A case that had R&D implications was finalised in the AAT at the end of July 2013.
Although the matter, Vision Intelligence Pty Ltd and Commissioner of Taxation  AATA 527, went to the AAT looking for a reduction in penalties imposed by the ATO, the crux of the case revolved around an application lodged under the old R&D Tax Concession. The R&D Tax Concession was replaced by the R&D Tax Incentive with effect from 1 July 2011.
This case looked at issues arising from the R&D Tax Concession but there are some interesting lessons that are applicable to the R&D Tax Incentive.
A summary of the background to the case is as follows:
- Vision Intelligence Pty Ltd (“VI”) was incorporated on 2 June 2009.
- VI engaged a management and technology consultancy firm called Capital Technic Consulting Pty Ltd (“CTC”) on 5 June 2009.
- VI agreed to pay CTC a $10,000 upfront non-refundable retainer and a success fee of 12.5% (less the retainer) for all amounts awarded by the ATO to the applicant for the annual R&D Claim.
- VI entered into a further agreement on the 15th of June 2009 with a CTC related company, ThorSol Technologies Pty Ltd (“TST”), a Registered Research Agency (“RRA”).
- TST was to be the prime R&D contractor to undertake R&D activities for VI.
On the 30th of June 2009, TST issued an invoice for $1,089,796.40 (incl GST) to VI for R&D Services for work with a start date of 1 June 2009 and and end date of 30 June 2010.
An R&D Tax Concession application was lodged with AusIndustry and a registration number was received on 13 July 2009.
VI lodged a tax return on 9th of September 2009 with a R&D Tax Schedule showing a refund to VI of $371,521.
In November 2009, the ATO contacted VI asking for more information about the R&D expenditure. There was ongoing communication between the parties until the 6th of May 2011 when the ATO issued an ammended tax assessment disallowing the R&D Tax offset. The offset was never paid.
The AAT looked at three issues but for purposes of this article, we will look at only the first issue – had VI incurred the relevant expenditure in respect of the relevant year?
Subsection 73B(13) provides that “Subject to this section, where an eligible company incurs contracted expenditure during a year of income, the amount of that expenditure multiplied by 1.25 is an allowable deduction to the company for the year of income.”
Note that the 1.25 is a reference to the R&D Tax Concession and does not apply to the R&D Tax Incentive.
VI asserted that the liability to TST had been incurred in the year ended 30 June 2009 and was therefore entitled to claim in the R&D Tax Schedule.
VI further contended that an expense could be incurred without it being paid in the year ended 30 June 2009.
The AAT examined whether the expense at 30 June 2009 was merely “contingent, pending, threatened or expected” or “definitively committed”.
If the expense is merely contingent, pending or expected as at the end of 30 June 2009, it is an expense that has not been incurred in that year. On the other hand, if it is an expense to which VI is definitively committed as at the end of 30 June 2009, it is an expense that has been incurred in the year to 30 June 2009.
The AAT looked at a couple of issues around the contract.
These centred around whether VI had authorised the R&D work to be undertaken and whether a commitment to make the payments existed as at 30 June 2009.
Although the AAT does not specifically make a finding on the authorisation aspect, it did find that no amounts had been paid by VI and nothing had been demanded by TST.
In the end the AAT concluded that the R&D expenditure had not been incurred in the year ended 30 June 2009.
It is worth noting that one of the changes to the R&D Tax Incentive was the requirement that any expenses to related parties claimed, had to be paid in the financial year that the R&D expense would be claimed. In other words these expenses would be treated on the “cash” basis of accounting as opposed to the “accrual” basis of accounting.