AusIndustry has in this post set out some key R&D Tax Incentive lessons that can be learnt from the Mt Owen AAT case.


Mount Owen Pty Ltd had an open-cut coal mine and had claimed for R&D activities at the mine during the period January 2000 to 31 December 2005 under the R&D Tax Concession program – a predecessor to the current R&D Tax Incentive program.

Innovation Australia initially rejected the claim on the 24th of November 2009 but varied its decision on the 26th of February 2010 whilst confirming much of its original decision. Mount Owen applied to the AAT on the 23rd of March 2010 for a review of the Innovation Australia decision. The AAT made its decision on the 16th of August 2013. It is not clear from the decision why it took almost 3 years for the outcome to be decided.

Key Lessons

  • Activities eligible for the R&D Tax Incentive must be for the specific purpose of generating new knowledge
  • Routine tests and common activities conducted in a complex environment are not, on their own, R&D activities
  • There must be credible evidence of the purpose of conducting the activities and the existence of a hypothesis
  • Geology, safety, operational, production, economic and other commercial risks do not demonstrate technical risk
  • A specific hypothesis must form the basis for specific experimental activities
  • Aggregation/disaggregation of activities – companies must be able to
    • identify and describe what was done in the activities
    • explain how activities collectively satisfy the definition if some or all of the activities don’t individually
  • The exclusion for activities ‘associated with’ complying with statutory requirements should be interpreted broadly.

Key points to consider

Any claimed or documented purpose must be evident through the aims and objectives of the activity before and during the carrying out of the activity. If some new knowledge incidentally results from an activity, this does not mean that the generation of the new knowledge was a purpose of the activity.
Mount Owen didn’t have any evidence that it had developed any new or different approach to resolving those issues. The decision confirms that merely using established testing techniques in the manner for which they were designed will not be experimental. It also confirms that site-specific test results are not, of themselves, new knowledge.
Simply utilising numerous existing technologies in a manner where they do not impact one another’s functioning will not be sufficient.  They must be used in an inter-related manner that generates some uncertainty in their combined effect. 
When considering whether the outcome of an experiment cannot be known it is important to focus on the technical risk in the substance of the experiment itself, and not on the wider risks of the company’s operations. The uncertain outcome must be because of technical risk, not economic or other non-technical risks.
The formulation of specific hypotheses form the basis for experimental activities and are necessary for a systematic experimental progression of work.  A vague ‘overarching’ hypothesis is not a specific hypothesis.  
If activities are aggregated or claimed to be ‘integrated’, the Company must provide a sufficient explanation of how the overall ‘system’ satisfies the criteria. Further, claiming an overarching activity is not a justification to avoid explaining the specifics of what is being done within that activity.  

Some Other Observations

The R&D Tax Incentive is a self-assessment process. That means it is also a subjective process. In this AAT case, AusIndustry used the testimony of expert witnesses who had a different viewpoint to the experts used by Mount Owen to dispute the level of technical risk in the R&D activities claimed for by Mount Owen. Just because you think that what you are doing is generating new knowledge, doesn’t mean that someone else will also think so. Be prepared to be able to back up your opinion!

The Mount Owen case dealt with R&D activities that took place between 2000 and 2005. By the time, this case was heard, it would have been during or after 2010, more than 5 years after the R&D activities that were claimed for took place. It is clear  from reading the decision, that there were problems with the recollection of some of the staff involved in the R&D. The decision notes that ” The contemporaneous material and other records do not approach the level of precision which would be expected of a systematic investigative process or a well-documented research and development program.” Make sure that you have good documentation from before the start of the R&D project as well as during the project.

Whilst this case dealt with the R&D aspects of the R&D Tax Concession, there will inevitably be a financial impact as well. Innovation Australia would notify the ATO that the applicant is no longer entitled to the R&D Tax benefit and the ATO would issue a revised Tax Assessment for the applicable financial years.

A listed mining company indicated in a release to the ASX that it had voluntarily amended some of its R&D claims as a result of  the Mount Owen case, which had the effect of increasing its income tax expense by $120m.


The R&D Tax Incentive is a great way to foster innovation by Australian companies. Just make sure that you get the correct advice because getting it wrong could prove to be disastrous.