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GHP 104 160 689 Pty Ltd v FCT [2014] AATA 515

Summary of 104 160 689 matter

The ATO has issued a Decision Impact Statement in relation to the recent decision handed down in the AAT, GHP 104 160 689 Pty Ltd and FCT [2014] AATA 515; 2014 ATC 10-373

The case concerned whether certain expenditure was to be disallowed deductibility at the rate of 125% because it was ‘feedstock expenditure’ within the meaning of the former section 73B(1) of ITAA 1936. GHP 104 160 689 Pty Ltd (‘the applicant’) carried on the business of mining operations which included certain research and development (‘R&D’) activities.

Decision of the AAT

The AAT was called on to consider:

1. Whether the disputed expenditure was incurred in acquiring or producing materials or goods ‘to be the subject of’ processing or transformation for the purposes of the definition of ‘feedstock expenditure’ in subsection 73B(1) of the ITAA 1936.
2. Whether expenditure incurred in producing copper concentrate which was then fed into the copper smelter constituted ‘feedstock expenditure’ for the purposes of subsection 73B(1) of the ITAA 1936

The AAT found that the scope of feedstock expenditure within this scenario included:

• expenditure on acquiring and producing ores to be the subject of concentrator processes;
• expenditure on acquiring or producing copper concentrate to be fed into the smelter process; and
• expenditure on oxygen which was inserted into the furnace during the copper blow and in the anode furnace.

The AAT found the remainder of the disputed expenditure was not within the scope of feedstock, i.e. not “incurred by the company in acquiring or producing materials or goods to be the subject of processing or transformation by the company in research and development activities”.

The Tribunal considered that, as a matter of statutory construction, things acquired to be the subject of some process in an activity could not share a common identity with those acquired to subject them to that activity. The expression requires a distinction between expenditure on materials or goods to be the subject of processing or transformation and expenditure on actions or processes which thereby subject those materials or goods to processing or transformation.

In respect of the copper concentrate ‘overlap’, the Tribunal decided that expenditure incurred in producing copper concentrates to be used in the smelter trials was properly characterised as ‘feedstock expenditure’ by reason of its relationship to the smelter trials. The words ‘to be’ in subsection 73B(1) could not be read as meaning one thing for some forms of goods and materials the subject of processing and transformation, and another when there was an overlap.

Implications of Decision

Within its decision impact statement, the ATO has stated that it accepts the AAT’s decision and will adopt its reasoning, where applicable, for the purposes of construing the definition of ‘feedstock expenditure’ in former subsection 73B(1) of the ITAA 1936.

Whilst this decision was made with respect to a claim under the previous R&D Tax Concession regime, the ATO will adopt the relevant principles in determining the scope of feedstock expenditure for claims made under the current R&D Tax Incentive regime.

Click here to view the ATO Decision Impact Statement.