Draft R&D Tax Incentive Determination on clinical trials (Phase 0-III) for an unapproved therapeutic good.

Level 1, 70-72 Campbell Street,
Surry Hills NSW 2010
PO Box 859, Darlinghurst NSW 1300
W mjassociates.com.au
T 02 9810 7211
F 02 9818 2297

15 February 2022

AusIndustry
Department of Industry, Science, Energy and Resources
GPO BOX 2013
CANBERRA, ACT 2601

ATTN: R&D Tax Incentive Engagement

RE: Public consultation on the “Draft R&D Tax Incentive Determination on clinical trials (Phase 0-III) for an
unapproved therapeutic good” (The Draft Determination)

Thank you for the opportunity to provide feedback on the Draft Determination on Clinical Trials. This is the first
Draft Determination on the R&D Tax Incentive to be made by the Industry Innovation and Science Australia board
(The Board) since it was recently granted this capability. It is most welcome that this determination has been made
to actively provide certainty on why certain R&D activities are eligible for the R&D Tax Incentive. This
Determination is an excellent start to the new process. It shows that this can enhance program integrity and foster
a process of mutual understanding between the Board, AusIndustry and the R&D Tax Incentive community and
promote more businesses to do more R&D for the benefit of Australia and the world. We look forward to future
Determinations that may tackle more complex areas of uncertainty in the program and hope that they give as much
clarity and agreement on why certain R&D activities are (or are not) eligible under the R&D Tax Incentive program.

Our response to the questions asked in the consultation paper are:

1. Is the draft determination appropriate for providing more certainty of access to the R&D Tax
Incentive for clinical trials in Australia? How effective would the draft determination be if it were
finalised in its current state in providing certainty to your business? Why?

The Draft Determination does give more certainty of access to the R&D Tax Incentive for specific types of clinical
trials. This is limited to trials that involve the unapproved use of therapeutic goods in well understood and defined
clinical trial phases. The eligibility of these types of clinical trials in Australia for the R&D Tax Incentive is not
currently an area of great concern but the Determination does provide welcome certainty. If the Determination was
finalised in its current state, it would provide certainty to our business and clients conducting or seeking to conduct
clinical trial in Australia.

The Draft Determination can be an effective instrument to promote the program to businesses considering
conducting clinical trials in Australia. This is not just in what the Draft Determination advises are Core R&D
activities. It is also in how the Determination and its explanatory notes highlight where clinical trials that fall outside
of what the Determination states are R&D activities may still qualify under normal processes to be R&D activities.
For example, this could include where R&D may be required in the developments for a generic therapeutic.

2. Should the draft determination be expanded? Specifically, do you agree with the scope of the draft
determination including definitions? Do you consider it should include additional clinical trials?
Could it support you more with overseas and advance findings? How?

The Draft Determination is clear and precise in what it includes. As such, there is no real need for it to be
expanded.

There are areas of uncertainty that could be included. These could include:

ABN: 65 003 644 657 Sydney | Melbourne | Brisbane
• Pre-clinical work. It can be harder for a business to apply for R&D registration or an overseas and
advance finding when the R&D activities are still in the early stage of research. This is because the
hypothesis, methodologies and dependent outcomes are more likely to be constantly evolving. The
experimental development stages tend to be more structured and formalised with clearer and more easily
described hypotheses and hoped for outcomes. This applies generally to most R&D required in the
creation of new knowledge in the form of new or improved products and processes, but especially in Phase
0 to III clinical trials using unapproved therapeutic goods. The pre-clinical work will often include research
(both basic and applied) and experiments to support ethics approvals and alike. Some of this R&D may be
considered to be part of the Phase 0 clinical trials.

The requirement in the annual registration for R&D activities and, especially, in the overseas and advance
finding application that the R&D entity be able to describe intended future experiments or how they will be
evaluated can make explaining these activities difficult. Despite these being no less eligible than the later
clinical trials, the overseas and advance finding application process does not cater for the uncertainty in
future outcomes. The Determination could be expanded to include experiments required in the lead up to
the formal clinical trial phases.

