AAT rules in favour of ISA in recent R&D Tax Incentive cases

The Administrative Appeals Tribunal (“AAT”) heard two cases relating to the Australian R&D Tax Incentive in the last few months and has ruled in favour of Innovation and Science Australia (“ISA”) in each of them, agreeing with its decision to deem the R&D activities in question as ineligible.

Here is a brief summary of both cases:

  • Havilah Resources Ltd and ISA

In April 2020, the AAT found that in the case between Havilah Resources Ltd and ISA, the activities which Havilah Resources Ltd had claimed were not ‘core R&D activities’, and therefore did not qualify to be included in the company’s R&D Tax Incentive claim.

Havilah Resources Ltd, a mining and exploration company based in South Australia, had put a claim through for the 2013 and 2014 financial years for its ‘hydrogeological’ investigations with respect to the groundwater drainage and proposed fine-grained tailings storage. The company undertook these investigations at three different sites and claimed each site’s investigation activities as individual core R&D activities.

In 2016, AusIndustry disputed the eligibility of these activities and asserted that they did not meet the eligibility for core or supporting R&D activities. Havilah Resources Ltd appealed this decision to the AAT.

However, upon review of the case, the AAT ruled against Havilah Resources Ltd and sided with ISA’s decision to reject the claim.

The AAT explained that it found that all three activities failed to meet the requirements outlined in subsection 355-25(1) of the Income Tax Assessment Act 1997 (“ITAA”) that require experimental activities.

Additionally, the AAT found that two of the claimed activities fell within the exclusions outlined in subsection 355-25(2)(f) of the ITAA (in that they were activities “associated with complying with statutory requirements or standards”), and that the third activity fell within the exclusions outline in subsection 355-25(2)(b) of the ITAA (in that they were related to “prospecting, exploring or drilling for minerals”).

  • Camalic Pty Ltd and ISA

In June 2020, the AAT found that in the case between Camalic Pty Ltd and ISA, the activities which Camalic Ltd had claimed were not core R&D activities, and therefore did not qualify as eligible R&D activities for the purpose of claiming the R&D Tax Incentive.

Camalic Pty Ltd, a financial technology company, registered an activity relating to the “development of an algorithm to predict shareholder value increase” along with three supporting activities, which included data acquisition, literature and technology reviews and project planning. The registered activities took place between August 2013 and December 2016.

After reviewing of the evidence provided by Camalic Pty Ltd, the AAT found that the company had never intended on developing a bespoke algorithm but was merely training an existing one. Additionally, the AAT believed that work done with this existing algorithm was not conducted for the purpose of generating new knowledge about the functionality of this algorithm, thereby rendering it ineligible to be claimed as a core R&D activity.

Aside from the AAT not being convinced of Camalic Pty Ltd conducting its core R&D activity for the sake of generating new knowledge, it also found that the claimed core R&D activity fell under the category of ‘management studies’, which, according to subsection 355-25(2)(c) of the ITAA, is excluded from being claimed as a core R&D activity.

Since supporting R&D activities must be connected to a core R&D activity in order to be eligible, after finding that Camalic had not claimed an eligible core R&D activity, the AAT ruled that the claimed supporting R&D activities were also ineligible, effectively rejecting the entire claim.