 40 of the Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration is included to refer readers to guidance on the Commissioner's view on the valuation of non-monetary consideration. The principles are relevant in other contexts, such as the 'at risk' rule, where non-monetary benefits are received. The reference does not suggest conformance with the GST Act definition of 'consideration'.

This contradicts the Decision Impact Statement on Bogiatto which limited the use of the case to circumstances involving promoter penalty laws.

It is inconsistent to limit the application of Thawley J's comments on record keeping to the promoter penalty provisions yet use other aspects of the case to widen the meaning of consideration in section 355-405.

Bogiatto is referenced in the draft Ruling in the context of illustrating how courts have approached the interpretation of the term 'consideration' to include non-monetary benefits. We have not broadened the meaning of 'consideration' in the final Ruling, rather interpreted it as having regard to recent case law.

In particular, Ludekens does, in fact, consider whether non-monetary consideration would include a loan. At [40] in Ludekens, Middleton J noted that '... the Commissioner submitted that 'consideration' as it appears in s 290-60(1)(b) may encompass the receipt of non-monetary benefits (such as a promise to perform or pay an amount)' (emphasis added).

Middleton J also stated in Ludekens at [46]:

I accept the submissions of the Commissioner that had the legislature intended to strictly confine the application of s 290-60 to monetary benefits, it could have employed a more definite term to achieve such an end (such as 'payment' or 'amount').

Paragraph 3.166 of the EM focuses on the application of the results test. In that example, the expectation of receiving consideration for the development and sale was based on:

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the terms of the contract, and

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the entity's experience and technical capability concerning the degree of confidence about successfully performing that contract.

Where product development involved R&D activities, and delivery of the product required those R&D activities to be, in effect, successful, it cannot be said that the consideration could reasonably be expected to be received regardless of the results of those activities.

Example 6 of the final Ruling does not state the 'at risk' rule will not apply to all contracts involving the sale and development of a product. Rather, it likewise illustrates the 'at risk' rule will not apply where such sale and development of a product is dependent on the outcome of the R&D activities. That is, Example 6 of the final Ruling is consistent with paragraph 3.166 of the EM.

The phraseology in paragraph 20 of the draft Ruling of the term 'their' instead of 'the' could lead the reader to assume that consideration for any expenditure could be used to deny a notional deduction.

We think it is clear from paragraph 4 of the final Ruling that it is only expenditure that can be notionally deducted under Division 355 that can be claimed for the R&D tax offset.

The term 'their' used in paragraph 19 of the final Ruling is in reference to that entity's R&D expenditure, not any expenditure.

Consideration, in the context of section 355-405, must be received or reasonably expected to be received as a result of expenditure incurred. That expenditure must be incurred on the conduct of activities which the R&D entity registers under section 27A of the Industry Research and Development Act 1986.

If the consideration is not receivable as a result of incurring the expenditure on registered R&D activities, the first part of the 'expenditure not at risk integrity measure' fails.

As explained in paragraph 19 of the final Ruling, section 355-405 is an integrity provision which reduces or denies eligible notional deductions if the expenditure is not at risk. Subparagraph 355-405(1)(a)(i) makes reference to the consideration being as a direct or indirect result of the expenditure being incurred, not activities.

Whether the 'at risk' rule would apply to loans that are subsequently converted to equity will depend upon having regard to the factors in subsection 355-405(3), in addition to satisfying the nexus to expenditure test and regardless of results test.

Whether the 'at risk' rule would apply to venture funding depends upon the particular facts and circumstances that give rise to the funding, including any terms and conditions related to convertible notes or debt instruments. This will depend upon having regard to the factors in subsection 355-405(3), in addition to satisfaction of both the nexus to expenditure test and regardless of results test.

Taxpayers seeking further certainty are encouraged to engage with the ATO for advice or guidance.

However, an R&D entity cannot deduct expenditure under sections 355-205 or 355-480 if the conditions of section 355-405 are met. Therefore, section 355-410 cannot apply where the 'at risk' rule applies.

