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MJA Updates

We have been saying that R&D can be part of business as usual and the AAT agrees

February 9, 2016 Kris Gale

Posted by 9/2/2016 2:41 PM by Kris Gale

The recent AAT decision, JLSP and Innovation Australia [2016] AATA 23 (22 January 2016) http://www.austlii.edu.au/au/cases/cth/AATA/2016/23.html, is the first decision on the definition of R&D since the R&D Tax Incentive (the Incentive) provisions were introduced in 2011. This decision confirms that R&D can be undertaken in a commercial context and it is possible to have a business as usual activity that is an eligible activity; the key is to prove you are seeking to generate new knowledge.

Most of the recent cases, whether they have looked at the legislation associated with the Incentive or the previous R&D Tax Concession, have involved the perennial challenges for R&D entities to produce and keep adequate contemporaneous documentation and properly separate R&D activities from non-R&D activities. This decision, however, provides useful guidance as to the way in which Innovation Australia is to assess the eligibility of R&D activities. The AAT confirms that the assessment should not take into account whether or not the claimant may not ultimately be eligible for the R&D tax offset due to other factors including the context in which the R&D occurs or the business circumstances of the claimant.


Whilst much of the background remains hidden, the case involved the rejection of an Advance Finding application for clinical trial activities conducted by an Australian entity of a global, corporate group where the R&D (or clinical trials) was part of a larger, world-wide, R&D project. The Tribunal found that the activities met the statutory description of a core R&D activity in that they were experimental, that new knowledge was to be generated from the activity and that the outcome of the activity could not be known in advance. The key issue under consideration by the AAT was whether the activity was conducted for the purpose of generating new knowledge.


The Innovation Australia Board (the Board) rejected the claimant’s Advance Finding application on the basis that the project did not contain a core R&D activity. The rejection was based on the fact that the activity was not considered to be conducted for (a) a purpose held by the claimantand (b) for the dominant purpose of creating new knowledge. Furthermore, the Board apparently also considered the rejection of the Advance Finding application was binding on the Commissioner of Taxation (the Commissioner) in respect of the eligibility of the expenditure for the R&D tax offset.

The AAT agreed with the Board in that the purpose of generating the new knowledge must be one that is held by the claimant. Notwithstanding that the R&D activity was being performed as part of a larger, global R&D project, the AAT determined that appropriate agreements were in place to demonstrate that the Australian entity did hold a purpose of generating new knowledge in undertaking the clinical trials.

However, the Tribunal rejected the Board’s submission that this purpose of generating new knowledge must be the dominant purpose or that a but for test applies. The Tribunal determined that the creation of new knowledge need only be “more than an insubstantial purpose”.

The Tribunal rejected the arguments that an activity can only be undertaken for the purpose of generating new knowledge if the person conducting the activity:

has an uncertain financial return from the activity (which was not the case in this matter as the expenditure was incurred in the performance of a contract for a foreign entity).
is not carrying on business as usual.
The Deputy President recognised that there can be more than one substantial purpose to undertake an activity but the mere existence of more than one substantial purpose does not preclude an activity from meeting the definition of R&D.

Furthermore, the Tribunal determined that the Board was “overreaching” its responsibility by assessing whether the expenditure would be eligible for the offset. The Deputy President noted that Board is responsible for administering the integrity of findings and not assessing the eligibility of expenditure. The Commissioner is responsible for the integrity of the taxpayer’s assessment of eligible expenditure against these activities.

The Learnings

The learnings from this case are:

R&D entities need to be able to show the purpose of each core R&D activity. The plan, execution, measurement of results and the response must show that R&D was “more than an insubstantial purpose” yet it does not need to be the purpose that outweighs all others.
R&D can be conducted in a commercial context and it is possible for an R&D activity to be a business as usual activity as long as the R&D entity can demonstrate a substantial purpose for each core R&D activity is to generate new knowledge.
An activity must be conducted for the R&D entity or for an associated foreign company. If the later, then proper agreements need to be in place.
When your R&D is reviewed by AusIndustry (for the Board) or the ATO (for the Commissioner), it is important that the review process is managed by you and your R&D advisor to make sure that the appropriate administrator is following due process. An initial rejection of activities or expenditures need not be the end of the matter. The crucial requirement is ensuring you have the appropriate arrangements and documentation in place and that you co-operatively work with either or both administrators to resolve the claim to the full extent of its eligibility.
Should you wish to discuss this matter further, please do not hesitate to contact
Kris Gale, Sarah Lander or Ian Ross-Gowan on (02) 9810 7211.

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