Royal Wins Pty Ltd and Innovation and Science Australia

Case [2020] AATA 4320

Royal Wins Pty Ltd and Innovation and Science Australia [2020] AATA 4320 (28 October 2020)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2019/2057

Re:Royal Wins Pty Ltd

APPLICANT

Innovation and Science Australia And  

RESPONDENT

DECISION

Tribunal:Deputy President I R Molloy

Date:28 October 2020

Place:Sydney

The decision under review is affirmed.

............................[SGD]............................................

Deputy President I R Molloy

CATCHWORDS

INDUSTRY RESEARCH AND DEVELOPMENT – whether activities core or supporting research and development activities within the meaning of Division 355 of the Income Tax Assessment Act 1997 (Cth) – where Applicant’s activities related to the integration of gaming algorithms to develop a gaming platform – whether activities displayed a systematic progression of work – whether outcomes could not have been known or determined in advance on the basis of current knowledge, information and experience – inadequate contemporaneous documentation – decision under review affirmed

LEGISLATION

Income Tax Assessment Act 1997 (Cth) ss 355-5, 355-25, 355-30, 355-205

Industry Research and Development Act 1986 (Cth) ss 6, 27A, 27J, 27L, 30C, 30D, 30E

CASES

DBTL and Innovation Australia [2013] AATA 573; (2013) 137 ALD 88

Rix’s Creek Pty Limited; Bloomfield Collieries Pty Limited and Innovation Australia [2017] AATA 645

SECONDARY MATERIALS

Explanatory Memorandum, Tax Laws Amendment (Research and Development) Bill 2010 and Income Rates Amendment (Research and Development) Bill 2010 (Cth)

REASONS FOR DECISION

Deputy President I R Molloy

28 October 2020

  1. The Applicant operates a gaming platform for skill-based gaming applications that facilitate betting. By application dated 15 April 2019[1] the Applicant applies for review of an internal review decision of the Respondent dated 15 March 2019 (the Decision).[2] The Decision involves the Applicant’s activities related to the integration of gaming algorithms to develop a gaming platform.

    [1] Exhibit A at T1.

    [2] Exhibit A at T33.

  2. The Decision confirmed the Respondent’s initial decision on 9 October 2018 under section 27J of the Industry Research and Development Act 1986 (Cth) (IRD Act) that the activities allegedly undertaken by the Applicant in the 2015/16 and 2016/17 financial years were not Core or Supporting research and development (R&D) activities for the purposes of the Income Tax Assessment Act 1997 (Cth) (ITAA).[3]

    [3] Exhibit A at T25.

  3. The Decision was made under paragraph 30D(2)(a) of the IRD Act, on the basis that the Applicant’s claimed R&D activities were not:

    (a)Core R&D activities within the meaning of section 355-25 of the ITAA (Core R&D Activities); or

    (b)Supporting R&D activities within the meaning of section 355-30 of the ITAA (Supporting R&D Activities).

    Legislative framework

  4. The Respondent is a body established under section 6 of the IRD Act and is administratively assisted by the Department of Industry, Science, Energy and Resources (the Department). The Department and the Commissioner of Taxation (the Commissioner) administer the Commonwealth’s tax incentive scheme for entities engaged in R&D activities (R&D Entities), which is called the R&D Tax Incentive.

  5. The operative rules for the R&D tax incentive…

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Details
AGLC
Royal Wins Pty Ltd and Innovation and Science Australia [2020] AATA 4320
Case
[2020] AATA 4320
Decision Date

CaseChat Overview and Summary

The Administrative Appeals Tribunal reviewed a decision by Innovation and Science Australia (the Respondent) concerning the eligibility of research and development (R&D) activities undertaken by Royal Wins Pty Ltd (the Applicant) for tax incentives. The Applicant sought registration for R&D activities related to the development of a hybrid gaming platform, specifically focusing on integrating gaming algorithms. The Respondent had initially refused to register these activities as either Core or Supporting R&D activities under Division 355 of the *Income Tax Assessment Act 1997* (Cth) for the 2015/16 and 2016/17 financial years.