Paragraph 3.54 of the EM uses the term 'effectively owns' in explaining one of the factors considered in determining whether R&D activities are 'conducted for' the R&D entity under section 355-210.

Section 355-405 can limit the deduction of expenditure allowable under section 355-205. The types of activities an R&D entity can deduct under section 355-205 must meet the criteria set out in section 355-210.

The last sentence in paragraph 5 of the draft Ruling suggests that any consideration received will mean that expenditure is denied.

Paragraph 4 of the final Ruling states that the 'at risk' rule compares consideration with R&D expenditure and may deny or reduce the expenditure you can claim for the R&D tax offset. This does not mean any consideration will result in the R&D tax offset being denied.

However, we disagree that the term 'expenditure' should be changed to 'expenditure incurred' throughout the Ruling, because the term 'expenditure' also arises in other contexts in the section; for example, the consideration being a 'result of the expenditure being incurred' (subparagraphs 355-405(1)(a)(i) and (2)(a)(i)) and the 'activities on which the expenditure is incurred' (subparagraphs 355-405(1)(a)(ii) and (2)(a)(ii)).

'However, where it can be shown that the consideration would be received without the expenditure being incurred, no denial of notional deductions for the expenditure will result.'

'Can it be objectively concluded when the money was spent that you or your associate will receive or could reasonably be expected to receive consideration whatever the outcomes of the R&D activities are?'

We consider the wording in paragraph 35 of the final Ruling sufficiently explains the objective nature of the test.

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the technical R&D outcomes not being relevant as to whether Fortasse receives the consideration, and

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the 'timeliness and quality standards' are part of expected processes required to conduct the research in an appropriately rigorous nature, not part of the technical matter/hypothesis being investigated through conduct of R&D activities.

Taxpayers seeking further certainty are encouraged to engage with the ATO for advice or guidance.

The clawback adjustment guide recognises that, in some cases, a government grant might cause the application of the 'at risk' rule depending on the particular circumstances.

It fails to take into account that former Subdivision 355-G (up to 30 June 2021) and current section 355-440 (from 1 July 2021) recognise that the expenditure is eligible and is not affected by the 'expenditure not at risk' provisions.

Normally the arrangements with such a grant or subsidy require the R&D entity to report on the progress and results of the funded R&D. This meets the requirement that the consideration must only be receivable with regard to the results of the R&D activities because the R&D entity's periodic and final reports require the results to be measured, documents and reported.

We note that the clawback recoupment provisions contained in Subdivision 355-G have no application where a notional deduction has been denied in full, including where this result occurs by virtue of the 'at risk' rule applying. This view is consistent with that expressed by the Commissioner at paragraph 7 in Taxation Determination TD 2021/9 Income tax: JobKeeper payments received or expected as a result of research and development expenditure as to the application of the 'at risk' rule to JobKeeper amounts received by an employer R&D entity.

Whether an R&D entity needs to report on the progress and results of its R&D activities to receive a grant or subsidy is not determinative to whether the 'at risk' rule applies. A requirement to report on progress and results does not mean the consideration cannot be received, or reasonably expected, regardless of the results of those activities. As stated at paragraph 34 of the final Ruling, '[t]he 'results' are the outcomes of your R&D activities on which you incurred R&D expenditure, rather than the process that led to those outcomes'.

The interpretation adopted in the draft Ruling would result in the 'at risk' rule applying to all government recoupments, both reimbursements (for example, subsidy or rebates) and grants. This would make Subdivision 355-G redundant which cannot be the correct application of these provisions.

However, we do not agree that the interpretation of section 355-405 in the Ruling renders the clawback recoupment provisions in Subdivision 355-G redundant, with no work for the provision to do.

The clawback recoupment provisions could still apply where the elements of section 355-405 are not satisfied, such as where an R&D entity:

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incurs R&D expenditure for which no consideration is received or could reasonably be expected to be received at the time they incur the expenditure, or

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receives a grant that was conditional on the successful outcome of the R&D activities.

