R&D Tax Incentive – the ATO can now assess the eligibility of R&D activities

The Administrative Appeals Tribunal recently released its decision regarding the case of GQHC v Commissioner of Taxation (2024). Whilst the case deals with a few R&D Tax Incentive issues (e.g. what constitutes feedstock, etc.), it is significant because it is the first time in the almost four decades that an R&D tax program has existed in Australia that the eligibility of projects and activities has been decided by the Australian Taxation Office (ATO).

To give some context here, the Australian R&D tax programs have always been and continue to be dually administered; AusIndustry (on behalf of Industry Innovation and Science Australia) has always had jurisdiction about whether projects and activities meet the tax definition of R&D, and the ATO has always had jurisdiction about whether the claimed expenditure on those R&D activities was eligible.

In this case, the company had submitted its annual R&D application and had been registered (conceptually similar to approved) by AusIndustry. In situations such as this, the ATO would typically only concern itself with whether the claimed expenditure on those R&D activities appeared eligible. However, the ATO instead disputed whether those projects and activities did, in fact, meet the tax definition of R&D. This is significant because it is the first time that the ATO has sought to rule on the eligibility of projects and activities.

In court, the company challenged whether the ATO was legally capable of making decisions about the R&D eligibility of projects and activities. However, in an outcome that has surprised many, the court ultimately decided that the ATO was, in fact, allowed to make such decisions. This outcome seems logically inconsistent with the original intention of having a dually administered R&D tax program, where it was believed that the ATO wouldn’t possess the requisite understanding of such highly technical and scientific matters, and that therefore these elements of the R&D tax program should be the jurisdiction of AusIndustry.

This court case raises two key questions:

• Will this broaden the scope of the ATO’s R&D audits in the future, such that they will now include an assessment of projects and activities?
• Given that AusIndustry had previously registered the projects and activities as constituting R&D, and given that the ATO ultimately overruled AusIndustry’s position here, will it be more difficult for businesses to qualify for the R&D Tax Incentive moving forward? Or to put it another way, will the ATO continue to set the bar higher than what AusIndustry historically has?

If you would like to know more about this or any other government incentives in Australia, please get in touch to arrange a discussion.

By Dave Corbin, Managing Director of Catalyst Solutions Australia.