Australia: R&D tax incentive (Full Federal Court)
Australia: R&D tax incentive (Full Federal Court)
The Full Federal Court—in a case concerning the interpretation of section 8AAZN of the Taxation Administration Act 1953 (Cth) (TAA 1953) as to what constitutes an administrative overpayment—held for the government in a case concerning a claim for research and development (R&D) tax incentive.
While the decision in relation to section 8AAZN is interesting in its own right, there has been much attention given to comments made in passing in the decision about the Commissioner’s ability to form his own view on the eligibility of R&D activities for the R&D tax incentive.
The taxpayer had self-assessed under the R&D tax incentive and was paid a tax offset refund of approximately $2.27 million for the 2013 income year.
At the time, despite the R&D tax offset refund being claimed as part of the tax return, it was not part of the formal assessment process as it now is (section 166 of the Income Tax Assessment Act 1936 (Cth) (ITAA36)). After the tax offset refund had been paid to the taxpayer, Innovation and Science Australia (AusIndustry or the Board) made a finding that the registered R&D activities were ineligible. This finding was initially challenged by the taxpayer, but by the time of the trial and appeal, the taxpayer had accepted that it was not entitled to the tax offset or the resulting refund.
The question at trial and on appeal was whether the payment of the tax offset refund was an administrative overpayment—namely “an amount that the Commissioner has paid to a person by mistake, being an amount to which the person is not entitled” (section 8AAZN(3) of the TAA 1953).
At the first instance in the Federal Court, on 31 July 2020, the court held the Commissioner was not authorised to apply section 8AAZN of the TAA 1953 to recover a tax offset refund because that provision was only intended to cover procedural mistakes in running balance accounts. The Commissioner appealed the Federal Court decision and the Full Federal Court allowed the Commissioner’s appeal with costs.
First, the court held the tax offset refund was “paid… by mistake” pursuant to section 8AAZN(3) of the TAA 1953 on the basis that in any event, section 27L of the Industry Research and Development Act 1986 (Cth) (which deems that a finding made by AusIndustry about eligible R&D activities is given effect from the time the activities were registered) would render the tax offset refund as being “paid to a person by mistake” under section 8AAZN(3) of the TAA 1953. This was because the relevant R&D registrations would have been retroactively affected by the Board’s unfavourable finding.
Second, the Full Federal Court held that the language in section 8AAZN of the TAA 1953 must be construed broadly, enabling the Commissioner to rely on section 8AAZN(3) of the TAA 1953 to recover the mistaken payment of the tax offset refund in the discharge of his duty to administer the taxation laws.
The court’s opinion included observations made in passing (obiter dictum) that the Commissioner may form his own views about the eligibility of a taxpayer’s R&D activities on the basis of the Commissioner’s general powers to administer the tax laws (section 166 of the ITAA36). While these comments are not central to the decision (and are therefore persuasive and not binding) they are being viewed as significant. Historically and practically, decisions about the eligibility of R&D activities have been determined by AusIndustry, and decisions about whether expenditure is eligible R&D expenditure have been determined by the Commissioner. The Full Federal Court decision suggests the Commissioner does not need an AusIndustry finding to determine that an R&D entity’s activities are ineligible R&D activities. The taxpayer may seek special leave to appeal the decision to the High Court, but any appeal that proceeds may not address these comments.
A response by the Australian Taxation Office (ATO) (or AusIndustry) would perhaps explain how two regulators can both assess the eligibility of R&D activities and whether doing so will afford a taxpayer the requisite level of certainty about its tax affairs.
For more information, contact a KPMG tax professional in Australia:
Ross Hocking | +61 3 8663 8651 | firstname.lastname@example.org
Georgia King-Siem | +61 2 9335 8567 | email@example.com
Joshua Goldsmith | +61 3 9288 5706 | firstname.lastname@example.org
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