H2O Exchange Pty Ltd and Innovation and Science Australia (Taxation)

This matter concerned an appeal by H2O Exchange Pty Ltd against a decision by Innovation and Science Australia (ISA) regarding the eligibility of certain research and development activities for the R&D tax offset. The core dispute revolved around whether the activities undertaken by H2O Exchange in developing an online water trading platform constituted "core R&D activities" or "supporting R&D activities" as defined by Division 355 of the *Income Tax Assessment Act 1997* (Cth). The case was heard by Deputy President B W Rayment Oam Qc P.

The legal issues before the court were whether the identified R&D activities were "core R&D activities" or "supporting R&D activities" for the purposes of the R&D tax offset. Crucially, this required determining whether the intended outcomes of these activities could be known or determined in advance based on current knowledge, information, and experience, and whether these outcomes amounted to new knowledge. The court also considered whether an internal review for a variation of a decision could be made while the decision was under external review.

The court reasoned that for activities to qualify as R&D, their outcomes must not be known or determinable in advance. In relation to Activity 1.1, the court found that part of the outcome was known to be achievable, while another part was known not to be achievable due to specific state conveyancing requirements. For Activity 1.2, which involved adapting the platform to real-time changes in trading rules, the court considered the possibility of using AI software. However, the evidence did not satisfy the court that the applicant was experimenting with AI software for this purpose during the relevant income years, or that such experimentation had an uncertain but potentially successful outcome. The application for registration did not indicate the use of AI, and the evidence regarding experimentation was unclear as to its purpose, timing, and methodology. Consequently, the court was not satisfied that the outcome of the registered activities was not known or able to be determined in advance, except for potentially a small part related to AI experimentation, which was not sufficiently evidenced.

The court affirmed the decision of the respondent.