In brief: Pay attention to administrative details or risk ineligibility

Much has been written lately regarding the eligibility of research and development (R&D) activities under the R&D Tax Incentive program in Australia. Several Administrative Appeals Tribunal (AAT) decisions have highlighted the importance of detailed preparation and attention to detail in meeting the eligibility requirements associated with such R&D claims. Clearly, AusIndustry and the AAT have not been afraid to refuse applications and find them ineligible especially when substantiating documentation has not been available.

Most of the AAT decisions have been made on matters concerning the nature of the R&D claimed and the eligibility of that claim as a matter of law. Claimed business activities need to fall within the definition of R&D under the Industry Research and Development Act 1986 (Cth) (IR&D Act), with recent AAT decisions* providing guidance and helpful indicia supporting R&D eligibility, including:
  • having a well-documented and rigorous experimental methodology upfront
  • being able to demonstrate a systematic progress of work from hypothesis to experiment, observation, analysis and evaluation, followed by a reasoned conclusion demonstrating that the purpose of the activity was to generate new knowledge
  • having activities with novelty and sufficient levels of technical risk rather than ordinary business as usual where mere iterative steps were undertaken, and
  • ensuring records and supporting information provide the necessary evidence that the claimed activities are systematic, investigative and experimental
(*See Rix's Creek Pty Ltd; Bloomfield Colleries Pty Ltd and Innovation and Science Australia [2017] AATA 645, which provides useful insight into eligibility requirements regarding R&D activities and the need to supporting evidence and documentation. Also, RACV Sales and Marketing Pty Ltd and Innovation Australia [2012] AATA 386, Mount Owen Pty Ltd and Innovation Australia [2013] AATA 573, and Docklands Science Park Pty Ltd and Innovation Australia [2015] AATA 973.)

Administrative Appeals Tribunal decision shows that correct eligible applicant for R&D claim must also be established

One recent AAT decision, however, has highlighted the equally important step in establishing the correct eligible applicant for such R&D claims even if the R&D activities themselves would otherwise be eligible.

In DZXP, KRQD and QJJS and Innovation and Science Australia [2017] AATA 576, the AAT heard a dismissal application to have several other substantive applications set aside concerning whether DZXP, KRQD and QJJS were entitled to apply to Innovation Australia for R&D tax incentive advance/overseas findings in respect of certain overseas R&D activities, pursuant to section 28A and section 28C of the IR&D Act. Despite a number of procedural issues—Innovation Australia contended that the application was "frivolous, vexatious, misconceived or lacking in substance" and had "no reasonable prospect of success"—as to whether the AAT review had the power to affect an outcome of the R&D Tax incentive under section 355.205 and section 355.210 of the Income Tax Assessment Act 1997 (Cth), the application was not prevented from continuing.

In this case, there was no dispute as to the facts. Rather, the dismissal application only concerned a question of law, namely the application of section 31 of the IR&D Act.

Were participants in joint venture entitled to certain R&D tax incentives?

As background, DZXP, KRQD and QJJS entered into an unincorporated joint venture agreement to recover gas in Western Australia. The key substantive issue was whether DZXP, KRQD and QJJS were entitled to certain R&D tax incentives relating to the joint venture, being designed, constructed and developed by DZXP, KRQD and QJJS as participants in the joint venture.

Each company lodged individual applications for overseas findings activities, with Innovation Australia initially finding the activities ineligible. The AAT decided that a further review of the R&D activities themselves was unnecessary and irrelevant as the companies were not eligible to apply in any case, as they were subsidiaries of a multiple entry consolidated (MEC) group.

Relevantly, section 31 of the IR&D Act provides that "An R&D entity’s registration under section 27A for an income year has no effect to the extent that the registration is for an activity conducted during a period that the R&D entity is a subsidiary member of a consolidated group or MEC group, of which the head company is an R&D entity" and that "If: (a) a finding is made under this Part on application by an R&D entity that is a subsidiary member of a consolidated group or MEC group; and (b) the head company of the group is also an R&D entity; the finding has no effect to the extent that the finding is for an activity conducted during a period that the R&D entity is a subsidiary member of the group.

The Tribunal agreed with the view of Innovation Australia, that section 31 of the IR&D Act indicates that only one company in a consolidated group or MEC group should obtain the benefit of the R&D tax offsets at any given time, and that it should be the “head entity” (provided that the head entity is also a “R&D entity”) that applies for and obtains the relevant findings in relation to the particular “R&D activities”.

The Tribunal held that as only the head entity in a MEC can apply for an advance/overseas finding, DZXP, KRQD and QJJS were ineligible to apply and decided further review of the merits of the R&D claim were unnecessary and irrelevant.

Consider correct name, substantiating documentation and nature of claimed activities

Clearly, Innovation Australia, supported by Tribunal findings, is taking a hard line in refusing applications not filed in the correct name and in finding R&D claims ineligible, especially when substantiating documentation is not available and when the claimed activities are not seen to be "systematic, investigative and experimental" in nature.

These decisions indicate the critical importance in getting the administrative details correct when registering under the R&D tax incentive.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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