Australia: Research and development tax incentives claim denied (Federal Court decision)

The Federal Court held that the taxpayer did not qualify for research and development (R&D) tax incentives provided under the Industry Research and Development Act 1986 (IR&D Act 1986) because, although the taxpayer successfully registered their R&D activities, it conducted significant R&D activities outside of Australia that were not covered by an Overseas Advanced Finding.

The case is: T.D.S Biz Pty Ltd v. Commissioner of Taxation [2023] FCA 710 (29 June 2023)

The taxpayer’s application for R&D tax incentives indicated that their R&D activities were conducted solely within Australia and that no overseas R&D expenditures were being claimed. However, the taxpayer in fact had paid a Chinese supplier for “design, development and fabrication and/or supply of components.” These R&D activities were not covered by an Overseas Advanced Finding as required under the IR&D Act 1986.

As a result, the Commissioner disallowed R&D notional deductions in relation to these activities and also applied a 50% penalty for the taxpayer’s false and misleading statements.

The Federal Court upheld the Commissioner’s denial of the taxpayer’s R&D tax incentive claim, as well as the penalty.

Taxpayers applying for R&D tax incentives need to consider:

• Obtaining advice on and confirming that the legislative criteria are met and relevant R&D registrations are obtained
• Establishing that experimental activities are underpinned by scientific principles and methods and that the hypothesis is accurately articulated
• Confirming a thorough understanding of the activities that have been registered and maintaining contemporaneous documentation to evidence and protect claims

For more information, contact a KPMG tax professional in Australia:

Kristie Schubert | kschubert3@kpmg.com.au