Federal Court hands down record $23 million penalty, over “systematic abuse” of R&D Tax Incentive scheme

The Federal Court has handed down the largest-ever promoter penalty for “systemic abuse” of the R&D Tax Incentive (RDTI) scheme, ordering a total of $22.68 million to be paid.

Former RDTI advisor Paul Enzo Bogiatto has himself been ordered to pay $6.51 million.

Three of his related entities, Ryusei, Lambda Chase Chartered Accountants and Lambda Chase Service, were also issued penalties of $6.51 million, $6.01 million and $3.65 million, respectively.

Between 2012 and 2015, Bogiatto was operating as an R&D Tax Incentive advisor, in his capacity as a registered tax agent and chartered accountant.

According to the tax office, during that time, he promoted arrangements that saw his clients lodge “overstated and unsubstantiated” RDTI claims, an ATO notice states.

If his calculations were questioned by clients, Bogiatto allegedly responded that his methodology was his intellectual property, and he would not disclose it.

In total, $45.5 million in R&D refunds were paid to Bogiatto’s clients, a statement from the ATO says.

An investigation into Lambda Chase’s activities found “systematic abuse” of the tax incentive scheme, and that claims were not reflective of clients’ actual R&D expenditure.

That had “a devastating impact” on the individuals and businesses that followed his advice, ATO assistant commissioner Ash Khera said in a statement.

In the judgment, Justice Thomas Michael Thawley suggests Bogiatto’s clients “suffered significant loss by reason of the need to repay amounts to which they were not entitled, plus interest and penalties in some cases”.

Loss or damage may also include non-financial harm, the justice noted, including in terms of the clients’ health and wellbeing.

He also specifically noted a lack of remorse from the promoters in this case, saying this contributed to the size of the penalty.

“It was submitted that the lack of remorse increased the need for specific deterrence,” the judgment said.

The size of the penalty also reflects the scale and “abusive nature” of the scheme, Khera explained.

“We want to protect individuals and businesses from being unwittingly caught up in schemes like this one,” he said.

“Those who encourage others to do the wrong thing and claim the incentive to which they are not entitled will be caught and held to account for their actions.”

Bogiatto was deregistered as a tax agent in 2017, and is no longer a member of the Institute of Public Accountants.

He is still listed as an owner of Sydney chartered accountants and auditor firm Hill & Boggiato, however, SmartCompany was unable to contact him prior to publication.

This record penalty comes amid ongoing confusion around the RDTI scheme. But, it could lead to some element of clarification.

While a range of controversial changes were scrapped in the 2020 Federal Budget, there is still confusion as to what software development is eligible under the scheme.

The bar for eligibility for software claims is also incredibly high, with auditors focusing on ensuring claims involve both scientific research and an element of risk.

In fact, members of the startup community and smallbusiness and family enterprise ombudsman Kate Carnell have called for a whole new, software-specific R&D tax scheme, saying the current system is unsuitable for businesses working in this space.

In a blog post when the Federal Court made its judgment in the Bogiatto case, Nicola Purser, R&D Tax Partner at tax consultant BDO, noted that the court had also addressed this uncertainty.

“The goalposts have been determined … not to have been properly aligned in terms of both the activity eligibility and the documentation/compliance requirements,” she wrote.

Purser, therefore, anticipates that following this case the levels of confusion and uncertainty around accessing the RDTI incentive “should be diminished” following the decision.