In Moreton Resources Ltd and Innovation and Science Australia  AATA 3378 the Administrative Appeals Tribunal (Tribunal) upheld the decision of Innovation and Science Australia, finding that the activities of the Taxpayer were not research ‘R&D activities’ as defined in s 355-20 of the Income Tax Assessment Act 1997 (ITAA 1997).
The Taxpayer in this case was an Australian resources company that sought to demonstrate that some of its activities carried out in connection with certain projects should be registered as R&D activities and consequently, that it should be able to access the R&D concessions provided by Division 355 of the ITAA 1997. The projects included:
- Designing and developing an underground coal gasification generated (UCG) syngas cleaning and power generation pilot plant. This involved the integration of known technologies for the first time.
- Designing and developing a second UCG syngas processing plant based on the outcomes of the first project, and determining the most appropriate economical uses for syngas.
- Developing a conceptual water model and rehabilitation plan following the first project.
Division 355 of the ITAA 1997 provides taxpayers with access to certain tax concessions in respect of R&D activities they carry out. R&D activities are defined to include both core R&D activities and supporting R&D activities.
Core R&D activities are defined by section 322-25 of the ITAA 1997 to be ‘experimental activities 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 are conducted for the purpose of generating new knowledge.’ Supporting R&D activities, as the name may suggest, are defined by section 355-30 of the ITAA 1997 to be activities that are directly related to core R&D activities or are certain prescribed activities that are undertaken for the dominant purpose of supporting core R&D activities.
Innovation and Science Australia initially determined that the Taxpayer’s activities were not sufficient to be deemed R&D activities. This decision was upheld by the Tribunal, which concluded that:
- none of the activities were core R&D activities within the meaning of that term; and
- as a consequence of the finding there were no core R&D activities, none of the Taxpayer’s activities could then be found to be supporting R&D activities (as this relies on the existence of core R&D activities).
In coming to this decision the Tribunal noted the following relevant points:
- Activities associated with complying with the conditions of a Mineral Development Licence under the Mineral Resources Act 1989 (QLD) or an Environmental Authority issued under the under the Environmental Protection Act 1994 (QLD), are activities associated with complying with a statutory requirement, which are expressly excluded from the definition of core R&D activities by section 355-25(2)(f) of the ITAA 1997.
- Certain activities claimed to be ‘experimental’ were not, because:
- they did not involve testing a principle or discovering whether a particular outcome would flow from the Taxpayer’s activities. The potential outcomes of the Taxpayer’s activities could not be said to be unknown, as they could be determined in advance on the basis of existing knowledge or experience; and
- they were not a progression of work that proceeded from that hypothesis to experiment, observation and evaluation and on to logical conclusions. The process that the Taxpayer undertook suggested a random approach that was not underpinned by an ordered or planned system of trial and error.
Historically, operators of mines have been successful with R&D concession claims where the whole of a mining operation came within the definition of R&D activities. Recently we have seen that these claims are now being challenged, and this case is merely another example of Innovation and Science Australia challenging R&D claims that would historically have been accepted.