The central legal issues before the Tribunal were whether the Applicant's claimed activities constituted Core R&D activities or Supporting R&D activities as defined by the *Income Tax Assessment Act 1997* (Cth). Specifically, the Tribunal had to determine if the activities involved experimental work whose outcomes could not be known or determined in advance based on current knowledge, and if they proceeded through a systematic progression of work from hypothesis to experiment, observation, and evaluation, leading to logical conclusions. The Tribunal also considered whether the activities were conducted for the purpose of generating new knowledge or information.

The Tribunal reasoned that a critical deficiency in the Applicant's case was the inadequate contemporaneous documentation. While the Applicant presented simulations, the lack of inline documentation within Python scripts and Excel worksheets, and the absence of clear records detailing hypotheses, experimentation, and results, prevented a full understanding of the work undertaken. The Tribunal accepted the Respondent's submission that adequate documentary evidence is essential for demonstrating a systematic progression of work, which is a requirement for R&D activities. The Tribunal found that the provided documentation did not sufficiently evidence the application of a scientific method in a systematic progression from hypothesis to experiment, observation, and evaluation, leading to logical conclusions.

Consequently, the Tribunal affirmed the Respondent's decision. The Applicant's appeal was dismissed, and the R&D activities in question were not registered as eligible for the R&D tax incentive scheme.

Orders

Orders of the court

Full text does not contain this section.

Background

Background to the litigation

Section 30E of the IRD Act provides for applications to be made for review of internal review decisions to the Tribunal. Factual background The following summary of the factual background is taken from the Respondent’s Amended Statement of Findings of Fact and Reasons dated 11 July 2019. On 5 September 2016, the Applicant submitted an application to the Respondent for registration of R&D activities for the 2015/16 registration year. The project to which the activities related was titled “201601 Integrated Hybrid Gaming Algorithm and Platform” (the Project).[6] The stated objective of the project was to “create a system based on a hybrid model game of skill and chance” and to “test and implement the individual standalone games, mathematical algorithms, global mechanical redistribution models and security features”.[6] Exhibit A at T7. In its application, the Applicant sought to register three Core R&D Activities and related Supporting R&D Activities, which were described as:Core Activity 1.1: Research and Development of Skill and Chance Game RTP Mathematical Algorithm to normalise returns;Supporting Activity 1.1.2: Development of social casino game server + back office for deployment of games to test RTP balancer, math models and gambling game mechanic theories;Supporting Activity 1.1.3: Development of games to test RTP balancer, math models and gambling game mechanic theories;Supporting Activity 1.1.4: Literature research and background reviews;Supporting Activity 1.1.5: Project Management and administration;Core Activity 1.2: Planning, design and mathematical models for skill-based difficulty balancer;Supporting Activity 1.2.1: Literature research and background reviews;Supporting activity 1.2.2: Project Management and administration; Core Activity 1.3: Sample size analysis, determination and creation;Supporting Activity 1.3.1: Research player profile of skill game players and player profile of online gambling players;Supporting Activity 1.3.2: Development of social casino game server + back office for deployment of games to test RTP balancer, math models and gambling game mechanic theories;Supporting Activity 1.3.3: Development of games to test RTP balancer, math models and gambling game mechanic theories;Supporting Activity 1.3.4: Literature research and background reviews; andSupporting Activity 1.3.5: Project Management and administration. On 6 September 2016, the Respondent made a decision to register the Applicant's activities for the 2015/2016 registration year under section 27A of the IRD Act.[7][7] Exhibit A at T8. On 20 September 2017, the Applicant submitted an application to the Respondent for registration of R&D activities for the 2016/17 registration year. These activities also related to the Project.[8] The Applicant sought to register three core activities which were supported by 10 supporting activities. The activities were the same as those in the application for registration in the 2015/16 year, save that they did not include Supporting Activity 1.3.1.[8] Exhibit A at T9.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The Applicant operates a gaming platform for skill-based gaming applications that facilitate betting. By application dated 15 April 2019[1] the Applicant applies for review of an internal review decision of the Respondent dated 15 March 2019 (the Decision).[2] The Decision involves the Applicant’s activities related to the integration of gaming algorithms to develop a gaming platform. [1] Exhibit A at T1. [2] Exhibit A at T33. The Decision confirmed the Respondent’s initial decision on 9 October 2018 under section 27J of the Industry Research and Development Act 1986 (Cth) (IRD Act) that the activities allegedly undertaken by the Applicant in the 2015/16 and 2016/17 financial years were not Core or Supporting research and development (R&D) activities for the purposes of the Income Tax Assessment Act 1997 (Cth) (ITAA).[3] [3] Exhibit A at T25. The Decision was made under paragraph 30D(2)(a) of the IRD Act, on the basis that the Applicant’s claimed R&D activities were not:(a)Core R&D activities within the meaning of section 355-25 of the ITAA (Core R&D Activities); or(b)Supporting R&D activities within the meaning of section 355-30 of the ITAA (Supporting R&D Activities).Legislative framework The Respondent is a body established under section 6 of the IRD Act and is administratively assisted by the Department of Industry, Science, Energy and Resources (the Department). The Department and the Commissioner of Taxation (the Commissioner) administer the Commonwealth’s tax incentive scheme for entities engaged in R&D activities (R&D Entities), which is called the R&D Tax Incentive. The operative rules for the R&D tax incentive are contained in Division 355 of the ITAA. Section 355-5 of the ITAA sets out the object of Division 355 in the following terms:1The object of this Division is to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy.2This object is to be achieved by providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form (including new knowledge in the form of new or improved materials, products, devices, processes or services). Section 355-205 of the ITAA provides that an R&D Entity may deduct for a registration year expenditure incurred during that year to the extent that the expenditure, relevantly, is incurred on one or more R&D activities for which the R&D Entity is registered under section 27A of the IRD Act for a registration year. Section 27A of the IRD Act provides that the Respondent must, on application by an R&D Entity, decide whether to register or refuse to register the R&D Entity in relation to Core R&D Activities or Supporting R&D Activities for a registration year. Core R&D Activities are defined in subsection 355-25(1) of the ITAA (subject to certain exceptions provided under subsection 355-25(2)) as experimental activities:(a)whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:(i)is based on principles of established science; and(ii)proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and(b)that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).

