FCT v Desalination Technology Pty Ltd

November 4th, 2014

AAT Decision – Desalination Technology Pty Ltd v FCT Click Here
Full Federal Court Decision – FCT v Desalination Technology Pty Ltd Click Here

In the case of ‘Commissioner of Taxation Vs Desalination Technology Pty Ltd’, the appeal by the COT was dismissed by the Administrative Appeals Tribunal. This case involved a taxpayer who paid an invoice by debiting a running account in favour of a supplier, where that account does not have to be settled under certain circumstances. The taxpayer is part of a group of companies involved in R&D activities, from the collaboration between Mr Davey and Mr Kofoed.


The Commissioner first appealed that the Tribunal had erred in law in that the taxpayer was definitively committed to the expenditure.

The second appeal by the Commissioner involved that as the CityLink Melbourne suggests, a contingency as to the timing of the payment does not mean that expenditure has not been incurred. The commissioner submitted that the two contingencies did not adhere the following, in that the taxpayer was not bound to repay IDTG unless it came into funds to do so.

The third appeal was that the Tribunal erred in finding the statement that IDTG financing the R&D work can only mean that has a debt to IDTG for the value of the R&D work invoiced. The submission was that one party will finance work is not an agreement that the other party will pay them the financed amount.

The fourth appeal consisted of the Tribunal’s treatment of the taxpayer’s balance sheet. The accounts for the 2009 year recorded the existence of an intercompany loan of just over $1 million.


In regards to the first appeal, the Tribunal said that “The timing of the payments by DST to IDTG is reliable on that DST receives funds from investors, lenders or other sources and even though it has funds, DST considers it prudent to make a payment to IDTG. This proposition however does not help the entirely different proposition that DST was committed to IDTG in regards to the R&D expenditure”.

The Tribunal’s conclusion that the taxpayer was definitively committed to paying for the R&D expenditure makes sense. Once the Tribunal found proof that the taxpayer was committed then the application of established principle led to the conclusion that the R&D expenditure had been ‘incurred’ and was deductible. Once it was found that the transactions constituted by the issue of the invoice and the debiting of the running account were separate transactions, the issue of contingencies became irrelevant.

For the second appeal, The Tribunal stated that the contingencies were not theoretical and not about timing. It was quite possible that the desalinator might not succeed and the running account might never be paid off.

In the third appeal, The Tribunal found in an agreement that the taxpayer was immediately expected to pay the invoices and did so by means of supplier finance.

In regards to the final appeal, The Tribunal recorded the view that this was a proper reflection of the situation as documented in the directors’ minute and the Service Agreement.

In conclusion, the appeal was dismissed with costs. It was not necessary to deal with the taxpayer’s notice of objection as well as the competency of the appeal. Even if the appeal was accurate, it would not have been regarded as a sufficient basis to award indemnity costs.

Click here to view the Commissioner of Taxation v Desalination Technology Pty Limited [2014] FCA case.

AAT - Swanson Reed - Specialist R&D Tax Advisors