SFGV and INNOVATION AUSTRALIA
[2010] AATA 677
•7 September 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 677
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2010/1684
GENERAL ADMINISTRATIVE DIVISION ) Re SFGV Company
And
INNOVATION AUSTRALIA
Respondent
DECISION
Tribunal Mr R G Kenny, Senior Member Date7 September 2010
PlaceBrisbane
Decision The Tribunal affirms the decision under review.
.................[Sgd]..................
Senior Member
CATCHWORDS
Innovation Australia - Research and development concession – Late registration – No exceptional circumstances for late lodgement - Discretion to register the applicant company’s late application not exercised – Decision under review affirmed.
RELEVANT ACT/S:
Industry Research and Development Act 1986 (Cth) ss 6, 39AA, 39A, 39D, 39J, 39JF 39S 39T
Industry Research and Development Amendment Act 1999 (Cth) Sch 1
Income Tax Assessment Act 1936 (Cth) ss 73B, 73BA, 73I, 73QA, 73QBActs Interpretation Act 1900 (Cth) s 15AB
CITATIONS
Bloomfield Collieries Pty Ltd and Anor and Innovation Australia [2009] AATA 69
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634
Cabal & Anor v United Mexican States & Ors (2001) 180 ALR 593Commissioner of Taxation v Forester [2003] NTMC 56
REASONS FOR DECISION
7 September 2010
Mr R G Kenny, Senior Member
BACKGROUND
1. On 17 August 2009, the applicant company (“the company”) lodged with Innovation Australia, pursuant to the Industry Research and Development Act1986(Cth) (“the Act”), a concession application seeking late registration for the research and development taxation concession in respect of the 2005-2006 income year[1]. Innovation Australia is a Board established under the Act[2]. On 29 September 2009, a delegate of Innovation Australia rejected the application. That decision was affirmed on 20 April 2010[3].
[1] See s 39JF of the Act.
[2] See s 6 of the Act.
[3] See s 39S of the Act.
ISSUES AND LEGISLATION
2. Certain provisions of the Income Tax Assessment Act 1936 (Cth)[4] provide a tax incentive, in the form of a tax deduction, to encourage research and development (R and D) activities in Australia and make eligible companies more internationally competitive by:
(a)encouraging the development by eligible companies of innovative products, processes and services; and
(b)increasing investment by eligible companies in defined research and development activities; and
(c)promoting the technological advancement of eligible companies through a focus on innovation or high technical risk in defined R and D activities; and
(d)encouraging the use by eligible companies of strategic research and development planning; and
(e)creating an environment that is conducive to increased commercialisation of new processes and product technologies developed by eligible companies.[5]
[4] See ss 73B, 73BA, 73I, 73QA and 73QB of the Income Tax Assessment Act 1936 (Cth).
[5] See s 39AA of the Act.
3. The benefits of the tax incentive are targeted by being limited to particular expenditure on certain defined activities undertaken by an eligible company under the Act[6]. It is not disputed that the company is an eligible company[7]. Under the Act, it is assumed that Australian R and D activities are for the benefit of the Australian economy[8]. An object of the Act is to complement the nominated tax incentives by giving the Board the role of determining whether an eligible company satisfies the requirements for the incentive and whether, accordingly, it may be registered[9]. Applications to Innovation Australia must be made within a certain time-frame. In this case, it is not disputed that the due date was 30 April 2007[10] or that the application was not lodged until 17 August 2009. The Act makes provision for registration if an application is made after the due date. In this matter, the relevant provision is s 39JF(1) of the Act which reads:
The Board may register an eligible company under section 39J in respect of a year of income, despite the fact that the application for registration was not made within the period for making the application, if the Board considers that the application was made after the end of the period due to exceptional circumstances.
[6] See s 39AA of the Act.
[7] See s 39A(1) of the Act.
[8] See s 39D(1) of the Act.
[9] See s 39AA(1) and Part IIIA of the Act.
[10] See s 39J(1A)(d) of the Act.
4. The issue for determination is whether the discretion in that provision should be extended to the company. Of relevance in that determination is the ‘Guide to the R&D Tax Concession’ (“the Guide”) which is a joint publication of the Tax Office and AusIndustry[11].
