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Change, risk and opportunity: R&D tax claims in the mining and resources sector

Tax Insights

With so much change impacting business, we present a summary for the mining and resource sector highlighting issues that could impact (some positive) their current and future R&D tax claims.

We explore recent industry applicable changes, implications of case law and identify risk and opportunity in the resource sector for R&D tax incentive claims.


R&D tax casesA number of cases over the last 12 months have had direct implications for resource industry R&D Tax claims.

A number of cases over the last 12 months have had direct implications for resource industry R&D tax claims. The fundamental premise of the R&D tax incentive has not changed; however, it is important to understand that historical interpretation or understanding of eligibility may need to be reconsidered, positively or negatively, due to the outcomes of these cases.

This includes the meaning of core and supporting R&D activities, relevant exclusions and how best to consider activities for inclusion in an R&D claim.


Recent R&D tax cases

Coal of Queensland Pty Ltd v Innovation and Science Australia [2020] AATA 126

A coal mining company held an exploration permit covering several coal deposits in central Queensland which were by conventional wisdom, not commercially viable. Coal of Queensland applied to register core and supporting R&D activities based on developing a new mining and beneficiation process to make the coal deposits commercially viable.R&D tax activities based on developing a new mining and beneficiation process to make coal deposits commercially viable.

In the 2011/12 financial year, Coal of Queensland registered four core R&D activities and one supporting activity in relation to the project, however upon review, Innovation and Science Australia (ISA) determined that none of the registered activities were eligible.

The AAT affirmed ISA’s decision based on the fact that the registered core R&D activities had no documentation demonstrating that they met the general requirements of progressing from ”hypothesis to experiment, observation and evaluation, leading to logical conclusions.” Also, that these activities were not conducted for the purpose of generating new knowledge. The activities were found to fall within the exploration exclusion.

This case also applied core R&D activity exclusions to some of the test work. The coal washability and handleability test work was considered by the AAT to be “predictable,” could have been known in advance and did not generate any new knowledge. The AAT further considered that the test work was routine coal analysis in accordance with Australian standards. It is for these reasons that the work did not meet the general requirements of being a core R&D activity and were also caught by the exclusion.


Havilah Resources Ltd and Innovation and Science Australia [2020] AATA 933

Havilah Resources Ltd, a South Australian exploration company controlling mining tenements in South Australia registered various activities relating to mining projects; several of which were found to be neither core nor supporting R&D activities on review by ISA.

The activities registered related to Iron and Gold deposits and were of an exploratory nature. Activities included hydrogeological investigations, developing a groundwater management process and investigating Gold in tertiary clays.

The AAT affirmed ISA’s decision that none of the disputed activities were core R&D activities and therefore also could not be deemed supporting R&D activities. The AAT held that although new knowledge was produced, in terms of a solution to technical uncertainties, it was not generated through experimental activities. The activities were held to be routine investigations rather than generating outcomes that could only be determined by applying a systematic progression of work that proceeds from hypothesis and leads to logical conclusions.

The AAT also held that in relation to several of the registered activities exclusions applied. Many of the activities conducted were found to be associated with complying with statutory requirements or standards. As in the preceding case, it was again determined that there was a lack of documentation and evidence to support eligible R&D activities.


Key takeaways from these two cases

Eligible R&D activitiesThese cases demonstrate the need for early stage mining companies to understand the definitions of eligible R&D activities and the relevant exclusions.

  • These cases demonstrate the need for early-stage mining companies to understand the definitions of eligible R&D activities and the relevant exclusions.
  • Given the distinction between core and supporting R&D activities, potential claimants should be aware of the specific eligibility requirements for core and supporting R&D activities.

 

Exclusions

  • In consideration of the way ISA are actively applying exploration and statutory compliance exclusions, mining companies need to ensure core R&D activities do not fall within one of the exclusions.
  • Recent AAT cases have established that even when core R&D activities are conducted for a dual purpose, the exclusion can extend to the entire activity.
  • Further, the statutory compliance exclusion is broad and will be applied to all activities associated with compliance and is not limited to activities conducted for the sole purpose of compliance.

 

Documentation of activities

  • The emphasis on the documentation of activities cannot be understated.
  • Claimants must consider all eligibility requirements and ensure activities are properly defined and progressively recorded.
  • Demonstrating the systematic progression of work necessary to generate the new knowledge is required to substantiate any resources R&D claim. 

Additional R&D tax case

Moreton Resources Ltd v Innovation and Science Australia [2019] FCAFC 120

The Moreton Resources case (Moreton) yielded a positive result for claimants in providing the first judicially binding precedent for the R&D tax incentive.

In July of 2019, the landmark Moreton case became the first judicially binding precedent on the meaning of “R&D activities” where the Federal Court provided clarity on the interpretation of terms. The decision provided a The Moreton Resources case (Moreton) yielded a positive result for claimants in providing the first judicially binding precedent for the R&D tax incentive.departure from the manner in which some concepts were being applied in previous AAT cases.

Critically, the Court confirmed that the application of existing technologies or methods to a new site will not be precluded from meeting the definition of a core R&D activity. Additionally, the requirement for core R&D activities to be “experimental activities” was applied more broadly by the Court.

A full analysis of these findings can be found here in our Moreton article.


COVID-19

Tax legislation changes made as a result of COVID-19 may provide new R&D Tax opportunities for resource industry companies such as;

Instant Asset Write-Off Extension

The Australian government has extended the Instant Asset Write Off (IAWO) threshold from $30,000 to $150,000. This means that some companies will be able to include IAWOs in their eligible R&D expenditure where the asset is used for an R&D purpose in the income year it starts to be held.

Accelerated Depreciation

Measures have been introduced to allow businesses with aggregated turnover of less than $500m, to deduct the cost of depreciating assets at an accelerated rate.  Businesses will now be able to include this accelerated depreciation component in their eligible R&D expenditure for assets that are used for R&D purposes in the relevant income year.

Lodgement deadline extension

For companies with a 30 June year-end, the April 30 lodgement deadline has been extended until 30 September 2020, providing companies with more time to consider R&D activities from the 2018-19 financial year. Post 1 July 2020 it may be efficient for companies to simultaneously prepare both the 2018-19 and 2019-20 R&D claims.


How can RSM help?

As always, there are many complexities when considering potential eligible R&D activity and interpreting the new rules correctly.

In light of the recent cases and COVID-19 tax changes, resource industry claims should ensure that they consider the latest and most up to date advice when making claims. This will assist in minimising resource R&D claim risk and that the implications of all changes including beneficial ones have been considered. Please speak to your local RSM R&D specialist for information specific to your circumstances.

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