Putting the R&D Tax Incentive To The Pub Test: Is This The End For AusIndustry?

March 21, 2024 Kris Gale

When we look back at the towering achievements of the 21^st century, one phenomenon that is likely to be at the head of the queue is the rise of the ‘pub test’. The test is regarded as something the ordinary patron in an Australian pub would understand and accept to be fair, were it to come up in conversation.

Well, this week, the operation of the R&D Tax Incentive (the RDTI) has been clarified in the courts in a way that appears to be counter to almost 40 years of administrative practice and one which I contend fails when put under that most onerous of Australian spotlights – the pub test.

The ATO Can Decide What Qualifies As R&D

On Friday 16 February 2024, the Administrative Appeals Tribunal (AAT) released reasons for decision in the matter of GQHC v Commissioner of Taxation [2024] AATA 409 (the Decision).

The AAT has affirmed the Commissioner of Taxation’s objection decision which was the subject of the review. The AAT found that, absent a finding by Industry, Innovation and Science Australia (IISA), the Commissioner does have the power to assess or make decisions as to whether a Research and Development entity’s activities constitute eligible “R&D activities” within the meaning of s 355-25 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). The AAT follows obiter on this point from the Full Federal Court in Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; (2021) 284 FCR 294.

This decision comes off the back of a great deal of noise in recent years that the ATO has been effectively determining the eligibility of R&D activities in risk assessments and audits without the involvement of AusIndustry and the IISA. The delivery of the Auctus Resources obiter crystallised concerns that the Australian Taxation Office (ATO) was empowered to do so despite the widely-understood convention that the ATO should refer all matters concerned with the eligibility of R&D activities to IISA.

I was involved in the Board Of Taxation’s’ November 2021 Report on the RDTI’s Dual Agency Administration Model which looked at this matter in some detail. Many bodies that made submissions talked about the uncertainty that had come into the division of responsibilities between AusIndusty and the ATO as a result of the ATO’s increasing involvement in matters concerning the eligibility of R&D activities and that the fact that having two bodies able to decide the most fundamental RDTI eligibility question – what is R&D? – would make the system entirely unworkable for taxpayers.

The Board of Taxation recommended that the dual agency model be retained because of the distinct skill sets Ausindustry and the ATO had in relation to the RDTI and that the uncertainty be removed either by legislation or by a clear commitment in an RDTI Program Charter that was being proposed. (A Charter has emerged but is effectively silent on this issue.)  The GQHC decision now means that the uncertainty has become a reality and this matter requires urgent attention at a political level.

Why Is This Happening?

The Board Of Taxation evaluated the merits of the dual agency and single agency delivery model in its extensive consultation process. There were submissions made in support of both approaches. All the advocates for a single agency delivery model contemplated the ATO as the single regulator, given the RDTI is ultimately a tax instrument. However, not one submission recommended that, under a dual agency model, AusIndustry and the ATO should be able to make decisions on the same issue, namely eligibility of R&D activities. Not one.

It is apparent that there are issues still needing to be worked through between the two agencies in order to successfully deliver the RDTI. The GQHC decision appears to be reflecting a lack of trust in the ATO about the results that AusIndustry is producing, yet this is the agency that serves an IISA Board that has been legislatively established to make binding findings in this key area. And the GQHC case reconfirms that the Commissioner is bound by those findings. It is stunningly apparent that this matter needs to be resolved with the involvement of all stakeholders as a matter of urgency.

I remain a staunch advocate for the dual agency model because of those distinct skill sets which the two groups bring to the table and the incontrovertible benefits associated with having two bodies with complementary but separate objectives in terms of delivery of industry support programs and protection of revenue.

For some time, I have been characterising this phenomenon whereby each agency seems to be very keenly interested in the matters regulated by the other body when conducting R&D risk assessments/audits as the ‘movie star/rock star effect’. Entertainment history is littered with attempted crossovers of various levels of success. By way of illustration, Russell Crowe once remarked that he was “a musician that happens to act”. I stand to be corrected but fans of his band, 30 Odd Foot Of Grunts, do not appear to legion. Perhaps, Russell and the ATO best serve us all by staying in their respective lanes.

This problem can be fixed and fixed quickly. Let’s all drink to that and make it happen.