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2023 Annual Report for IISA: Update on R&D Tax Legal matters and litigation

Industry Innovation and Science Australia (IISA) is the government department responsible for determining whether companies’ activities meet the legislative criteria eligible under the R&D Tax Incentive.

The 2022-23 Annual Report for IISA was recently released, and a section of the report provides an update on legal matters and litigation relevant to the department.

When comparing the 2022-23 Annual Report with the equivalent publications from previous years, a continued decline in the number of R&D Tax disputes arising between companies and IISA is apparent.

The 2022-23 Annual Report notes that:

• There were 4 AAT decisions on R&DTI matters involving IISA during the 2022–23 period. There were a further 6 AAT matters resolved prior to AAT decision (3 withdrawn by the applicants, 3 resolved by consent orders after agreement was reached between the parties).
• There was 1 AAT matter that proceeded to final hearing in the 2022–23 year – this was the matter of Active Sports Management Pty Ltd v Innovation and Science Australia (final hearing held on 1–3 May 2023 and 21 July 2023). This matter is now reserved for AAT judgement.

The 2022-23 Annual Report seems to suggest a lower level of dispute activity as AAT matters resolved over the past few years have been:

• 2021-22: 10 AAT matters resolved;
• 2020-21: 17 AAT matters resolved;
• 2019-20: 26 AAT matters resolved;

The above relates to ISA matters on activity eligibility only and not R&D Tax disputes involving the ATO.

This reduction in litigation is despite the number of registrations not materially declining. This decline may be attributable to a combination of:

• Companies withdrawing registrations when their eligibility is challenged by ISA, rather than disputing findings;
• Changes to compliance processes by the regulators;
• Better quality of registrations submitted;
• Companies with ineligible activities refraining from participating in the programme;

Reduction in disputes is a good outcome for both companies and the regulators, and hopefully a sign of improving health of the R&D Tax Incentive overall.

However, with increased R&D Tax compliance activity expected over coming months, it might be that the number of disputes starts to increase.

Companies participating in the R&D Tax Incentive programme should keep up to date with regulator guidance when assessing activities to reduce the likelihood of ending up in costing disputes.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.