[11] See note 16 below.
EVIDENCE
5. The essential facts in this matter are not in dispute. The company was incorporated in 2001 with Mr GL and two others (TM and BL) as co-directors and shareholders. While Mr GL was inexperienced in management and administration, both TM and BL were experienced company directors. Initially, administrative functions of the company were undertaken by a corporate entity associated with BL. Mr GL’s role was to carry out the main function of the company which was R and D, particularly in relation to technology and equipment for the mining industry. So that Mr GL could focus on those activities, the company’s board of directors decided to appoint a general manager to deal with administrative matters. In January 2005, DT was appointed to that position. DT’s contract specified that he was responsible for making the concession applications to Innovation Australia. This was for the 2003/4 financial year and beyond. The concession applications for the 2001/2 and 2002/3 financial years had been prepared by the corporate entity associated with BL. The concession applications for the 2003/4 and 2004/5 financial years were completed by DT with the assistance of the company’s finance officer, KG.
6. In January 2006, Mr GL and his wife acquired the share interests of TM and BL. Since then, Mr GL and his wife have been the company’s sole directors and shareholders and Mr GL has been its chief executive officer. Mr GL was involved in R and D activities in Australia and in potential expansion into South Africa and, accordingly, was reliant on DT in relation to general administrative matters. He missed the involvement of TM and BL after he and his wife assumed control of the company. KG left the company on 6 August 2006 and a replacement finance officer, RT, commenced on 4 August 2006.
7. In November 2006, DT began to experience health problems associated with his heart which kept him away from work for substantial periods in late 2006, in 2007 and in early 2008. However, whenever he was at work, he assured Mr GL that he was well enough to continue with his responsibilities and, accordingly, Mr GL retained him as the company’s general manager. Mr GL assumed, when DT told him that he was coping with the workload, that he was capable of finalising the annual concession applications as well as other administrative duties.
8. DT completed the concession application for 2005/6, without the assistance of RT. However, this was not done within the required time-frame for lodgement on 30 April 2006. It was attached to a letter, dated 16 July 2007, completed by DT and addressed to but not forwarded to Innovation Australia. Rather, it was faxed to the company’s accountants. The letter acknowledged that the lodgement deadline had been missed and requested that the concession application be accepted under the exceptional circumstances associated with DT’s illness. The company’s accountants retained the concession application and the letter of 16 July 2007 in its own files but did not forward them to Innovation Australia.
9. With his health improved in late 2007/8, DT completed the 2006/7 concession application. On 1 May 2008, the company’s accountants advised Mr GL that the 2006/7 concession application was one day late. At Mr GL’s direction, DT lodged the concession application with Innovation Australia on 1 May 2008. Mr GL’s evidence was that this was the first time that he became aware that there was a deadline at 30 April for concession applications. At that stage, Mr GL was still not aware that the 2005/6 concession application had not been lodged with Innovation Australia.
10. DT resigned from the company, at Mr GL’s request, on 4 July 2008. A replacement general manager was appointed shortly afterwards but he did not take up the position until March 2009.
11. The company’s accountants delayed the preparation of the taxation returns of the company for 2005/6, 2006/7 and 2007/8. In July 2009, while preparing the 2005/6 returns, the accountants noted that the concession application for 2005/6 had not been lodged with Innovation Australia even though a copy of the application had been received by them on 16 July 2007. On being advised of this, Mr GL conducted a search of the company’s records and located file copies of the 2005/6 concession application which he forwarded to Innovation Australia with a request that it be processed as a late registration. He also considered that, as it had been completed, it must have been forwarded to Innovation Australia but had been lost in the mail by Innovation Australia. At that stage, the taxation returns for the 2005/6 and later years had still not been lodged as the company’s accountants were concerned about lodging them prior to a determination of the status of the concession application. Subsequently, Mr GL realised that, on 16 July 2007, the concession application for 2005/6 had been sent to the company’s accountants and not to Innovation Australia.
