AAT decision on PKWK vs ISA case to encourage industry R&D claimants


PKWK is a business established to remediate contaminated soil. During construction of their soil treatment facility, PKWK undertook to determine whether it could develop a process to enable the pyrolysis of municipal solid waste.

PKWK sought to register these activities as core or supporting research and development (R&D) activities, however Innovation and Science Australia (ISA) determined these were not core or supporting R&D activities. This decision was confirmed by internal review at ISA, and as a result PKWK sought review of this decision in the Administrative Appeals Tribunal (AAT).

The decision in PKWK v Innovation and Science Australia at the AAT found in favour of PKWK. This decision should provide R&D Tax Incentive claimants with some comfort that the program is designed to encourage industry R&D and not academic R&D.

Case details

The applicant company contended that its registered R&D activities met the definition of eligible R&D activities.

Following an internal review, ISA determined none of the claimed development activities, including process design, modelling and mechanical design constituted eligible core R&D activities. In particular, ISA contended that the project activity related to operational challenges that a qualified professional could overcome using their experience and knowledge in the field. ISA further opined that the supposed ‘new knowledge’ sought did not go beyond validating existing processes and knowledge in its particular circumstance. Notable views of interest are highlighted below.

In a comprehensive 116 page decision, the AAT concluded it was satisfied the claimed core activities were R&D activities: that is, they were experimental activities whose outcome could not be known or determined in advance based on current knowledge, information or experience. Notable views of interest are highlighted below.

Consideration of related activities

The language of R&D provisions allows for a set of related experimental activities to be registered and evaluated against the statutory criteria. The AAT noted that consideration of a single outcome arising from a set of related experimental activities is therefore permitted to determine whether a particular core activity could meet the eligibility criteria.

Establishing a hypothesis

In contrast to ISA, the AAT was satisfied the fundamentals of a hypothesis could be established from several sources such as the terms of the consultancy agreements, witness statements and through oral evidence.

Creating ‘new knowledge’ threshold

The purpose of creating ‘new knowledge’ does not mandate the concept of scientific breakthrough, let alone resolution of fundamental uncertainty. The AAT concluded that activities that lead to an improvement on existing processes can qualify as new knowledge. It also accepted evidence of the key differences between what the applicant was trying to achieve when compared to existing technologies as sufficient to show the creation of new knowledge.

Establishing a progression of work

A systematic progression of work can be established by evidence including various iterations of designs, computer simulations and correction of errors. The AAT found that iterations of various documents prepared by the applicant and the various oral evidence from several witnesses revealed the existence of a logical process and a systematic progression of work.

Trial and error can be experimental

Some forms of trial and error, where assumptions are progressively tested and refined, accords with the definition or concept of ‘experimental’.


In a commercial setting, the level of record-keeping would not be as detailed or comprehensive as might be found in another institution or university. The AAT accepted that in a commercial enterprise it is not unusual for there to be no direct evidence of the activities undertaken, other than the final result, and further noted that commercial considerations should be seen in the light of industry-based objects of the Industry Research and Development Act of 1986.

BDO comment: Future implications

The AAT’s broader interpretation of the eligibility criteria in this case should provide further comfort that activities seeking to build upon an existing body of knowledge can meet the eligibility requirements. BDO believes this case aligns with the landmark Moreton Resources decision and provides further clarity and certainty about the correct legislative eligibility criteria to apply to the R&D Tax Incentive.

Furthermore, the reliance on witness statements and oral evidence to help guide its decision on eligibility for the R&D Tax Incentive aligns with the recent Federal Court decision, Commissioner of Taxation v Bogiatto. AusIndustry has already considered this case in its updated Guide to Interpretation and other recent guidance material.

BDO can assist organisations determine whether they can meet the legislative requirements to access the R&D Tax Incentive for their R&D activity. If you would like advice in relation to your R&D Tax Incentive claim contact your local BDO R&D adviser.