Federal Court ruling on R&D Tax means claimants can breathe a little easier: says BDO Australia

29 July 2019

BDO Australia has today welcomed the Federal Court’s ruling, which rejected a narrow interpretation of what constitutes ‘core R&D Activities’.

BDO R&D Tax Partner, Nicola Purser said the Court’s decision in the matter of Moreton Resources Limited v Innovation and Science Australia means that claimants of the R&D Tax Incentive can breathe a little easier.

“The Full Federal Court judgement confirms that the definition should be read more broadly,” Purser said.

“It is particularly good news for mining & non-lab based tech companies.”

“A core R&D activity can include more than the specific experiments undertaken, and therefore the activity should be assessed as a whole, rather than on the basis of the individual experiments. This was highlighted by the Court due to the fact that the phrase ‘experimental activities’ does not further narrow the definition of core R&D activities beyond the requirements that the activity:

  • has an outcome which cannot be known or determined in advance; and
  • is conducted for the purpose of generating new knowledge.

‘Experimental activities’ may include ‘activities having the purpose of generating new knowledge with respect to the application of an existing technology at a new site’. The more specific wording of the explanatory memorandum can’t be treated as a substitute for the statutory text, as the meaning of the statutory text is not unclear in this circumstance.

“The individual circumstances of the taxpayer must also be considered in applying the legislative definitions.

“The judgement affirms the original purpose of the program - to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy.”

Proposed changes to the R&D Tax Incentive legislation, designed to reduce the cost of the program by $2.4 billion were put on hold earlier this year following a senate inquiry.

Purser said: “AusIndustry (whose role is to support industry) has since further escalated compliance activities and sought to apply narrower interpretations of the legislation, in particular, with regard to the definition of eligible core R&D activities.” 

“This narrower interpretation has largely been accepted by the Administrative Appeals Tribunal.”