July 13th, 2023
As noted on the Swanson Reed blog in November 2022, an AAT decision handed down in October 2022 (T.D.S BIZ PTY LTD and Commissioner of Taxation) considered the case of an R&D Entity attempting to claim the cost of overseas moulds, fabrication, CAD and assembly within their R&D Tax Incentive claim without having first attained an Overseas Finding from AusIndustry.
This was one of the only administrative decisions to consider the specific issue of:
- Is R&D expenditure related to the cost of components for conducting R&D Activity in Australia; OR
- Is R&D expenditure related to the cost of Overseas Activity, which then triggers requirements for sufficing Overseas R&D Expenditure rules and to attain an Overseas Finding (a pre-approval to claim overseas activity expenditure) before expenditure can be claimed under the R&D Tax Incentive.
Key background points from the case:
- T.D.S BIZ PTY LTD (“The Applicant”) submitted a FY18 R&D claim for the design and development of an electric tricycle. This claim included $1,613,462 of contractor invoices from overseas entities:
- $1,280,742 invoiced from HK Flistar Limited for producing vehicle components; and
- $332,720 invoiced from Hefei Kelly Technology Investment Co Ltd for electrical components.
- The original R&D application for the period did not include any supporting activities;
- Following a review of the applicant’s tax return, The ATO (“The Respondent”) notified the applicant in July 2019:
- (a) The respondent will issue an amended assessment where $1,613,462 of the applicant’s R&D notional deductions will be reclassified as general deductions under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997);
- (b) The amount of $1,613,462 was comprised of the HK Flistar and Hefei Kelly invoices; and
- (c) The applicant did not have a finding under paragraph 28C(1)(a) of the IRDA 1986 (overseas finding) in respect of overseas activities conducted during the year ended 30 June 2018.
- A Notice of Assessment of Shortfall Penalty for FY18 was also imposed of an amount of $350,927.95;
- In July 2019, the applicant prepared and submitted an R&D Tax Incentive Registration Variation to AusIndustry (variation request), registering its supporting R&D activities. The variation request reclassified the construction and cost of the prototype from a ‘core R&D activity’ to a ‘supporting R&D activity’. The variation request made no mention of the fact that the supporting R&D activities were conducted overseas to produce the components for the prototype.
- In August 2019, AusIndustry issued to the applicant a Variation to R&D Tax Incentive Registration setting out variations to the applicant’s registration for FY18 consistent with the variation request.
- The applicant objected to the Notice of Assessment in September 2020, the respondent issued to the applicant a notice of objection decision (objection decision) advising that its objection was disallowed. The applicant has sought review of this decision in the AAT;
As part of this decision, The AAT sought to determine:
- Whether The Applicant entitled to the R&D tax incentive for its Supporting R&D Activities, noting that it did not have an Overseas finding in that period;
- Whether The Applicant is liable to an administrative penalty; and
- Whether remission of the administrative penalty imposed for the year ended 30 June 2018, in whole or in part, is warranted.
The AAT ultimately found in favor of the Commissioner of Taxation on the grounds that:
- ‘Contrary to the applicant’s contentions, the applicant’s supporting R&D activities are not the mere supply of components. The approved supporting R&D activities plainly go beyond the mere supply of components.
- As such, the applicant’s supporting R&D activities are not covered by paragraphs 355-210(1)(d) or 355-210(1)(e) as these activities are conducted overseas and the applicant does not have an overseas finding.’
T.D.S BIZ PTY LTD then appealed to the Australian Federal Court, and a decision of 29 June 2023 dismissed the appeal, again finding in favor of the Commissioner of Taxation.
This case serves as a reminder that where Australian companies are seeking to include the cost of overseas R&D Activities within their Australian R&D Claims, they must
- Distinguish between
- the mere procurement of components for use in Australian R&D Activities; and
- the conduct of overseas R&D Activities;
- Where a company is seeking to claim the cost of overseas R&D Activities, they must both:
- Meet the requirements for Overseas R&D Activities as per paragraph 28C(1)(a) of the Industry Research and Development Act 1986; AND
- Lodge an Overseas Finding Application with AusIndustry and attain a positive outcome.
Please get in touch with our office if you would like to speak to someone about a potential R&D claim, or check out our website for more information.