Digital Games Tax Offset Alert – Timing of Tax Return Lodgement

The following content was provided by Peter Xi, Partner, R&D Tax and Government Incentives at RSM, your trusted DGTO advisor.

Due to what appears to be an unintended consequence during the drafting of the DGTO legislation, an important technical issue has been brought to our attention relating to the timing of the tax return lodgement and including the DGTO claim in the tax return.

With other refundable tax offsets (e.g. R&D Tax), it is commonplace to lodge the primary income tax return if the R&D claim is not finalised (due to a later lodgement deadline than the tax return) and then amend the income tax return for the R&D tax offset.

The Office of the Minister of Arts and the ATO have both confirmed that the DGTO legislation technically requires the DGTO claim to be lodged with the primary income tax return. Failure to do this could result in a forfeiture of the DGTO benefit. Practically, this is an issue with possible widespread application to gaming businesses given the timing of finalising the DGTO claim, receiving the final certificate and the deadlines for the income tax return. The ATO has advised that it is not possible to utilise the usual avenue of amending your primary income tax return to include the DGTO benefit.

The ATO position can be found here under “Where to claim the tax offset.”

The law

For the legal and tax enthusiasts out there, the first instance reaction to this is most likely that the position is not correct, or it doesn’t make sense. This appears to go against the operation of how all other similar refundable tax offsets are managed in the tax system, especially as the DGTO offset is a refundable tax offset under s67-23.

The key reason why this interpretation holds from a statutory interpretation perspective is the manner in which para 378-10(1)(b) is worded. That paragraph specifically states that “the company claims the offset in its *income tax return for the income year” [emphasis added]. The use of “income tax return”, a defined term in the ITAA 1936, creates this problematic scenario.

Income tax return is in turn defined as “a return under section 161, 162 or 163 of the ITAA 1936”, which makes no mention of section 170, which is the section required for the amendment of an income tax return. Section 170 then makes no mention of sections 161, 162 or 163. In fact, section 170 only refers to the amendment of “assessments”, rather than an “income tax return”.

In other words, prima facie the text of the legislation does not appear to offer any option to access section 170. If section 170 cannot be accessed, an eligible entity would not be able to amend their income tax return or assessment to include the DGTO claim.

This position has been discussed by the Government regulators as well as tax and legal experts and it would appear there are minimal alternate interpretations which could overcome the aforementioned issue, regardless of the inconveniences and issues caused for practical application.

What if you have already lodged an income tax return and what’s next?

The ATO has indicated that there may be an alternate method to resolve this issue if one has already lodged the income tax return. This would not involve invoking section 170 or amendment of the income tax return. In fact, the ATO advice is to refrain from seeking an amendment.

It is recommended that the company and its DGTO advisor / tax agent engages the ATO on this matter if the company has already lodged the primary income tax return, then later receives a DGTO certificate.

Key program bodies have indicated that this issue will be raised with the relevant authorities with a view to amending the legislation going forward. At the time of writing this, this has not occurred.