Talking Tax – Issue 21

Case law

AAT rules ‘drug tests’ to be a core R&D activity– JLSP and Innovation Australia [2016] AATA 23

The Applicant, an Australian based biopharmaceutical company, conducted clinical research of the efficacy of a drug to treat a particular illness through services contracts with an international pharmaceutical company.

The Applicant sought notional deductions and tax offsets by classifying the clinical research as a ‘core R&D activity’ under section 355-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Under the Industry Research and Development Act 1986 (Cth) (IRD Act), the Applicant applied to Innovation Australia for an ‘advance finding’ in relation to its research activities. Innovation Australia decided that the activities were not ‘core’ R&D activities’, and after the internal review process provided by the IRD Act, the Applicant sought review of the decision by the Administrative Appeals Tribunal (AAT).

Evidence was provided to the AAT verifying the scientific and experimental standards of the research. The AAT held that the research met the definition of ‘core R&D activities’ for the following reasons:

• The outcome of the activity could not have been determined in advance on the basis of the knowledge information or experience current at the time of the research’s performance.
• The outcome of the activity could only be determined by applying a ‘systematic progression of work based on principles of established science and proceeding from hypothesis to experiment’.
• The purpose of generating new knowledge only needs to be the substantial purpose for conducting the research even in the presence of other substantial purposes and does not have to be the dominant or prevailing purpose, as Innovation Australia argued.

One of the key elements required for an activity to be a ‘core R&D activity’ is that it must be for the purpose of generating new knowledge. This case provides clarity for taxpayers of the meaning of the term ‘purpose’ confirming that it is broader than dominant purpose.

If you have any questions about whether your activities have the requisite purpose or meet the broader requirements of a ‘core R&D activity’, please contact one of our experienced tax lawyers for advice.

ATO updates

ATO determines that employers are not entitled to an input tax credit for expenses paid on behalf of a superannuation fund

The ATO has released a Goods and Services Tax Determination (Determination) that prevents an employer from claiming an input tax credit if it pays an expense on behalf of a superannuation fund.

If all of the requirements of Division 11 of the A New Tax System (Goods and Services) Tax Act 1999 (Cth) (GST Act) are met, input tax credits are available to a registered entity for any creditable acquisitions. A creditable acquisition occurs if the entity acquires anything solely or partly for a creditable purpose. An acquisition is obtained for a creditable purpose to the extent that it is applied in the carrying on of the entity’s enterprise.

Under the GST Act, an employer paying an expense on behalf of a superannuation fund has not itself acquired anything for the payment and consequently has not made a creditable acquisition. An example provided in the Determination is where an employer, for administrative convenience, pays the legal fees for legal advice given to its associated superannuation fund. In this situation, the employer would not be permitted to claim an input tax credit for this expense.

As a result of the Determination, the Commissioner of Taxation withdrew a previous GST Advice and Miscellaneous Taxation Ruling (MTR). The previous GST Advice mirrors the Determination and was consequently withdrawn. The MTR dealt with the tax treatment of expenses incurred by a superannuation fund paid by an employer on behalf of the fund.

If you have any questions or concerns about how the GST Determination will affect you, please contact one of our experienced tax lawyers.

Legislation and government policy

Treasurer assures that substantive tax changes will be taken to an election

The Federal Treasurer, Scott Morrison has recently provided his insights into the Government’s expected position on tax reform in the lead up to the election. The Treasurer insisted that the Government has a ‘very strong view’ about how it needs to ‘grow the Australian economy’, and that this ‘will be laid out in chapter and verse over the months and months that are ahead of this election’.

However, the Treasurer did not provide significant detail on the taxation reforms that may form a part of this plan for growth, and repeatedly declared that ‘everything’s on the table’. The Treasurer did indicate that:

• the Government would be ‘pushing for tighter governance of superannuation’, including ‘more independent directors’, and that it was ‘looking at greater choice out of the Financial Systems Inquiry Report’;
• the incentives in superannuation need to be targeted at its purpose and not the building of ‘tax free inheritance pools’;
• the personal income tax settings and ‘our high rates of company tax’ were things holding the Australian economy back; and
• the Government is likely to favour increasing the GST rate as opposed to broadening the tax base to areas such as health and education.

The Commissioner’s potential new powers

In December, the Federal Treasury released an exposure draft piece of legislation that expands the Commissioner’s powers to modify the operation of a provision in the taxation and superannuation law in particular circumstances to ensure that the law is being administered consistently with its purpose. The power does not allow the Commissioner to amend the actual text of the law, but allows its application to be modified for entities in certain situations.

The Commissioner’s power is described as a ‘remedial power’ that can be exercised as a power of last resort when all other options available to the Commissioner have been considered and found to be unsuitable.

For further consideration of the main issues present in the draft legislation, see this article presented by Andrew O’Bryan, Partner, Frank Hinoporos, Special Counsel.