Australian coal mining company Moreton Resources has won a Full Federal Court appeal over the R&D tax offset claims it made on a failed Underground Coal Gasification Plot Plant.
Whilst the Decision is still subject to appeal, the case is being hailed as a landmark in the R&D Tax space as the judgement handed down by the Court provided greater clarity in respect of the following:
The Court’s approach to interpretation of the RDTI legislation
The Court confirmed that R&D provisions are designed to encourage industry R&D and in this context, it supported an expansive interpretation of the legislation including what constitutes ‘’new knowledge’, ‘purpose’’, ‘outcome’’, ‘’core’’ and ‘’supporting’’ activities etc.
The definition of ‘Core R&D activities’
Instead of equating core R&D with the dictionary definition of ‘’experimental activity’’, the Court concluded that one should simply pay heed to the legislative definition of ‘’R&D’’ in s355-25 paragraph (a) and (b).
Practically, this means ‘’core R&D activities’’ can be qualitied by checking if it satisfies the following:
1. The outcome of undertaking the activities is unknown (i.e. knowledge/technology gap), and cannot be determined in advanced using current knowledge, information or experience; and
2. This gap can only be bridged by undertaking hypothesis guided experimentation based on scientific principles.
The scope of the registered activities
The Decision reaffirmed the Court’s approach to viewing a set of ‘’core R&D activities’’ as a whole and not as individual ‘’components’. The legislation (s355-25) defines ‘’core’’ in the plural form – “core R&D activities”, implying that it permits a set of related experimental activities to be considered in combination and evaluated against the statutory criteria.
This is consistent with our practical approach to the characterisation and registration of activities, as what we often tell clients that a mosaicked approach should not be taken in assessing eligibility.
Records and documentation
The Court sighted many documents generated during the course of the ‘project’. This highlights the importance for companies to generate and maintain contemporaneous documentation evidencing R&D activities registered.
How can Noah help
The different approaches taken by the AAT and the Court in the interpretation of the RDTI legislation demonstrate the complexity behind the qualification, characterisation, and substantiation of ‘R&D activities’.
The most frequent question we get asked by a client is “We’re doing or developing X,Y, and Z, is it R&D?”. I wish there was a more straightforward answer that I could give, but as is the case with all other federal statutes, the RDTI legislative definitions are open to interpretation. Under self-assessment, it all turns on how compelling or, in legal terms, ‘’reasonably arguable’’ is your position.
A trusted and experienced adviser like Noah can guide you through the steps required to determine if a ‘project’ you’ve undertaken involved ‘’R&D activities’’. More importantly, our in-depth knowledge and understanding of the legislation and case law governing the space mean that you’ll be fully informed about all the measures you should factor into your deliberations when assessing if certain activities satisfy the legislation.
In conclusion, I’d also say that it was refreshing to see the Court in the Moreton case reaffirming the importance of taking account not just of the text of the legislation but also its context and purpose. In simple terms that means acknowledging that the RDTI is what is referred to as a piece of ‘’relieving’’ tax legislation. It is not designed to impose a penalty but rather to encourage and promote a certain class of activity – i.e. ‘’research and development’’ activity. Under these circumstances, one should not seek to ‘’read the legislation down’’ in order to apply a narrow interpretation.
If you’d like to know more about the importance of the Moreton decision and how it might impact your RDTI entitlements, please feel free to get in touch today.