• Notification not required. Where the experiments involve the use of therapeutic goods or devices that do
not require the researcher to notify the TGA of the intended use in clinical trials. The Draft Determination is
limited to goods or devices under item 3 of Schedule 5A of the Therapeutic Goods Regulations 1990 or
item 2.3 of Schedule 4 to the Therapeutic Goods (Medical Devices) Regulations 2002; or require approval
under sections 19(1)(b), 32CK(1)(e) or 41HB(1)(e) of the Therapeutic Goods Act 1989. The Determination
could be expanded to include an explanation of when or how clinical trials that use goods or devices that
do not require these notifications or approvals may qualify as R&D activities. This need not be the provision
of a definitive answer but just to give clarity that these trials may still qualify subject to the normal rules of
R&D eligibility.

3. Do you see the potential for the draft determination to be abused, undermining the integrity of the
R&D Tax Incentive? Do you consider people may try and apply to register activities that are not
core R&D activities? How?

The possibility for Draft Determination to be abused or to undermine the integrity of the R&D Tax Incentive needs
to be considered in how this is applied by all potential users. This would include:
• fraudulent misuse of the Determination to access the program where there are no activities or they are
ineligible,
• misunderstanding of the Determination by R&D entities, R&D advisors or program administrators, and
• selective application of the Determination and related materials to overzealously restrict R&D eligibility

The narrow focus of the Draft Determination to certain clinical trials and the formal nature of these trials means that
fraudulent use of the Determination over and above the potential for fraudulent use of the Program is very unlikely.
We do not see that this Determination will result in more people seeking to misuse the program in this way.

The normal processes of users, advisors and administrators in applying this Determination would only lead to a
reduction in the integrity of the program if it allowed activities that are not R&D to be registered or disallowed
activities that are R&D that should otherwise have been registered. All R&D claims must meet the laws on who is
allowed to register the activities and claim the eligible expenditure. The Determination that specific clinical trials are
core R&D activities is only part of the process to claim the R&D tax offset.

In regard to recognising activities that are not R&D as if they are, it is hard to imagine that clinical trials from Phase
0 to III that require the researcher to notify the TGA or the TGA to approve the use or importation of key inputs to
the trials will not be for required experiments in the development of new knowledge in the form of new or improved
products, processes, materials, services or devices. These trials are already restricted as a result of the TGA and
ethical approval processes to prevent unnecessary clinical trials. This can be contrasted with food technology
development trials where the requirement for lab trials for new or improved processes or inputs may not be so
strongly tied to the R&D requirement that the experiments are needed to create new knowledge.

Page 2 of 4 Pages
The Determination and related explanatory material make it generally clear that clinical trials or activities that are
just outside of the Determination may still be R&D activities, subject to this being determined under the law. This
means that it is unlikely that the Determination could be applied so that it excludes otherwise eligible R&D
activities. It also clarifies that the formal, set and repetitive nature of the clinical trials is a strength in identifying that
this is R&D. This is good clarification that there is no requirement for there to be anything new.

The final integrity risk would be where those trials are just outside of being eligible core R&D activities or in how the
negative test in the definition of core R&D activities (s355-25(2)) is applied. The Determination correctly recognises
that R&D activities that are for certain purposes may not able to be considered as core R&D activities. Instead, they
may be supporting R&D activities if they are done for the dominant purpose of supporting core R&D activities.

An aggressive interpretation of this matter could consider that, for example:

• s355-25(2)(d) excludes R&D experiments on humanities. This could be misread as affecting some
psychological related therapeutics,
• s355-25(2)(f) excludes R&D experiments that are associated with complying with statutory requirements
such as to maintain or calibrate standards or are routine testing. This could be misread to eliminate all
clinical trials because they are subject to statutory requirements.
• s355-25(2)(g) excludes reproduction of commercial products or processes by physical examination,
detailed specifications or from publicly available information. This could be misread when applying to R&D
for developing processes to make generic drugs. Often these require core R&D activities because the
original patent holder will not provide sufficient information to the generic producer on how to make the
therapeutic good once the patent expires.

