LAKES OIL NL and INNOVATION AND SCIENCE AUSTRALIA (Taxation)

The Administrative Appeals Tribunal (AAT) considered a dispute between Lakes Oil NL and Innovation and Science Australia (ISA) concerning the eligibility of certain research and development (R&D) activities for the R&D Tax Incentive. Lakes Oil sought to claim tax offsets for activities undertaken between 2013 and 2015, which ISA had previously confirmed were not eligible. The Tribunal's review focused on whether these activities met the criteria for eligible core or supporting R&D activities under the *Industry Research and Development Act 1986* (Cth) and the *Income Tax Assessment Act 1997* (Cth).

The primary legal issues before the Tribunal were whether the activities undertaken by Lakes Oil constituted eligible core R&D activities, specifically whether they fell within any excluded categories, such as those relating to exploring, prospecting, or drilling as defined in section 355-25(2) of the *Income Tax Assessment Act 1997*. Additionally, the Tribunal had to determine if the activities were experimental in nature, with outcomes that could not be known in advance and were conducted for the purpose of generating new knowledge. The Tribunal also considered whether any claimed supporting R&D activities were directly related to eligible core R&D activities and undertaken for the dominant purpose of supporting them.

The Tribunal reasoned that the definition of an experimental activity requires a systematic progression from hypothesis to experiment, observation, and evaluation, leading to logical conclusions, and must be conducted for the purpose of generating new knowledge. It also noted that activities related to exploring, prospecting, or drilling are generally excluded from eligibility. The Tribunal considered expert evidence from both parties, including Professor Bedrikovetsky for ISA and Professor Johnson for Lakes Oil, while also addressing procedural fairness concerns regarding the admissibility of certain evidence. The Tribunal ultimately affirmed ISA's decision, finding that the activities undertaken by Lakes Oil did not satisfy the conditions for eligible R&D activities.