Do Your R&D Activities Have a Dominant Purpose?

February 26th, 2016

TaxUndeniably, the rules and regulations surrounding the Research and Development (R&D) tax incentive may be bewildering for some. This is particularly the case when distinguishing the eligible R&D activities. To clarify, both ‘core’ and ‘supporting’ R&D activities can be claimed – however, activities must show that they are undertaken for the dominant purpose of supporting R&D activities or generating new knowledge, rather than a commercial or other purpose.  With the April 30 tax deadline looming, the importance of correct compliance is mounting. Therefore, in order to illustrate the meaning of ‘dominant purpose’, the Administrative Appeals Tribunal (AAT) decision in the case of the JLSP and Innovation Australia [2016] AATA 23 will be used as an example.

Recently, the case of JLSP and Innovation Australia [2016] AATA 23 principally dealt with whether the core R&D activities of a claimant company, which was under a contractual agreement with another company, were conducted for the purpose of generating new knowledge.  The result was that the claimant company’s core activities were not to generate new knowledge; but rather, the primary purpose of the activities was to fulfil obligations in accordance to the commercial agreement they had entered into with another company. To that end,  the AAT concluded that “[…] the purpose of generating new knowledge does not have to be the purpose that outweighs all others. Instead, I consider that the purpose of generating new knowledge must be more than an insubstantial purpose […] even if at the same time other substantial purposes also exist. ”

Thus, as the JLSP and Innovation Australia case validates, companies must be capable of demonstrating the purpose of each core R&D activity. Ultimately, the R&D activity must be more than an ‘insubstantial purpose’, yet it doesn’t need to be the purpose that dwarfs all others. In fact, in some cases R&D can be a business as usual activity. However, in these instances, the company must illustrate that a substantial purpose for each core R&D activity is to produce new knowledge. Lastly, if the R&D is conducted for an associated foreign company then proper contracts must be established.

Ultimately, with the increased compliance focus by AusIndustry and the ATO, now is a good time to discuss your claim and compliance concerns with a registered R&D Tax Specialist. Swanson Reed is a specialist R&D Tax Consultant firm that will be able to help you with any of your concerns. Contact us today if you would like to learn more about the R&D Tax Incentive.