Case law

R&D claim fails due to lack of contemporaneous documentation – Re Docklands Science Pty Ltd and Innovation Australia [2015] AATA 973

The Administrative Appeals Tribunal (AAT) in Re Docklands Science Pty Ltd and Innovation Australia [2015] AATA 973 has determined that activities conducted by the taxpayer cannot be core R&D activities as there is insufficient contemporaneous documentation to support the claim.

The taxpayer performed various activities which it registered with AusIndustry as R&D activities. Later, the taxpayer was subject to an AusIndustry review which concluded that the activities did not constitute core R&D activities for the purpose of Division 355 of the Income Tax Assessment Act 1997, notwithstanding the activities had been previously registered with AusIndustry. The taxpayer sought an internal review of the decision with the AAT.

The AAT agreed with AusIndustry that the activities were not core R&D activities because there was insufficient supporting documentation.  In particular, Senior Member Egon Fice of the AAT noted at [63] ‘it is the absence of documentation which has resulted in my findings‘. He went on to discuss the elements of a core R&D activity and emphasised at [63] ‘an applicant cannot succeed in establishing those requirements in the absence of detailed documentation recording the process of each activity as it develops’.

This is not the first time that the importance of maintaining contemporaneous documentation to support an R&D claim has been emphasised by the courts or tribunals. It is paramount that taxpayers prepare robust documentation at the time of performing their R&D activities to ensure that their claim can be supported when challenged by AusIndustry or the ATO – particularly in the current environment where R&D reviews are increasingly common. If you have any concerns about the level of documentation you need to support your R&D claim, please talk to one of our experienced tax lawyers.

Assessments issued by the ATO based on privileged information allowed by Full Federal Court – FCT v Donoghue [2015] FCAFC 183

The Full Federal Court unanimously allowed the Commissioner’s appeal in FCT v Donoghue [2015] FCAFC 183 holding that default assessments issued by the Commissioner were valid even though the ATO relied on documents that were subject to a claim of legal professional privilege.

The taxpayer was issued with default assessments for not lodging income tax returns. The taxpayer objected to the assessments. The taxpayer claimed that some documents used by the ATO during the audit were subject to legal professional privilege and that these documents were ultimately relied upon in issuing the assessments. The documents had been provided to the ATO by a third party. The Federal Court held that the assessments were invalid. Specifically, the Federal Court found that the auditor knew there was a small risk the documents were privileged so he did not act in bad faith but acted recklessly which constitutes conscious maladministration. The Commissioner appealed to the Full Federal Court.

The key issue on appeal was whether the ATO acted with conscious maladministration such that the assessments would be invalid. The Full Federal Court held that there could not be a breach of privilege as it is an immunity against the right to compel a party to produce information, and it is not a right in itself available where a party receives documents that are privileged. In this case, the correct cause of action for the taxpayer would have been a breach of confidence which was not raised by the taxpayer. The Full Federal Court concluded that, as the act of maladministration (being the breach of privilege) could not be found in this case, there cannot be conscious maladministration on the part of the Commissioner. The privileged documents therefore could be relied upon by the ATO in determining the assessments such that the default assessments are valid.

This case is a helpful reminder of the scope of legal professional privilege and that the protection is only afforded to documents that the Commissioner tries to obtain, not documents that the Commissioner already has in his possession.

Hosting and promotional staff found to be common law employees for payroll tax purposes – Styling Australia Pty Ltd v Comr of State Revenue [2015] VCAT 1792

The Victorian Civil and Administrative Tribunal (VCAT) has recently held that a company providing hosting and promotional staff for events, functions, carnivals, and marketing campaigns had sufficient control over its staff members such that they were employees at common law. As a consequence, the taxpayer company was liable to pay payroll tax, as the payments to staff came within the definition of wages under the Payroll Tax Act 2007 (Vic).

While the taxpayer argued that the staff members were independent contractors, VCAT emphasised that:

  • the staff were required to consistently present themselves professionally;
  • notify the taxpayer when they were unable to accept an assignment;
  • seek the consent of the taxpayer to accept an offer of employment from a client; and
  • as a consequence a casual employment relationship existed.

If you have any concerns about the classification of your staff as employees or contractors and consequently your liability for payroll tax, please contact one of our experienced tax lawyers for assistance.

ATO updates

ATO consulting with small business owners to reduce GST reporting costs

The ATO has noted that in 2016 it will be working with small businesses with a turnover of less than $2 million to reduce the costs of their GST reporting. Some measures include simplifying account set up, record keeping and business activity statement (BAS) preparation by removing unnecessary GST labels on BAS. This is a positive sign for small businesses and should result in reduced compliance costs.

Legislation and government policy

EU passes tax transparency directive

Another step has been taken in the global pursuit of preventing multinational tax avoidance. The Council of the European Union has adopted a directive that will require member states to automatically exchange information on advance cross-border tax rulings and advanced pricing arrangements (APAs). Additionally, a secure central directory will be developed that will facilitate information exchange between member states and for the implementation of the directive.

Tax rulings are the assurances that tax authorities provide to taxpayers in regarding the tax treatment of a particular issue. An APA is a type of tax ruling that is focussed on the pricing methodology applied by a taxpayer to the transfer of goods or services between companies.

The EU noted in its directive that it ‘will ensure that where one member state issues an advance tax ruling or transfer pricing arrangement, any other member state affected is in a position to monitor the situation and the possible impact on its tax revenue’.  This is consistent with the wider tax base erosion and profit shifting initiatives being pursued by the OECD and discussed at the G20.

The new rules will apply from 1 January 2017.