12. The person employed by the company’s accountancy firm who was responsible for providing accounting advice to the company was JT. In a statement by DT, dated 5 July 2010, DT wrote that he had discussed the concession application with JT after the due date and JT explained that DT should send a letter to Innovation Australia detailing his health problems and seeking an extension of time. DT wrote that he then prepared the letter of 16 July 2007 and forwarded it to JT in the belief that JT would forward it to Innovation Australia.
13. JT was aware that DT was the company’s employee with responsibility for completing the 2005/6 concession application. JT’s evidence was that, although the company provided him with a copy of the concession application each year, he was not responsible for lodging these with Innovation Australia. He referred to the concession applications for the previous years and to their lodgement by a member of the company’s staff, initially LY and then, more recently, DT. He recalled discussing with DT the 2005/6 concession application during February and March 2007, including the due date for lodgement of 30 April 2007. He also recalled another conversation with DT after the due date for lodgement when he advised DT that, as the concession application was late, a letter should be sent to Innovation Australia explaining that this was because of DT’s health problems. He also believed that DT had agreed to do this and to send a copy to him. JT understood that it was DT’s responsibility to send the concession application directly to Innovation Australia. JT recognised the letter dated 16 July 2007 from DT and said that this was sent by DT to him with a copy of the concession application attached to it. This was confirmed by the principal of the company’s accounting firm. JT had placed it in the company’s file and did not recall being asked to complete the lodgement process with Innovation Australia on behalf of the company.
14. JT did not give further consideration to the 2005/6 concession application until July 2009 when he was preparing the company’s taxation return for the 2005/6 financial year. At that time, he became aware that there had been no acceptance by Innovation Australia in relation to the 2005/6 concession application. JT referred to the late lodgement of the company’s taxation returns for the 2005/6 and later years and said that this had been due to “work pressures”.
15. In evidence was a copy of the letter, dated 16 July 2007, written by DT. It was addressed to Innovation Australia and noted that the 2005/6 applications date had been missed. It referred to DT’s health problems and to consequential impact on the company’s business. It also requested that the concession application be accepted under the exceptional circumstances surrounding his health problems. The letter bears the stamp “FAXED” but does not indicate the recipient.
SUBMISSIONS
16. I have given consideration to the following submissions made by the parties[12].
[12] This includes Mr Keane’s reference to the decision of in Commissioner of Taxation v Forester [2003] NTMC 56
17. For the company, Mr Keane submitted that the taxation concession was very important as it entitled the company to receive a concession of 125% of R and D expenditure in the relevant financial year. He submitted that the 2005/6 concession application had particular significance in that, because the concession application for the previous years had been lodged, the 2005/6 concession application would qualify the company for a concession at 175% of approved expenditure. He submitted that, as a result of the concession application not being accepted, the company was liable to pay tax for the 2005/6 financial year when, if the company concession application had been accepted, the company would have received a taxation refund. He submitted that the purpose of the Act was to foster R and D, that the company had been heavily engaged in such activities, that the company was an innovative participant in the mining industry, that it currently holds two patents and is currently pursuing a further patent application, that it has won a Research, Development and Innovation Excellence Award and, that it represented Queensland in the Engineering Achievements in Australia award ceremony in Canberra in 2009.
18. Mr Keane submitted that Mr GL had been heavily involved with the R and D work of the company and had entrusted his administrative staff to carry out functions such as those relating to the concession application although he conceded that Mr GL now takes personal responsibility for the preparation of the annual concession application. He submitted that the company relied on DT to complete and forward the 2005/6 concession application to Innovation Australia and that it was not until July 2009, on being contacted by the company’s accountants, that Mr GL realised that it had not been sent to Innovation Australia.
19. Mr Keane submitted that the circumstances relevant to the company should be considered as a whole in order to assess whether they are exceptional[13]. He submitted that the exceptional circumstances in this matter were made up by the sum of the following: small size and inexperience of the company; the nature of the company’s business in R and D as its core business rather than as a peripheral aspect of its business; the company’s role in R and D, the support of which is the object of the Act; Mr GL’s lack of knowledge of the lodgement date for the concession application; the change of personnel, including KG, responsible for management matters, including the lodgement of the concession application; Mr GL’s reliance on DT because of his own involvement with the R and D activities of the company; the absences of DT through illness; the company’s timely action once it became aware of the late lodgement of the concession application; and, the failure in communication between DT and the accounting firm about the lodgement process as exacerbated by the late preparation of the company’s taxation returns by the company’s accountants[14].
