Large mining taxpayer partially successful in former R&D tax concession claim

Analysis

Large mining taxpayer partially successful in former R&D tax concession claim

In a decision in a long running former R&D tax concession case, Re GHP 104 160 689 Pty Ltd and FCT, which the Commissioner has apparently appealed to the Federal Court, the taxpayer has been successful in claiming a 125% R&D tax concession deduction for some disputed expenditure with some claims disallowed on the basis of overlapping activities and expenditures.

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In a decision in a long running former R&D tax concession case, Re GHP 104 160 689 Pty Ltd and FCT, which the Commissioner has apparently appealed to the Federal Court, the taxpayer has been successful in claiming a 125% R&D tax concession deduction for some disputed expenditure with some claims disallowed on the basis of overlapping activities and expenditures.

In the income tax years between 2003 and 2007 the taxpayer conducted plant trials over a number of months to experiment with a number of potential improvements to its copper and lead concentrators and its copper smelter. 

The taxpayer sought to claim a large part of this expenditure as R&D at the enhanced deduction rate of 125% and for each of the relevant tax years, the Commissioner disallowed many, but not all, of the items of expenditure claimed. 

Under review, the Commissioner contended that the amounts were not eligible on the basis that the amounts related to "feedstock expenditure" being expressly excluded from the statutory definition of "research and development expenditure". Such excluded expenditure is that incurred to acquire goods and materials that will be the subject of transformation or processing in the R&D activities. 

It was also contended that some expenditures overlapped because the product of the plant trials was fed into the copper smelter activities and as such became excluded "feedstock expenditure".

On a detailed analysis of the complicated scientific factual position, the Tribunal held that on a correct application of the principles of statutory interpretation, the taxpayer was entitled to substantially succeed.  It held that the term feedstock expenditure was a defined term that must be construed as defined, subject only to the proposition that the meaning of the definitions themselves may be informed by the context of the legislation read as a whole. 

The Tribunal stated that things which are acquired to be the subject of some process cannot share a common identity with those acquired to subject them to that activity. Critically it also had regard to the link between feedstock expenditure and feedstock outputs to the extent that the Tribunal recognised that feedstock expenditure must be on goods or materials that may potentially become ‘products’ as a result of the transformation or processing. It acknowledged that the feedstock scheme enacted is coherent and self-contained.

Mining and R&D

The Tribunal also addressed some of the Commissioner’s specific considerations as follows:

  • The submission that the construction of the legislation requires a “common-sense commercial approach” was rejected where the proposition would support an outcome otherwise than that expressed by the text of the legislation itself.
  • The mere argument that a disproportionate benefit may arise compared to the risk incurred cannot displace the meaning of the statute as expressed by its text.
  • The compound phrase “expenditure incurred by the company in acquiring or producing materials or goods to be the subject of processing or transformation by the company in research and development activities” must be read as a whole.  

However it also accepted the Commissioner's argument on the overlapping expenditures on the basis that the R&D plans that were developed independently of each other and the timing of the scheduling of the R&D activities. 

Given that the definition of feedstock expenditure is substantially similar under the current R&D tax incentive, many aspects of this case, subject to appeal, will remain relevant in the interpretation of those provisions. 

AAT Case [2014] AATA 515, Re GHP 104 160 689 Pty Ltd and FCT, AAT, Kerr P, AAT Ref: 2011/4618, 4619, 4674, 29 July 2014.

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