Companies accessing the Australian Research and Development (R&D) Tax Incentive program can now do so with more confidence after a significant Federal Court ruling rejected The Administrative Appeals tribunals (AAT) somewhat narrow interpretation of what constitutes a ‘core R&D activity’ under R&D tax law.
Based on our previous experience with AusIndustry (which acts on behalf of Innovation and Science Australia), we have observed that it has generally submitted that the use or application of known or existing technologies (whether it be software, manufacturing or engineering technologies), albeit in a new context (such as in a new location or for a different purpose than what the technology was intended to be used for), would not constitute ‘new knowledge’ and therefore would not be considered an eligible ‘core R&D activity’ under the legislative definition.
The recent Full Court decision in the Moreton Resources Ltd vs Innovation and Science Australia case invalidates that view, by broadening the interpretative scope of ‘core R&D activities’ – particularly for ‘experimental activities.’
The Full Court findings noted that the construction of the legislative definition of ‘core R&D activities’ by AAT (and therefore indirectly by AusIndustry) was too restrictive. For example, in AAT’s view, the application of an existing technology at a new site would not generate new knowledge and therefore would not be considered ‘experimental’.
Whilst this ruling is applied in the context of an oil and gas mining operation, it’s a welcome outcome for all R&D claimants regardless of industry or project type. It provides some level of definitive clarification that has previously confused claimants (especially those in the tech industry).
However, it is also important to note that while the effect of this decision is immediate and provides new R&D case law to guide R&D claimants, it’s still open to interpretation by AusIndustry and the AAT in terms of how they will apply it to current and future compliance reviews. Furthermore, if ISA appeals the Decision, the case could be further escalated to the High Court.
For now, this case may restore and foster confidence in the self-assessment process undertaken by entities when assessing the eligibility of their R&D activities against the legislative criteria.
Specifically, those entities that have been discouraged by the high levels of AusIndustry review activity seen over the last 12-18 months may choose to revisit the (potential) eligibility of their R&D activities and take comfort in the fact that the R&D Tax Incentive program is there to support and incentivise eligible claimants undertaking R&D.
For further information regarding the potential implications of this Decision to your company’s R&D claim, contact your local William Buck Advisor.