R&D Tax Incentive is never static, with new guidance materials and any relevant developments providing further insight into the views of the regulators when they come to assess R&D claims.

Case law is one of the sources of information we continuously draw from. Each case is considered and studied to establish what it could mean for the stakeholders. This is especially significant when cases concern software development activities, which continue to be of a particular focus of Innovation and Science Australia (ISA).

In particular, we find the case law can highlight to claimants what types of evidence may and may not assist in establishing that eligible R&D has taken place.

On 21 September 2022 a case was released outlining that on 13 July 2022, the Administrative Appeals Tribunal (AAT) determined that the taxpayer was unable to show that activities were eligible R&D activities for income tax purposes. In doing that, the AAT affirmed the previous decision by ISA.

Absolute Vision Technologies Pty Limited and Innovation and Science Australia (Taxation) [2022] AATA 2319 (the case) was in respect of activities undertaken in the 2014, 2015, and 2016 financial years, and related to the modification of mature enterprise resource planning technology for further commercial and industrial applications.

R&D activities registered by Absolute Vision Technologies Pty Limited (AVT) related to the development of a real-time freight and manufacturing scheduling system. The issue for the AAT to determine was whether the registered activities met the conditions for eligible core or supporting R&D activities pursuant to Div 355 of the ITAA97. In arriving at its decision, the AAT considered R&D registration documents, witness statements and other evidence provided by AVT, and the expert evidence relied upon by ISA.

R&D Applications

In its decision, the AAT restated the requirement for a core R&D activity to be an experimental activity whereby the outcome cannot be known or determined in advance except by applying a systematic progression of work, based on principles of established science and proceeding from hypothesis to experiment, observation and evaluation to logical conclusions for the purpose of generating new knowledge, which essentially are the key eligibility provisions of the R&D Tax Incentive program.

The Tribunal found AVT’s stated hypotheses in the R&D Applications were not described as testable propositions focused on resolving technical or scientific areas of uncertainty. Rather, they were described as project goals and objectives. As eligible R&D activities require that hypotheses be identified and tested through a set of experiments or evaluations, the absence of clearly articulated experimental hypotheses statements meant that it was unclear how the described experimental activities followed a systematic progression of work aiming to validate or invalidate the hypotheses for the purpose of generating new knowledge. Furthermore, the AAT identified that it was not helpful that the actual experimental activities were not described in a way that would assist the Tribunal in making that connection.

Documentary Evidence

A key issue highlighted by the AAT was that it found the AVTs documentation to be deficient. Specifically, the documents provided were not contemporaneous; rather, they were prepared after the fact for the internal review by ISA. Further, a marked discord was noted between the documentary evidence and the activities as described in the original R&D applications which made it difficult to assess eligibility. Other documents were provided without any context which made it impossible to place them against the registered R&D activities.

Witness statements and expert evidence

Interestingly both AVT and ISA elected not to cross-examine any witnesses. The taxpayer did not challenge the expert evidence led by ISA against them, leading the Tribunal to accept that evidence. Given the lack of corroborative evidence to substantiate the taxpayer’s R&D activities and the unchallenged nature of the expert evidence against the taxpayer, the Tribunal was not satisfied that the eligibility criteria had been met. AVT’s witness statements were found to be unhelpful, as one did not possess the relevant technical knowledge and the other, while having the relevant professional background, had not provided sufficient evidence and being AVT’s founder, had their objectivity questioned by the Tribunal.

The decision

The AAT found the deficiencies in documentary evidence from the R&D claimant meant that the AAT could not be satisfied the R&D activities had been conducted or that other elements of the statutory criteria had been met. Additionally, the AAT confirmed that only those activities originally registered in the R&D application can be considered for R&D tax purposes, and attempts to amend deficiencies in the original registration with non-contemporaneous supporting documentation prepared significantly after the income year are unlikely to be accepted by the Regulator, particularly if the information substantially differs to the original registration.

Key Takeaways to Consider for R&D Claimants

This case once again highlights several key issues about making an R&D claim in 2022.  We see 3 key takeaways in this decision.

Firstly, it focuses on the importance of evidencing and documenting that the activities meet all parts of the definition of core R&D activities in the lodged application form, as the latter cannot be altered after the fact once the claim is under review. No new material can be added to the lodged documentation after the income year when the activities were undertaken.

Secondly, the case reconfirmed the need to document a hypothesis and its testing as part of an R&D claimant’s experimental program; simply relying on technical aims and commercial goals will not be acceptable.

Lastly, it also highlighted that the AAT does accept that IR&D Act does not expressly require documentation; especially in light of the decision in Commissioner of Taxation v Bogiatto [2020] FCA 1130, where it was held that documentation is not inevitably required to substantiate that claimed R&D expenditure was incurred on registered R&D Activities when subsequently dealing with the Commissioner of Taxation, and that evidence can take many forms. In this case, however, there was no oral testimony which meant the decision was made on the documents presented.

If you would like to discuss any of these matters further or require assistance with your R&D claim preparation and governance, please reach out to the Grant Thornton Innovation Incentives team today.