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18 Nov 08 No exemption for Budplan research companies - Australian Tea Tree Oil Research Institute

The Federal Court (Edmonds J) has dismissed applications by 2 taxpayers companies that their income was exempt from tax by reason of the fact that they were "scientific institutions" within the meaning of s 23(e) ITAA 1936 and ss 50-1 and 50-5 ITAA 1997. Further, on the basis of the reasoning in Business & Research Management Pty Ltd v FCT [2008] FCA 1652, the whole of the research fees received by them was included in their assessable income.

One company (ATTORI) was established to undertake research into the properties and applications of tea tree oil whilst the other company (AARI) was established to undertake research into the properties and structures of the plant and fruit of table grapes and the development of new or enhanced varieties, and the development of genetically improved cultivars and rootstock of selected traditional wine grape varieties. Both companies undertook their research for the benefit of participants in the Budplan projects.

In denying the companies an exemption from tax, the Court said, at paras 224-225, as follows:

"Viewed holistically, ATTORI and AARI were components of a larger commercial venture which had as its objective the commercialisation of the ‘research results’ for the financial benefit of the Participants and BARM. They did not manifest an independence and freedom, subject of course to financial constraints, in the activities each undertook in pursuit of the advancement of science. This is not to say that an entity claiming status as a ‘scientific institution’ cannot enter into contractual obligations to undertake scientific research for reward for a particular third party, but its entitlement to such status will be impaired if that is all it does or if such activities comprise the great bulk of its overall activities. Rather than being a scientific institution, it will be seen for what it is: a ‘captive’ scientific researcher undertaking research work for the benefit of a third party and its associates. In his oral submissions, senior counsel for the Commissioner referred to such a body as a ‘service provider’ and the description is apt; he suggested as an analogue, a company that undertook scientific research exclusively, or nearly exclusively, for a research-based pharmaceutical group; such a company, he submitted, would not be a scientific institution even though all its activities were devoted to the advancement of science. In my view, the analogue is also apt.

Finally, there is the absence of public benefit, except to the extent it can be said that the public benefits from scientific development for private commercial gain. The research results were kept strictly confidential by all concerned and the results were not to be published if ATTORI or AARI considered them to be of any commercial value. The material that did reach the public domain was minimal and was more in the nature of a mere by-product of ATTORI’s or AARI’s activities than the sole or even predominant or significant purpose for which each company was established. For an entity to claim status as a ‘scientific institution’, the results, albeit not necessarily the ownership, of the subject entity’s activities should be freely available to the community at large; the public community as well as the scientific community. Neither ATTORI nor AARI qualified on this score."

Australian Tea Tree Oil Research Institute Ltd (in liq) v FCT [2008] FCA 1653 (Federal Court, Edmonds J, 14 November 2008).

For a copy of the decision, go here.

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