Court ruling has big R&D impact


James Riley
Editorial Director

A Federal Court decision has “major implications” for Australian tech companies making software claims under the research and development tax incentive, with the government’s recent narrow interpretation of eligible activities rejected.

Last week the Federal Court handed down a decision in Moreton Resources Limited v Innovation and Science Australia, centred on the resources company’s attempt to develop an underground coal gasification facility in Queensland, for which it claimed the research and development tax incentive (RDTI).

In 2015, the government ruled that this activity wasn’t eligible for the tax breaks as it involved “testing the application of existing technology at a particular site and nothing more”, and the decision was upheld by the Administrative Appeals Tribunal.

Nicola Purser: Decision has big implications for software R&D claims

But the Federal Court has said that the AAT “erred” in its definition of a “core R&D activity” and took a too narrow approach to what “experimental activities” are under the scheme.

Moreton had been set to pay back $9 million because of the original decision, and the matter has now been remitted to the AAT for determination according to law.

Although the case did not involve a software claim, RDTI experts say the decision has serious ramifications for tech companies that access the popular scheme, and will be seen as welcome news for many.

The decision reaffirms a simple approach to applying the RDTI rules and is a “win for common sense,” BDO R&D tax partner Nicola Purser said.

“Over the last 12 months we have started to see companies shy away from the programme due to the highly publicised issues surrounding recent compliance decisions,” Ms Purser told InnovationAus.com.

“However, this case demonstrates that the definition of eligible R&D activities has not changed and hopefully AusIndustry will now reconsider its interpretation of the definitions and once again embrace its role in supporting Australian industry.”

The decision reaffirmed that a core R&D activity must be assessed as a whole rather than as individual experiments, and that “experimental activities” can include “activities having the purpose of generating new knowledge with respect to the application of an existing technology at a new site”.

“In the current climate in which the ATO and AusIndustry have escalated compliance activities, taxpayers can look to this case as a strong precedent in establishing what activities may be considered eligible R&D activities, contrary to AusIndustry and the ATO’s narrowing view of the legislation,” Ms Purser said.

“As confirmed in the Federal Court decision, the application of existing technologies within a new context is a theme that may resonate with some software companies,” she said.

“Further, the idea that an R&D activity should be assessed as a whole, rather than on the basis of the individual experiments, could have ramifications for many claimants within the software space.”

University of Technology Sydney special innovation adviser Roy Green said the decision would have “major implications” for companies making RDTI claims.

“Already we have seen controversy around the new guidelines issued by AusIndustry, particularly relating to the use or alleged misuses of the Frascati Manual definition of R&D,” Professor Green told InnovationAus.com.

“Irrespective of feasibility or appropriateness of the R&D project in this case, we now have a decision which defines ‘experimental activities’ broadly to include the application of existing technologies as well as the development of new ones so long as the purpose is to generate new knowledge.”

The department has been cracking down on software claims for the RDTI since 2017, when the ATO issued a taxpayer alert saying it was “reviewing arrangements for companies claiming RDTI on software development projects”, with subsequent guidelines issued last year.

While the government has said that this has not constituted a change in policy, many in the sector have said that the way the Act is being interpreted has changed dramatically.

Do you know more? Contact James Riley via Email.

Leave a Comment

Related stories