Even where a government grant or subsidy constitutes 'consideration' for the purposes of the 'at risk' rule, the 'nexus to expenditure test' and 'regardless of results test' must both be satisfied for the 'at risk' rule to apply. For example, Cash flow boost tax time essentials states that an R&D entity does not trigger the 'at risk' rule if they receive a cash flow boost payment.

Whether the R&D expenditure (and R&D activities) are likely to result in commercially valuable knowledge is not determinative of whether the 'at risk' rule will apply.

It is necessary to identify consideration received or reasonably expected as a direct or indirect result of the R&D expenditure incurred, not merely the possibility of commercial valuable knowledge being created. For instance, as noted in paragraph 29 of the final Ruling, the 'at risk' rule does not apply to consideration from a contract an R&D entity had not reasonably expected to enter when they incurred the expenditure.

The acquisition of the glider is more directly linked to the manufacturing costs that the taxpayer incurred in building the glider.

The remaining R&D expenditure (besides the $100,000 reimbursed) remains at risk because the taxpayer will not have any financial benefit from the contract if it does not result in an improved product.

Whether the acquisition of the glider is 'more directly linked' to another variable, such as the manufacturing costs, does not determine whether the 'at risk' rule applies. It is not necessary to identify the prevailing or dominant reason for which consideration is received or reasonably expected.

The 'at risk' rule is concerned with expenditure that can be notionally deducted under sections 355-205 or 355-480, rather than whether the taxpayer receives a net financial benefit from a contract.

The explanation in paragraph 72 of the final Ruling is clear regarding Volatus' obligation to pay Icterine either $200,000 for an existing glider without improved range or $500,000 for a glider with improved range. Paragraph 73 of the final Ruling also makes clear that either acquisition is conditional on R&D activities being conducted first.

This artificial circumstance is used to create the impression that the choice to purchase the unimproved version only if the R&D entity conducts R&D activities renders some of the R&D expenditure not at risk. This is a poor example of receiving consideration as an indirect result. It needs to be rewritten to prevent this from causing incorrect assessments by taxpayers or in ATO reviews.

Usually, the contractual arrangement between the parties is such that a contractor (Vahest) would not have a reasonable expectation to receive consideration for expenditure incurred on R&D activities where the R&D is not successful.

Providing a counterfactual scenario could be as follows:

However, if the contractual arrangement between the parties is such that Vahest would not be entitled to receive consideration for the $100,000 incurred on R&D activities where the R&D activities are unsuccessful then it may be the case that the expenditure incurred by Vahest is at its risk.

The mere construction of the plant would not likely constitute either a core R&D activity (no new knowledge) or supporting activity (plant construction costs not incurred for the dominant purpose of testing work). It is likely that the claim will be limited to the cost of activities related to testing the performance of the equipment in the specific circumstances required by Peradventure.

The risk provisions should therefore be limited to an adjustment based on the amount of consideration received for the conducting of the testing activities involving R&D.

For this reason, it is not correct that the entire $500,000 has the requisite nexus to the R&D expenditure incurred. It seems unlikely that where $500,000 is paid for acquisition of the device, and $100,000 relates to R&D activities, that no part of the remaining consideration is received for activities or physical supplies that are not related to expenditure incurred on R&D.

Example 7 of the final Ruling illustrates that the consideration must be received, or reasonably expected, as a direct or indirect result of the R&D expenditure being incurred.

As stated in paragraph 20 of the final Ruling, there is no requirement that consideration is received 'for' incurring the expenditure, or as a result of conducting the R&D activities.

During stage 4 and 5, the taxpayer incurs R&D expenditure of $160,000. At the time it incurs the expenditure, it cannot be concluded that consideration will be received for the R&D activities regardless of the outcome. Therefore, the expenditure at risk is $160,000.

The expenditure denied under the 'at risk' rule should be limited to $240,000.