[13] Referring to Cabal & Anor v United Mexican States & Ors (2001) 180 ALR 593 at 600.
[14] Referring to Commissioner of Taxation v Brian Wayne Forester op cit at para 32. There, the focus was on “extenuating circumstances” rather than “exceptional circumstances” as required under the Act.
20. For Innovation Australia, Ms Tibell submitted that, from the restructure of the company in January 2006, Mr GL was, effectively, the controlling mind of the company which was a small company involved in developing new technology and equipment for the mining industry. She submitted that, because the core business of the company was R and D, an integral part of its management structure should have been the establishment of proper procedures to ensure that the concession application was lodged in a timely manner each year. She noted that, although KG had resigned, her replacement should have been briefed in the requirements for the concession application to be completed. She submitted that the lodgement date enabled a company to have 10 months after a financial year finished before lodgement was required. Ms Tibell submitted that DT was well aware of what was required and that the company, regardless of its size, should have had a system of checks in place to monitor the progress of such matters. She also submitted that it was bad business management for Mr GL not to be aware of the due date where the concession application was vital to the continuing viability of the company. She submitted that the failure to lodge the concession application was due to an oversight by the company’s staff in the context of a failure to have checking systems in place and that this did not constitute an exceptional circumstance.
21. Ms Tibell referred to the Guide and noted that it provides that failure to send the concession application is not, in itself, sufficient to amount to exceptional circumstances and submitted that the matters raised by Mr GL were not matters beyond the company’s control. Further, Ms Tibell noted that the concession application was lodged nearly 2½ years beyond the due date and was, accordingly, “significantly late” as that term is used in the Guide such that, prima facie, it should not be accepted without very clear evidence that the lateness was due to exceptional circumstances.
CONSIDERATION
22. The procedure in s 39JF of the Act was amended in 1999[15]. The Explanatory Memorandum to the Bill[16] noted that the time for making a registration application was extended from six months after the end of the company’s year of income to ten months. The stated purpose of this was to make it easier for companies to meet the deadline for making an application by both increasing the period allowed and moving, for most companies, the deadline away from busy periods on the calendar. The Explanatory Memorandum also referred to the limited discretion extended to the Board to consider late applications, stating that it does not allow retrospective access to the Research and Development Tax Concession scheme, which the current deadlines in the Act are designed to prevent.
[15] See the Industry Research and Development Amendment Act 1999 (Cth) schedule 1.
[16] See the Industry Research and Development Amendment Bill 1998. For reliance on extrinsic material such as the Explanatory Memorandum and a Guide to the legislation, see the Acts Interpretation Act 1900 (Cth) s 15AB.
23. In Bloomfield Collieries Pty Ltd and Anor and Innovation Australia[17], the Tribunal concluded that the use of the word “may” in s 39JF of the Act introduced an implied discretion to grant or refuse registration notwithstanding that exceptional circumstances of the kind contemplated in the Act have or have not been established[18]. As I read s 39J of the Act and contrary to what was said by the Tribunal in that case, I am satisfied that it gives rise to a discretion only when it has been found that exceptional circumstances exist. Absent such a finding, no discretion arises and a late concession application will not be registered.
[17] [2009] AATA 69
[18] Op cit at [79].
24. The Act does not define exceptional circumstances. In Bloomfield, the Tribunal referred to the meaning of “exceptional” in the Oxford English Dictionary “Of the nature of or forming an exception; out of the ordinary course, unusual, special”; and also the Macquarie Dictionary: “not usual, common, or ordinary; uncommon in amount or degree; of an exceptional kind”. I am satisfied that these interpretations are appropriate in the application of s 39JF of the Act[19].
[19] I have noted the use of the term in Cabal & Anor v United Mexican States & Ors op cit, as contended by Mr Keane.
