Important AAT decision published


The recently published Administrative Appeals Tribunal decision, Mt Owen Pty Limited (formerly Xstrata Mt Owen Pty Limited) and Innovation Australia (initially released under the pseudonym DBTL and Innovation Australia), provides additional guidance for companies and reaffirms that activities eligible for the R&D Tax Incentive must be for the significant purpose of generating new knowledge. The Tribunal's position is consistent with the approach that AusIndustry and Innovation Australia have taken in recent years and in this article we provide some detailed commentary about the decision.

Some of the key points from the decision are:

  • routine tests and common activities conducted in a complex environment are not, on their own, R&D activities
  • there must be credible evidence of the purpose of conducting the activities and the existence of a hypothesis
  • geology, safety, operational, production, economic and other commercial risks do not demonstrate technical risk
  • a specific hypothesis must form the basis for specific experimental activities
  • aggregation/disaggregation of activities – companies must be able to
    • identify and describe what was done in the activities
    • explain how activities collectively satisfy the definition if some or all of the activities don't individually
  • the exclusion for activities 'associated with' complying with statutory requirements should be interpreted broadly.

More specific commentary on the decision, and some of the lessons that companies can draw from it, is included below.

Purpose of generating new knowledge


The decision affirms the legislative requirement that core activities must be carried on for at least a significant purpose of generating new knowledge (the Tribunal considered that in the R&D Tax Concession dominant purpose was probably the required level).  DBTL stresses that any claimed or documented purpose must be evident through the aims and objectives of the activity before and during the carrying out of the activity. If some new knowledge incidentally results from an activity, this does not mean that the generation of the new knowledge was a purpose of the activity.  The evidence indicated that DBTL did not have a significant purpose of generating new knowledge or any hypothesis. 

No evidence of R&D activities


The fundamental problem for the company was that it didn't have evidence of having conducted R&D activities. The company had evidence of routine tests and common mining activities conducted in a complex environment to deal with particular issues. But it didn't have any evidence that it had developed any new or different approach to resolving those issues.  The decision confirms that merely using established testing techniques in the manner for which they were designed will not be experimental. It also confirms that site-specific test results are not, of themselves, new knowledge.

Combining known technologies


The Tribunal stated that if activities are claimed to generate new knowledge by an original use of existing technologies in a new way, there must be a satisfactory explanation and evidence of how the combination of technologies meets the legislative criteria.  Simply utilising numerous existing technologies in a manner where they do not impact one another's functioning will not be sufficient.  They must be used in an inter-related manner that generates some uncertainty in their combined effect.

Uncertainty must be in the experimental activities


DBTL provided evidence that the mining involved numerous risks around geology, safety, operational, production, cost and other commercial risks. However, any uncertainty was intrinsic to the geological or other characteristics of the mine.  It was not an uncertainty in the outcome of the established methods being applied in their intended manner.  When considering whether the outcome of an experiment cannot be known it is important to focus on the technical risk in the substance of the experiment itself, and not on the wider risks of the company's operations. The uncertain outcome must be because of technical risk, not economic or other non-technical risks.

Specific hypotheses


The Tribunal made clear that the formulation of specific hypotheses form the basis for experimental activities and are necessary for a systematic experimental progression of work.  A vague 'overarching' hypothesis is not a specific hypothesis. 

Aggregation


The Tribunal was unswayed by the Company's argument that all the activities were R&D if they were considered as a collective system.  If activities are aggregated or claimed to be 'integrated', the Company must provide a sufficient explanation of how the overall 'system' satisfies the criteria. Further, claiming an overarching activity is not a justification to avoid explaining the specifics of what is being done within that activity.

Regulatory Compliance Exclusion


The decision made clear that subsection 73B(2C)(l), in referring to activities "associated with" complying with statutory requirements, used deliberately broad language. The Tribunal considered that the exclusion is not limited to activities which, for example, are "necessary" or "essential" in order to comply, but extends to cover activities "for the purposes of compliance".

Tips for self-assessing eligibility and registering


  • When considering all of the above in practice, it is necessary to identify what the activities involve and look for an identifiable experiment that tests a relevant hypothesis; a new or different technical or scientific idea or proposition. When preparing a registration application, companies must be sure that generating new knowledge is at least a significant purpose of the claimed core R&D activity.
  • They must also be carrying out a systematic progression of work that genuinely had a hypothesis that was subsequently investigated in an actual experiment.
  • Under the R&D Tax Concession, companies only had to be registered 'in relation to' activities.  The R&D Tax Incentive now refers to registering '… the entity for … one or more specified activities'. This requires that the registration must reasonably disclose the relevant eligible activities the company has undertaken within the previous income year.