The example indicates that consideration that is not directly or indirectly related to expenditure incurred on R&D is still taken into account in the reduction of notional deductions. This is not consistent with paragraph 41 of the draft Ruling which implies the need to apportion consideration 'where only part of the consideration satisfies the nexus test.'

However, we do not agree with the comments that suggest the 'at risk' rule matches consideration received, or reasonably expected, precisely against R&D expenditure that the consideration is received 'for'. This is an incorrect interpretation of the test, as the nexus between the consideration and expenditure is merely 'a direct or indirect result'.

We do not agree that Example 9 applies a whole of project methodology. Each amount of consideration, and whether it satisfies both the 'nexus to expenditure test' and 'regardless of results test', is examined separately.

Taxpayers seeking further certainty are encouraged to engage with the ATO for advice specific to their circumstances.

Paragraph 127 of the final Ruling states:

... effectively, Little P's loan would be forgiven to the extent to which the outstanding liability to Peradventure is greater than the value (if any) of the outcomes of the R&D activities and related information to Peradventure.

The application of the 'at risk' rule needs to be determined when the R&D entity incurs the R&D expenditure. Based on the facts in Example 11 of the final Ruling, taking into account what was likely to happen or exist after the R&D expenditure was incurred, no value could be applied to the outcomes of the R&D activities and related information. Therefore, the value of the consideration Little P could reasonably be expected to receive was $10 million.

The final Ruling should provide examples of when the Commissioner is likely to form this opinion and what an R&D entity can do to ensure that internal funding arrangements will not render the entirety of the R&D expenditure not at risk.

A comprehensive list of all things that will be taken into account is not possible, as this depends upon the facts and circumstances of each case. If further certainty is required taxpayers may engage with the ATO for advice or guidance.

We are unable to cover every variation in facts in the final Ruling.

Taxpayers seeking further certainty are encouraged to engage with the ATO for advice or guidance.

Typically, the loans will be repaid where the R&D is a success, either in cash or equity, but not if the R&D activity results in failure. Hence, whether the claimant is at risk for the expenditure outlaid from the loan funds is not 'regardless of the R&D results' - both success and failure are R&D results.

The Commissioner may consider it likely that a loan will not be repaid long before any commercialisation failure or debt forgiveness occurs. What can an R&D entity do to ensure that internal funding arrangement will not attract the 'at risk' rule?

However, the eligibility of an activity is a prerequisite issue that needs to be determined before section 355-405 has any application. Section 355-405 is an integrity provision whereby eligible notional deductions may be reduced or denied where the expenditure is not at risk.

If a loan contract specifies that the borrower will not be liable to repay the loan amount if R&D activities are a failure, then it is likely the 'at risk' rule would apply for the reasons given in Example 11 of the final Ruling. If the borrower is merely practically unable to repay the loan (but legally obligated to do so), then it is less likely the 'at risk' rule would apply. In both scenarios, anything that is likely to happen or exist after the time the R&D expenditure was incurred needs to be taken into account to determine the value of the consideration received, albeit the value of the consideration received at the time the expenditure was incurred.

If further certainty is required taxpayers may engage with the ATO for advice or guidance.

The R&D entity retains all IP and knowledge and makes key project decisions.

The contract specifies that the customer will not need to incur any consideration if the R&D entity was unable to fulfill the terms of the contract.

In this scenario, the 'at risk' rule would not apply to deny or reduce expenditure on the R&D activities and expenditure on the non-R&D activities would be excluded from notional deductions.

To the degree the proposed example involves non-R&D activities being excluded from notional deduction, we note that this is not a matter involving interpretation or application of the 'at risk' rule.

Taxpayers seeking further certainty are encouraged to engage with the ATO for advice specific to their circumstances.

Taxpayers seeking further certainty are encouraged to engage with the ATO for advice specific to their circumstances.

Taxpayers seeking further certainty are encouraged to engage with the ATO for advice or guidance.

This aspect of the application of the 'at risk' rule is uncontentious and we think it does not require a specific example.