TDS Biz appealed last year's AAT decision to the Federal Court and lost.

In recent R&D Tax news, TDS Biz appealed last year's AAT decision to the Federal Court and lost.

This case concerns a company attempting to claim the cost of overseas moulds, fabrication, CAD and assembly within its R&D Tax Incentive claim without having first attained an Overseas Finding from AusIndustry. Expenditure on overseas R&D activities is excluded unless a positive Overseas Finding is obtained.

The interesting point though is the distinction between what is an overseas R&D activity, and what is the mere purchase of components to be used in R&D activities undertaken in Australia. The latter being considered as an eligible R&D expense.

In this case, the Commissioner and the Federal Court considered that the things being done offshore were significant and warranted an Overseas Finding.

Some interesting points though:

1. Off the shelf items were caught in the overseas activity argument. TDS Biz stated that: "Hefei Kelly supplied ‘off-the-shelf’ items, e.g. motor controller, etc. which were required for the construction/assembly of the prototypes in Australia to enable the continuation of the core R&D activities in Australia as specified in 1.1 Electro- mechanical design."

2. TDS Biz did not appear to have demonstrated how and when the offshore components would be used in Australia.

The impact of this case on the regulators' interpretation of an Overseas R&D activity as opposed to a cost linked to Australian R&D activities is something which we will be seeking to further clarify in consultation with them.

This case has further highlighted the importance of having a clear distinction between R&D costs associated with Australian R&D activities, and evidence of these, as opposed to what could be seen to constitute overseas R&D activities.