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 subject of review. MinterEllison represented the Commissioner of Taxation (Commissioner).
The Decision is significant as it finds 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.
GQHC's challenge on R&D Tax Incentive availability
GQHC, a company within a group conducting a chicken growing business, applied for review of the Commissioner's objection decision for the income year ended 30 June 2013 (2013 Income Year).
The Applicant objected to its deemed income tax notice of assessment for the 2013 Income Year, seeking to increase its claim to the Research and Development Tax Incentive (RDTI).
Broadly, the RDTI provides a tax offset to eligible companies conducting eligible R&D activities. The RDTI is jointly administered by AusIndustry on behalf of IISA together with the Australian Taxation Office (ATO). Companies must register R&D activities with AusIndustry then claim their tax offset through annual tax returns with the ATO. The RDTI operates on a self-assessment basis and is required to be done in each relevant income year.
As an entity with aggregated turnover of more than $20 million, GQHC would have been entitled to an offset equal to 40% of total eligible R&D expenditure during the relevant year.
Eligibility of registered R&D activities
The issues in dispute were:
- whether the Commissioner (and therefore, the Tribunal) has the power to assess or make decisions as to whether GQHC's registered activities, conducted under four separate projects, consisted of eligible R&D activities as defined in Division 355 of the ITAA 1997;
- and if so, whether the relevant activities were eligible 'R&D Activities' within the meaning of s 355-20 of the ITAA 1997; and
- whether certain amounts should be included in GQHC's assessable income, as a "feedstock adjustment", pursuant to subdivision 355-H of the ITAA 1997.
GQHC contended that the Commissioner did not have the power, and thus the Tribunal did not have jurisdiction, to determine whether certain activities constituted “R&D activities”. This was in circumstances where the Board had not made any findings (under ss 27B or 27J of the Industry Research and Development Act 1986 (Cth)) (IRD Act) and had not issued the Commissioner with a certificate of any findings (under ss 27C or 27K of the IRD Act).
An extensive amount of scientific and industry data, as well as expert reports, was presented during the proceeding. This was particularly in relation to the nutrition and digestive processes of poultry, focusing on those activities GQHC claimed as eligible R&D activities in the relevant year.
Tribunal's verdict
The issue of ‘eligibility’ is the cornerstone of the RDTI and disputes as to eligibility have historically been in the domain of IISA. Accordingly, this is the first decision dealing with R&D eligibility where the Commissioner is the Respondent and this very issue, as to whether the Commissioner has jurisdiction to assess eligibility, was tested in the AAT.
What this means is that the Commissioner will not be hamstrung in those instances where IISA has not formally reviewed or denied ‘eligibility’ of a taxpayer's registered activities. It does raise a strategic question as to whether taxpayers would prefer to contest an R&D dispute with IISA or the Commissioner, and may well lead to future R&D amended assessments or audits conducted by the ATO on the issue of ‘eligibility’.
The Tribunal found that, on the available material, none of the activities conducted by GQHC under the four projects were 'core R&D activities' under s 355-25 of the ITAA 1997. As a result, none of the activities were eligible 'R&D activities' within the meaning of s 355-20 of the ITAA 1997.
The Tribunal indicated that, whilst it was not necessary to determine whether a feedstock adjustment was required given it had found GQHC did not undertake eligible R&D activities, it would proceed to make findings noting the 'significant time and expense incurred…by the parties on this issue'. The Tribunal considered whether the relevant expenditure (chickens or their feed) constituted a feedstock input that had been 'transformed or processed' during the Registered Activities. The Tribunal found that the feed and chickens were transformed and processed during the Registered Activities.
The Decision also:
- contains a helpful summary of the relevant legislation applying to claims for R&D expenditure during the relevant year, at paragraphs [57] to [98]. Changes to the RDTI have since commenced effective 1 July 2021, however this summary remains broadly illustrative of the legislative process applying to entities claiming the RDTI.
- reinforces the important of taxpayers maintaining sufficiently detailed contemporaneous records of any activities claimed as R&D. Furthermore, ensuring best efforts are applied to storing or archiving those records in case of a later dispute.
- Provides some observation of interest to legal practitioners in respect of briefing experts, including the way in which those questions posed to experts are framed.
The views expressed in the preceding article are those of MinterEllison and are not to be taken as a representation of the Commissioner's view.
Please contact us if you have any queries or require legal assistance relating to Research & Development disputes.