Whilst these three examples are very unlikely, the likelihood of this could increase because the Determination
directly references s355-25(2) without clarifying that this is not an intended consequence of the Determination.
Such applications would undermine the program’s integrity.

4. Do you consider the finalised determination should identify and require compliance with any
specific framework, guideline or standard, such as the Australian Guideline for Good Clinical
Practice? Why/why not? If yes, what should be specified?

No. The eligibility of an R&D activity is not determined by identifying and complying with any specific framework,
guideline or standard. The legal requirements for experiments to be core R&D activities are as defined in the
legislation. Any potential risk that a clinical trial that meets the requirements in the Draft Determination is not a core
R&D activity is not affected by whether the conduct of those trials are required to meet another framework,
guideline or standard. This would only increase compliance costs for Clinical Research Organisations (CRO) that
may already be required for other reasons to meet a different clinical practice guideline. This may occur because
the CRO is conducting the clinical trials in line with a similar overseas guideline.

5. Is there anything that confuses you about the draft determination? Please offer details.

The Draft Determination is clear and concise. The only confusion we have noticed is that some people we have
spoken to have assumed that this is a Tax Determination and therefore it binds the Commissioner of Taxation, not
the Board. Also, that its binding nature is the same as how it binds the Commissioner. This is incorrect. A decision
by or for the Board is binding on the Commissioner by the application of Div. 355, not the Tax Administration Act.
However, a Board Determination is not binding if it is contrary to the law, the Guide to Interpretation or a court
decision. Whereas, when the Commission is bound and a taxpayer relies on a Ruling, the Commissioner must
honour the instrument up to the point the instrument has been found to be incorrect.

6. Is it clear from the draft determination that it does not apply to all phases of clinical trials sector but
it is limited to specific phase in clinical trials? Is it clear how phases 0, I, II and III are core R&D
activities? Why?

Yes, it is clear that the Draft Determination does not apply to all phases of clinical trials, for example Phase IV
clinical trials which are commonly Post Marketing Trials. These often do not meet the legal requirements to be core
R&D activities.

Page 3 of 4 Pages
7. Is the explanatory statement helpful in understanding and applying the draft determination? Is it
clear what evidence you would maintain to apply to the R&D Tax Incentive and that you are still
required to maintain evidence of eligible expenditure? Is there anything that confuses you about
the explanatory statement? How could it be improved?

The explanatory statement is clear and helpful. It encourages participation in the program without creating the
impression that normal management and documentation processes to justify the R&D registration and expenditure
calculations are no longer required. As discussed above, it could be improved to explain how core R&D activities
just outside of the clinical trials may be eligible R&D and, how s355-25(2) should and should not properly apply to
clinical trials.

8. Would you know how to apply the draft determination when applying to the R&D Tax Incentive
Program? How? What is clear/unclear?

Yes

9. Any other comments

As the first Draft Determination, this is a very good start. A suggestion for a future Draft Determination would be
one that discusses what happens with a Draft Determination that has been relied upon by an R&D entity or an
administrator that has subsequently been found to be wrong. This could include how Determinations are binding on
the Board prior to this outcome. Future Determinations are likely to include determinations of when an activity is not
considered R&D. As these are broad decisions, there may be circumstances close to the reasons that the Board
has decided this way in a particular instance. This determination could include how the R&D entity’s self-
assessment on eligibility in a similar but different circumstance to the rejected R&D activity could be able to be
claimed as eligible R&D.

Should you wish to discuss any aspect of this submission, please contact In Ross-Gowan on ian.ross-
gowan@mjassociates.com.au or 0407 291 107.

Yours sincerely,
Ian Ross-Gowan
Director, Michael Johnson Associates

Page 4 of 4 Pages