Ratio Decidendi

Legal Principle Established

The Applicant produced numerous simulations in the form of Python scripts and Excel worksheets which showed attempts to modify (or “tune”) the game difficulty parameters. For each scenario, the simulations were executed many times (thousands to hundreds of thousands of times), such that the outcomes, the predicted RTP of each execution, as well as the overall RTP were calculated. The simulations allowed the Applicant to make conclusions regarding the values of the game parameters that would keep the game difficulty (and the RTP as a by-product) within the desired range.[20] [20] Berkovsky Report at [2.28].Consideration In the first place it is necessary to determine whether the alleged R&D activities, or what aspects of those activities, were conducted in the relevant years. As the Respondent points out, claims in respect of the same Core Activities were made over a number of years not limited to the relevant years for the purpose of this application. A threshold difficulty for the Applicant is the absence of documentation or records from which it can be determined what was done in each of the relevant years. This absence of documentation unfortunately permeates every aspect of this review. As Associate Professor Berkovsky says, there is an absence of adequate documentation, including of the hypothesis, experimentation testing the hypothesis, and the results of the experiment.[21] [21] Berkovsky Report at [1.22]. Associate Professor Berkovsky reported: I could generally understand the claimed project undertaken by Royal Wins. However, it should be noted that the collection of provided documents included very large volumes of irrelevant and/or barely documented information. For example, the documents describing the gaming industry were very generic and did not provide much information on the challenges and opportunities of the specific games developed by Royal Wins or skills-based wagering games. Likewise, the Python scripts and Excel worksheets included minimal to no documentation (that is, inline documentation of Python code, Excel formulas, and so on), which prevented me from fully understanding each and every decision made in the simulations. The lack of documentation is inconsistent with best practices in the industry and research alike, as this may slow down software development and complicate its maintenance. Mr Ali pointed out, with some justification as Associate Professor Berkovsky acknowledged, that it could not be expected that industrial research and development would necessarily follow the same path as that undertaken in, for example, a university setting. Industry research and development can take different forms. That said, I accept the Respondent’s submission that it is an essential aspect of the systematic progression of research and development applications that there be adequate documentary evidence. What is required is documentary evidence of the application of a scientific method in a systematic progression of work from hypothesis to experiment, observation and evaluation, followed by logical conclusions.