AAT decides that an activity is conducted for the purpose of generating new knowledge

BSI Admin

In a recent decision, the Administrative Appeals Tribunal (AAT) confirmed that Innovation Australia erred in its findings, and that the registered activity of an applicant company was a ‘core R&D activity’ within the meaning of s 355-25 (1) of the Income Tax Assessment Act 1997 (ITAA 1997).

The key issue in the hearing was whether the applicant R&D entity conducted the activity in question for the purpose of generating new knowledge; and, if it did, whether there was any requirement for that purpose to be so significant as to be at least the dominant purpose.

The AAT found in favour of the applicant R&D entity, and stated that while the R&D entity must hold the requisite purpose for conducting the activity, there is no further requirement for it to be the dominant or prevailing purpose.  The AAT went on to say that the purpose does not have to outweigh all the other purposes for which the activity may be conducted.  Instead, the purpose must be more than insubstantial, and enable the activity to be accurately characterised as conducted for that purpose. The AAT explained that the purpose might be a substantial purpose even if at the same time other substantial purposes might also exist. Further, if an alternative substantial purpose does exist then this does not necessarily preclude the purpose of generating new knowledge satisfying the test in s 355-25(1)(b) of ITAA 1997.

This decision is particularly relevant where a core R&D activity is performed under a contract for service.

To view the full Decision please click here or call (02) 9126 9100 to discuss the case in more detail with a member of our R&D consulting team.