Stakeholders of the Research and Development Tax Incentive (RDTI), need to understand the full impact of the Full Federal Court’s decision in the Moreton Resources Ltd v ISA case.
Importance of the case
All stakeholders of the Research and Development Tax Incentive (RDTI), across both government and industry, must fully understand the impact of the Full Federal Court’s decision in the Moreton Resources Ltd v Innovation and Science Australia (ISA) case.
Moreton Resources is the first case to reach the Federal Court, providing a judicially binding precedent in relation to the legislative meaning of ‘R&D activities’ in Division 355 of the Income Tax Assessment Act 1997. This case provides essential clarification, particularly at a time when the perceived risk of unfavourable determinations coupled with the increased cost of compliance has been deterring companies from accessing the program.
The Administrative Appeals Tribunal (AAT) has presided over several RDTI cases since the program replaced the R&D Tax Concession in the 2012 financial year that has been unfavourable to the taxpayer. For this reason, such a binding legal precedent relating to the RDTI program is timely, as confusion still reigns over how it should be administered and structured.
Background to the Moreton Resources case
Moreton Resources claimed the R&D Tax Concession (predecessor to the RDTI) for its early stage work on a pilot underground coal gasification facility in Queensland. The pilot facility failed, at which point the project was abandoned. Moreton Resources then undertook environmental remediation activities, which it also claimed under the Concession. ISA reviewed Moreton Resources’ activities under the RDTI program and found no eligible core R&D activities had taken place. The AAT subsequently upheld this view, determining although the pilot project could be considered an experimental activity under the ‘ordinary meaning’, it was not conducted for the purpose of generating new knowledge, as it was ‘testing the application of existing technology at a particular site and nothing more’.
In all, the company was set to pay back more than $9 million to the ATO.
The company appealed this decision before the Federal Court, arguing that ISA and the AAT had made an error of law in taking a narrow interpretation of ‘core R&D activities’.
Case outcomes – A precedent is set for defining ‘core R&D activities’
The Federal Court ruled in agreeance with Moreton Resource’s argument, noting ISA’s reliance on extrinsic materials, such as the explanatory memorandum, was not appropriate in situations where the wording of the statutory text is clear. In the case of defining ‘core R&D activities’, the Federal Court determined the statutory text is sufficient in constructing a definition, being those experimental activities that:
- Have an outcome that cannot be known or determined in advance, but can only be determined by applying a systematic progression of work
- Are conducted for the purpose of generating new knowledge.
The Court found:
- An activity meeting the above requirements would likely be experimental by nature, and as such, it’s not necessary to also test whether an activity is ‘experimental’
- There was no basis in the legislation for excluding activities with the purpose of generating new knowledge, and with respect to the application of existing technology at a new site.
Furthermore, the Court noted that a core R&D activity can include more than the specific experiments undertaken, and that ‘applying the criteria to individual activities or components of the overall activities in isolation is apt to lead to error’.
Based on these judgements, the matter was remitted to the AAT for further consideration of the particular activities in question.
The Federal Court’s decision on Moreton Resources should provide clarity and comfort to those companies claiming the RDTI or considering lodging a claim. With the Court holding in favour of Moreton Resources, the legislative interpretation of ‘R&D activities’ and legal principles established by the Court will now be binding in future AAT matters.
Although this case relates to the mining sector, the industry-agnostic nature of the program means the Federal Court’s interpretation of the scope of R&D activities has relevance to claimants across all industries. The fact the definition of eligible R&D activity remains unchanged since the commencement of the RDTI program in 2012 suggests the Government recognises the importance of the program in supporting industry R&D activities in Australia.
The outcome of the Moreton Resources case highlights the current definition can achieve the stated objective of the provisions, that is, to encourage organisations to undertake activities they may not otherwise undertake because of uncertain economic return, but which, if successful, will benefit the broader Australian economy.
If you would like advice in relation to your R&D Tax Incentive claim contact your local BDO R&D adviser.