AATA 515 (29 July 2014)

There were two principal issues for determination by the Tribunal in relation to the feedstock expenditure (in this instance, in relation to claims made under the R&D Tax Concession program).

Background

  • The claimant was in the mining industry and making R&D claims in relation to “plant trials” undertaken as part of the concentrating and smelting processes.
  • There was no dispute that the R&D claimant was carrying out eligible R&D activities which met the threshold of involving innovation or high levels of technical risk.

Issues

  1. Whether various items of expenditure used in the concentrate process and included in the R&D claim and deducted at 125% should have been categorised as feedstock (and deducted at 100%); and
  2. Given the inter-related nature of the concentrating and smelting processes, where the timing of the processes and materials used ‘overlap’ (i.e. where concentrate produced in the concentrate process was subsequently fed into the smelting process), the issue is whether this expenditure became feedstock expenditure in respect of subsequent plant trials at the smelter and thus could not be deducted at 125%.

Findings

  1. Whilst it was accepted that the expenditure items of sacrificial consumables used in the concentrate process were ‘goods’ or ‘materials’ or both, none of these items were the subject of processing or transformation during the concentrate process as they did not form part of the final product. The subject of the processing was the copper or zinc ore received from the mines, which was transformed into concentrate during the process. (N.B. the only disputed item which the Tribunal agreed became the subject of processing or transformation was the oxygen which combined with sulphur under intense heat to produce sulphur dioxide in the smelting process).
  2. Regardless of the intent for there to be process overlap or not, due to the use of concentrate product in subsequent, unrelated R&D activities in the smelter, this overlapping expenditure was properly characterised as feedstock.

What does this mean for you?

  • The case provides clarity in relation to prior year R&D claims (under the R&D Tax Concession) involving feedstock expenditure and the relevant calculation of that amount.
  • Under the R&D Tax Incentive, the definition and treatment of feedstock has changed, however this case may inform our interpretation of certain concepts going forward.