25. Assistance is also provided by the Guide for assessing whether exceptional circumstances exist[20] and I am satisfied that it does so in a manner consistent with the Explanatory Memorandum noted above. Part B2 of the Guide relates to Registration by Innovation Australia and s 2.1.9 thereof is concerned with late applications. It includes the following:
[20] As to use of the Guide, see Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634 at 639-645
It is important to note that the term exceptional circumstances refers to the lodgement of the application, that is, the lateness of lodgement of an application is the result of exceptional circumstances, not simply that a late (or non-) lodgement of a registration application is itself unusual or exceptional for the company concerned.
It should also be noted that the Board’s discretion to consider late applications under this provision is a limited discretion. It is not intended to allow the retrospective access to the R&D Tax Concession that the statutory application deadlines are designed to prevent.
When exercising its discretion in relation to exceptional circumstances, the Board will consider the relevant facts presented to it on their own merit, on a case-by-case basis. However, the Board will look specifically for evidence of an unforeseen or unforeseeable event or circumstance (or combination of events or circumstances) that was outside the control of the company.
The following key elements are likely to constitute exceptional circumstances:
• an unforeseeable occurrence; or
• a circumstance outside the control of the applicant company; or
•an external impediment, which causes the application to be dispatched late or not received on time.
Circumstances that the Board may consider to be exceptional, that is, circumstances which the Board considers to be outside the control of the applicant company, include (but are not limited to):
•delivery delays, such as postal delays outside the company’s control, delivery by post to an incorrect destination of a correctly addressed application or misdirection by a commercial or registered courier;
•personal tragedy or illness, or unforeseeable administrative changes, occurring prior to the deadline;
•natural or other disasters, such as flood, fire, earthquake and electricity blackouts; or
•unforeseeable actions of a third party over which the applicant has little or no control.
On the other hand, the Board considers that merely omitting to prepare an application, or preparing an application in time but failing to send it, are not exceptional circumstances (that is, are not outside the control of the person concerned).
In addition, the Board considers that significantly late applications should prima facie not be accepted without very clear evidence that the lateness was due to exceptional circumstances.
26. In applying s 39JF(1) of the Act, the issue is whether the application was made out of time due to exceptional circumstances. The Guide reinforces this with its note that the term exceptional circumstances refers to the lodgement of the application so that the lateness of lodgement of an application must be the result of exceptional circumstances. In one sense, that takes the focus away from the lateness of the preparation of the concession application. However, a primary reason for late lodgement may be the absence of timely preparation. I am satisfied that this was the situation in this matter. The interchange between MT and JT in July 2007 was to the effect that the application was completed after 30 April 2007. Consider, then, the matters which affected the timely preparation of the concession application.
27. Apart from its own management, the focus of the company was almost exclusively related to R and D activities under the control of Mr GL. In that sense, the company was a corporate entity which was clearly targeted by the Act. Despite that, the company’s management structure was characterised by an absence of internal checking mechanisms which, given the importance of the tax concession to the company, could be expected to be in place to ensure that procedures such as the preparation of the concession application for a given year was undertaken and then properly lodged. That was demonstrated with the company’s 2006/7 concession application when the company’s accountants noted, a day after the deadline, that the receipt from Innovation Australia had not been received. It was also the case with the 2005/6 concession application, the lateness of which was not noticed until the accountants’ became aware of the absence of a receipt from Innovation Australia.
28. Health problems of the kind experienced by DT fall within the circumstances beyond the company’s control. However, the importance of the concession to such a small and new enterprise as the company would make it incumbent on Mr GL, aware as he was of DT’s health problems and absences from work, to have incorporated a system of checks to monitor the progress of the concession application’s preparation and lodgement with Innovation Australia. The significance of the failure to have checking systems in place is not lessened by the relatively small size of the company. While KG, who had assisted DT with the 2003/4 and 2004/5 concession applications, resigned from the company, RT had been engaged two days earlier. Yet, she was not briefed to monitor, even in the most basic of ways, the progress of the preparation and lodgement process for the 2005/6 application. This was despite the special significance that it would yield an even greater concession, at 175% of expenditure, than in previous years.
