RSM Australia

R&D case strengthens definition of a core activity

JLSP and Innovation Australia [2016] AATA 23

In a decision published on 22 January 2016, the Administrative Appeals Tribunal (AAT) has found that an Australian-based company that is a subsidiary of a multinational biopharmaceutical research group was conducting a Core R&D activity when it ran a clinical trial to determine the safety and efficacy of a group client’s test drug. The Phase III clinical trial in question was the subject of an Advanced Finding application lodged by JLSP with Innovation Australia.

In the case in question, Innovation Australia had found that the main clinical trial activities were not a Core R&D Activity and that two related activities were not Supporting R&D Activities.

Reasons for Decision

In setting out his reasons for the decision, the AAT Deputy President has made some pertinent points about the definition of a Core Activity, as well as administration of the R&D Tax Incentive.

  1. The purpose of “new knowledge”
    An activity is a Core R&D Activity if, amongst other conditions, it is conducted “for the purpose of generating new knowledge.” Innovation Australia had argued that contractual arrangements under which JLSP were conducting the clinical trial meant that generation of new knowledge was not the dominant purpose for conducting the trial and therefore this condition was not satisfied. The AAT found that “the purpose of generating new knowledge does not have to be the purpose that outweighs all the others”.  This finding is significant because many projects have several “substantial purposes,” and there is now no requirement to demonstrate that creating new knowledge was the “dominant purpose.”  Tax advice should be sought by taxpayers in evaluating whether a substantial purpose exists.
  2. Clinical trials are experiments
    The AAT found that the clinical trial is an experimental activity, in that it satisfies both the Macquarie Dictionary definition of “experiment” and all the elements of the legislated “…definition of 'Core R&D Activities'”, in that:
    • “the outcome of the activity could not be known or determined in advance on the basis of the knowledge, information or experience that was current at the time they were conducted, since the specified dosage [of the test drug] had not previously been tested in the specified circumstances on subjects in the specified category"; and
    • “ the outcome of the activity could only be determined by applying a systematic progression of work based on principles of established science and proceeding from hypothesis to experiment, observation and evaluation, and leading to logical conclusions. That is the essence of clinical drug trials, and the only reliable way that additional knowledge can be obtained.”
  3. Overreach
    In arguments presented to the AAT, Innovation Australia submitted there was little practical point in making an advanced finding if the expenditure of the R&D entity is excluded by the eligible expenditure provisions. The AAT described this as “…overreach.” That is because the question of whether expenditure is excluded by the eligible expenditure provisions is a question for the Commissioner of Taxation, not [Innovation Australia].”

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