R&D Compliance Series: Ultimate Vision Inventions Pty Ltd (UVI) Vs Industry Innovation And Science Australia (IISA)

The R&D Tax Incentive (R&DTI) landscape has continued to evolve over the past year with several key compliance cases shaping the way claims are prepared. In Ascentium Australia’s R&D Compliance Series, we explore these recent cases and share practical insights to help claimants remain compliant.

Background

On the 17th of September, the Administrative Review Tribunal (ART) handed down a decision on a matter between Ultimate Vision Inventions Pty Ltd (UVI) and Industry Innovation and Science Australia (IISA). Continuing our compliance series, this case study provides a comprehensive guide for taxpayers on the evidentiary and procedural requirements for R&D compliance.

The matter revolved around whether UVI’s registered activities, focusing on the design, development, and evaluation of a digital health and fitness management system (known as HFS), were eligible under the R&DTI for the 2014, 2015, and 2016 income years. UVI claimed to have developed novel algorithms and cloud-based systems integrating health, fitness, and payment functionalities to facilitate calorie consumption and intake. IISA reviewed and rejected the eligibility of these activities on the basis that:

• They did not follow a systematic progression of work;
• They did not generate new knowledge; and
• The outcome of the activities could have been known in advance based on the information at the time.

UVI appealed the decision made by IISA, but it was upheld by the ART. However, upon appeal, the Federal Court found that the ART failed to conduct an independent review, and had instead substantially copied IISA’s original findings when forming its decision. As a result, the matter was remitted to the ART for a new hearing.

The key issues for determination by the ART were:

1. Whether UVI’s activities met the definition of core R&D activities;
2. Whether the activities were actually conducted as registered in the relevant income years; and
3. Whether any part of the activities could be considered as a supporting R&D activity.

Outcomes

Ultimately, the ART affirmed IISA’s decision that none of UVI’s activities for the relevant years were eligible R&D activities. The ART’s findings included:

• Lack of evidence of conducted activities: The ART found insufficient evidence that the registered activities were actually conducted in the years claimed. Whilst a large amount of documentation was kept on hand, much of the documentation was vague or related to unregistered or unrelated projects.
• No systematic progression of work: Given the lack of evidence, the ART accepted IISA’s expert witness’s opinions that UVI’s work did not demonstrate a systematic progression of work, as it was impossible to critically review if, when, and how the experiments were carried out. There was also little evidence to demonstrate how the experiments were evaluated and how logical conclusions were reached.
• Known outcomes: The expert witnesses for IISA established that the outcomes of UVI’s claimed activities could have been known in advance by competent professionals, based on existing knowledge and technology.
• No eligible supporting activities: As no core R&D activities were found to have been conducted, no supporting activities could be recognised.

Key Takeaways

There is much to learn from this case study, but the key takeaways can be summarised as:

Contemporaneous documentation:

IISA reviews R&D activities based only on the income year in question. As such, contemporaneous records that clearly evidence the conduct of registered R&D activities in the relevant income year must be maintained. Generic documentation is unlikely to satisfy the statutory R&D requirements. The R&D activities described within the Application Form should also reflect what is stated within the documentation.

Whilst UVI kept numerous documents on hand throughout the claim periods, there were many insufficiencies with these documents:

• Claimed R&D planning activities described in early 2014 conflicted with pilot testing beginning in October 2013;
• An ‘R&D Manual’ consisting of 9 volumes was kept throughout the life of the project, detailing all working documents; however, only a small portion was relevant to the registered activities;
• Supporting documents, such as algorithms/code and diagrams, were poorly labelled, making the conducted R&D activities difficult to understand;
• Tests set out within the documentation did not align with the activities that were registered;
• Business feasibility plans and patents that detailed competitor technologies, development schedules, and hardware and software specifications did not include details relevant to the HFS project, and were owned by a different entity; and
• Invoices and agreements lacked clarity on scope and timing, thus reducing their evidentiary value.

Further to the above discrepancies, UVI also wanted IISA to consider the totality of the project. The ART argued that only the ‘registered’ activities for each relevant year should be considered, rather than the project as a whole. Whilst it is understandable that earlier R&D activities may relate to those conducted in the current year, these should only be considered relevant if they help to clarify the details of activities for the income year in question.

Scientific method:

Activities must demonstrate a systematic progression of work based on established scientific principles, including clear hypotheses, experiments, observations, and conclusions.

UVI’s documentation lacked details linking objectives, methods, findings, and conclusions. Of the activities described within the documentation presented, it was inferred by expert witnesses that the activities appeared more like the generic monitoring of one or two individuals (family members) rather than a systematic progression of work with set parameters and variables to determine an outcome. The sample size utilised was also quite small, and thus the adequacy of the conclusions drawn from these activities was also questionable.

Unknown outcomes:

Activities whose outcomes can be determined in advance based on existing knowledge are not eligible as core R&D activities.

Based on the submitted evidence, it appeared that UVI’s background research consisted of a survey of existing health and fitness systems, which were largely copied from online sources, with little original analysis. Further to this, IISA’s expert witnesses noted that the equations utilised to work out calorie intake and consumption were widely known and not novel. Moreover, the witnesses noted that this equation, once understood, could be easily translated into code. All of this indicated that the outcomes of the experiment could have been known in advance.

Conclusion

UVI’s R&D claim was ultimately unsuccessful because they failed to provide sufficient evidence that the registered activities were actually carried out during the relevant income year, that the demonstrate that the activities followed a systematic approach, and show that the activities involved genuine technical uncertainty. These shortcomings meant the claim did not meet the necessary criteria for R&DTI eligibility. The ART’s decision serves as a reminder that the R&DTI is not intended to support activities whose outcomes are already known or can be determined by existing knowledge. The case also reinforces the importance of contemporaneous, detailed records and a clear, year-by-year approach to ensure R&D compliance.

If you would like more information on the above and the impact that these could have on your R&D Claim, please reach out to your Ascentium Australia engagement team or Victoria Campbell at victoria.campbell@incorpadvisory.au.

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