29. Mr GL’s evidence was that he was not aware of the due date for lodgement of the concession applications with Innovation Australia. However, DT, the relevant person in the company whose responsibility it was to prepare and lodge the concession application, was aware of it as he spoke with JT about the 2005/6 application in July 2007, advising him that it was late. At that time, JT advised DT to complete a letter which, in effect, was a request to Innovation Australia to accept late registration. DT completed this and sent it, with the concession application attached, to JT. He did not send it to Innovation Australia. Even if he had forwarded it to Innovation Australia, it would have already been out of time. I am satisfied that, given the knowledge of DT’s health problems by Mr GL, the late preparation of the 2005/6 concession application was due to the failure of the company to have a system of checks in place to monitor its preparation by DT as well as a lack of support for DT from other members of the company’s staff. These were not matters beyond the company’s control and did not involve any unforeseeable occurrence or external impediment. I am satisfied that there were no exceptional circumstances for the late preparation of the 2005/6 concession application.
30. From 16 July 2007 until July 2009, the concession application remained on the company’s file held by the company’s accountants. No step to have it lodged was made until after July 2009. Consider, then, whether there were any exceptional circumstances which prevented its lodgement after it had been prepared.
31. I accept JT’s evidence that he was not responsible for lodgement with Innovation Australia and that he merely received a copy of it for the company’s files. Further, I am satisfied that it was DT’s responsibility to do so. DT completed and lodged the concession applications for 2003/4 and 2004/5 in a timely manner; he completed the 2006/7 concession application in time but lodged it one day late. DT’s letter of 16 July 2007 was received only by JT who merely filed it and did not send it on. MT did not lodge the concession application with Innovation Australia and I am satisfied that this was in the nature of an oversight by him in that regard. This was not a matter beyond the company’s control and did not involve any unforeseeable occurrence or external impediment. I note that this accords with the Guide’s reference to failure to send a concession application as not constituting an exceptional circumstance.
32. The Guide makes specific reference to applications that are significantly late in that, prima facie, they are not accepted without very clear evidence that the lateness was due to exceptional circumstances. No guidance is provided as to what constitutes “significant” in that context. However, I am satisfied that the company’s application, being more than 2 years and 3 months beyond the deadline, meets that description. In any event, I am satisfied that there is no clear evidence that the late lodgement was due to exceptional circumstances.
33. In Bloomfield Collieries Pty Ltd[21], the discretion in s 39JF of the Act was exercised by the Tribunal in favour of the applicant company in respect of the 2005 financial year. There, the Tribunal determined that the applicant company had reasonably reached the conclusion that it had not been necessary for it to lodge a concession application. This was because it had reached an agreement with the central research and development body for the coal industry i.e. Australian Coal Association Research Program (“ACARP”). The only R and D deductions to be claimed by the applicant company were ACARP levies which had been the subject of a class ruling. However, the Tribunal rejected the company’s claim for the 2003 income tax year where reliance was placed on difficulties with a newly installed computerised accounting system, a change in the accountancy firm whose services it utilised, a corporate restructure which distracted management staff in attending to their day-to-day responsibilities and the resignation of a long serving general manager. The Tribunal considered it likely that the failure to make the concession application was due to mere oversight. It also referred to the matters listed in the Guide, in particular, the need for clear evidence where an application is significantly late, in that case, by almost four years. The Tribunal exercised the discretion against permitting registration in relation to the 2003 year, but in favour of permitting it in relation to the 2005 year[22].
[21] See note 17 (above).
[22] [2009] AATA 69 at [85].
34. The circumstances of the 2003 application in Bloomfield Collieries Pty Ltd are similar to those of the company. The lateness of the lodgement of the 2005/6 concession application was due, initially, to its late preparation and, subsequently, to the oversight of the general manager in not forwarding it to Innovation Australia. I am satisfied that no exceptional circumstances arise in relation to either of those underlying bases for late application and, accordingly, I am satisfied that the discretion in s 39JF of the Act should not be exercised in this matter.
DECISION
35. I would affirm the decision under review.
I certify that the 35 preceding paragraphs are a true copy of the reasons for the decision herein of Mr R G Kenny, Senior Member
Signed: ........................[Sgd]..............................................
Kate Slack, Research AssociateDate of Hearing 16 August 2010
Date of Decision 7 September 2010
Counsel for the Company Mr D Keane
Solicitor for the Respondent A Tibell, Clayton Utz
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