AAT Case confirms Tax Commissioner’s R&D Eligibility Authority

The issues for determination are:

1. Whether the Commissioner (and therefore the Tribunal) has the power to assess or make decisions as to whether GQHC’s registered activities, conducted under four separate projects, consisted of eligible R&D activities as defined in Division 355 of the ITAA 1997. 
2. Whether the relevant activities were eligible 'R&D activities' within the meaning of s 355-20 of the ITAA 1997; and
3. Whether certain amounts should be included in GQHC’s assessable income as a ‘feedstock adjustment’ pursuant to subdivision 355-H of the ITAA 1997.

GQHC contended that the Commissioner did not have the power, and therefore the Tribunal did not have jurisdiction to determine whether certain activities constituted ‘R&D activities’. As part of the proceedings, GQHC also provided supporting documentation including reports, meeting minutes and emails focusing on those activities claimed as eligible ‘R&D activities’ in the relevant year.

The AAT upheld the decision of the Commissioner of Taxation and determined that:

1. The Commissioner retains the authority to assess and decide whether the activities of a Research and Development entity qualify as eligible ‘R&D activities’ as per Division 355 ITAA 1197 in circumstances where no findings have been made by the IISA.
2. None of the activities were considered core R&D activities. The activities were considered to be routine, trial and error, or based on existing knowledge and technology. The Tribunal also found that there was insufficient evidence of observation and evaluation, and that the activities were not based on principles of established science. 
3. If GCHQ had engaged in eligible R&D activities, a feedstock adjustment would have been required on the basis that the feed was a feedstock input that resulted in the biological transformation of the chicken for human consumption (tangible product). The Tribunal rejected the submission from GCHQ that only a portion of the feed expenditure (i.e. less than 100 per cent) would need to be considered in the feedstock adjustment calculation.

Notable reasons for the AAT’s decision are highlighted below:

• The Tribunal found to the extent that any hypotheses were identified, expert opinions described these as ‘clumsy’ or ‘vague’ and more aligned to commercial aims or objectives, which does not satisfy the legislative requirements. A valid hypothesis in the context of R&D must have a scientific basis involving a degree of uncertainty that is formulated for the purpose of being either validated or invalidated by the conduct of an experiment.
• The AAT stated that the documentation produced in respect of many or all the activities, did not sufficiently establish the activity took place at all, or in accordance with the registrations in the R&D applications. The AAT was not satisfied with the given evidence for what work was undertaken in the performance of the claimed activities or when it was carried out.
• The AAT was unable to establish if the activities involved a systematic progression of work as required under the legislation. While it was acknowledged that industrial R&D may differ from academic research, maintaining adequate documentation is an essential aspect of the systematic progression of R&D. Documentary evidence is required to show the application of a scientific method with a systematic progression of work from hypothesis to experiment, observation and evaluation, followed by logical conclusions.
• Although it was not necessary to determine whether a feedstock adjustment was required given GQHC had not engaged in eligible R&D activities, the Tribunal concluded that both the feed and chicken underwent transformation and processing during the Registered Activities. The operations undertaken by GQHC in relation to the chickens involved subjecting the chickens to a method or process. As such, the chickens are processed for the purpose of human consumption through a series of steps. The chicken is fed the feed (the feedstock input) and then undergoes a biological transformation, through digestion and metabolisation, where the feedstock (the chicken feed) is converted (digestively transformed) into an agricultural product (chickens for meat or eggs). It is noted that the statute does not restrict the transformation to only non-biological processes and/or outputs.