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Ozone Manufacturing vs Commissioner of Taxation: Lessons in good record-keeping [2013] AATA 420

In the case of Ozone Manufacturing Pty Ltd v Commissioner of Taxation, the Administrative Appeals Tribunal has affirmed the Commissioner’s decision to refuse a taxpayer’s claim for a tax offset under s 73I ITAA 1936 for the 2001-2002 tax offset year.

Background

• In 2002, the company registered its R&D activities with”AusIndustry. In its 2001-02 tax return, the taxpayer included an election to claim an R&D tax offset of $388,601.
• Following a tax audit, the Commissioner issued a notice under s 73IA of the ITAA 1936 assessing the taxpayer’s entitlement to the R&D tax offset for the 2001-02 tax year as “nil”.
• The taxpayer’s objection was disallowed and it sought review before the Tribunal. The Commissioner won in the AAT, leading to the tax payer to repay an R&D offset of over $380,000.

Decision

The AAT found that the taxpayer did not:

• that  records did not establish the nexus between the expenditure and the activities, such that it could be said that the expenditure was incurred directly in respect of the R&D activities carried out by the taxpayer.
• adopt adequate capture time spent by its employees on R&D activities;
• distinguished R&D related purchases from other non related business purchases; and
• produce documents which could be communicated to and understood by a third party, such as an  independent expert.

Learning Points

Good record-keeping is not just  good business practice, it’s a legal requirement. These decisions in the AAT have highlighted that activities and expenditure must be supported and substantiated by relevant source documentation.

In September 2013, the Australian Tax Office (ATO) emphasised this case in its Large Business Bulletin. The ATO highlighted the importance of contemporaneous documentation and urged companies to avoid costly R&D record-keeping mistakes.

Re Ozone Manufacturing Pty Ltd and FCT [2013] AATA 420 (Senior Member R W Dunne, 21 June 2013