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DZXP, KRQD and QJJS v Innovation and Science Australia [2017] AATA 576

Introduction

In the case of DZXP, KRQD and QJJS v Innovation and Science Australia [2017] AATA 576, Innovation Australia’s decision to evaluate the application of DZXP, KRQD and QJJS R&D as unsuccessful was contested by the respective companies and subsequently taken to Tribunal. Innovation Australia’s position, with respect to this, was that by virtue of the operation of s 31 of the Industry Research and Development Act 1986 (IR&D Act), the outcome of any review by the Tribunal will be of no effect in terms of obtaining the benefit of the R&D Tax incentive for the claimed overseas R&D activities.

Background

Three companies, DZXP, KRQD and QJJS, each lodged applications for overseas findings in December 2012 for activities undertaken in a joint venture for the 2012, 2013, and 2014 income years. In June 2012, each company entered into an unincorporated joint venture to recover gas in Western Australia.

DZXP, KRQD and QJJS were each wholly-owned subsidiaries by head entities of MEC groups. The head entity of the DZXP MEC group was registered under the Industry Research and Development ACT 1986 as an R&D entity for the 2013 income year but not for the 2014 and 2015 income years. The head entities of the KRQD and QJJS MEC groups were registered under the IR&D Act for the 2013, 2014 and 2015 income years.

Section s 31 states that an R&D entity’s registration under s 27A for an income year has no effect if the R&D activities are conducted during a period where the R&D entity is a subsidiary member of a consolidated group or MEC group, of which the head company is an R&D entity. In short, subsidiary companies of a MEC group cannot apply in their own right for the R&D Tax Incentive, only a head company can register and claim.

As DZXP, KRQD and QJJS were wholly-owned subsidiary members of MEC groups, their application was concluded as unsuccessful by Innovation Australia. It should have been the head entities of the MEC groups that lodged the application.

Innovation Australia were misled by errors made in the application process by DZXP, KRQD and QJJS  as the respective companies incorrectly declared that they were not members of a MEC group, or that they were the head company of a MEC group. The following errors meant that the findings had no effect due to never being eligible to apply in their own right for the Finding.

DZXP, KRQD and QJJS opposed this decision and appealed their application to the Tribunal. Innovation Australia contended that the Tribunal proceedings were “frivolous, vexatious, misconceived or lacking in substance” and therefore had no reasonable prospect of success and should be dismissed.

Decision

The Tribunal dismissed the review of application because the applicants were subsidiaries of MEC groups. A review of activities by the Tribunal would not serve a purpose because the Finding application was not valid and the Tribunal does not have the power to correct such errors. Innovation Australia was correct in its submission that the head entities of the MEC groups were ineligible.

Conclusion

The following case illustrates the crucial importance of correctly filling out the application forms for claiming an R&D Tax Incentive. Care must be taken in both the application and registration requirements. Companies like DZXP, KRQD and QJJS, that fail to meet the specific requirements may not be able to claim the benefits.

Click here to view the Havilah Resources Ltd and Innovation and Science Australia case.