On 23.4.21, the Full Federal Court has upheld a decision that certain activities designed to make extracting coal from particular deposits commercially viable were not “core R&D activities” or “supporting R&D activities” for R&D income tax purposes.
See below for further details.
The taxpayer wanted to develop new mining and beneficiation processes that would enable it to extract and process coal in a commercially viable way in an area of central Queensland known as FCCM. It therefore applied to register various activities as “core R&D activities” for the 2012 income year (as part of a 3-year project):
- a 2D seismic survey and a SkyTEM electromagnetic survey;
- drilling to validate the survey results and provide samples for independent analysis; and
- the analysis.
Innovation and Science Australia eventually decided that the activities were not “core R&D activities” and the AAT agreed with that conclusion in Coal of Queensland Pty Ltd and Innovation and Science Australia  AATA 126. The AAT said that the activities were “generic exploration activities” which came within the exemption from “core activities” in s355-25(2)(b), namely for prospecting or drilling for minerals for the purposes of discovering deposits, determining more precisely the location of deposits and/or determining the size or quality of deposits (see definition below).
The Full Federal Court has dismissed the taxpayer’s appeal. In particular, the Court held that:
- the AAT did not apply the wrong tests in concluding that the:
- outcome “could have been determined in advance”, within the meaning of s 355-25(1)(a), and
- taxpayer’s activities were not conducted “for the purpose of generating new knowledge”, within the meaning of s 355-25(1)(b).
- Further, it was open on the evidence for the AAT to come to those conclusions; and
- The taxpayer failed to show that the AAT misapplied s 355-25(1) by assessing the relevant activities predominantly by reference to those undertaken in the 2012 year.
TAXATION – research and development tax offset
- where applicant held exploration permit for coal
- where coal in the area had high level of ash content and the coal seams were banded
- where applicant commenced a series of activities to investigate the nature and economic viability of mining the coal
- where the Tribunal found that none of the registered activities were “core R&D activities” within the meaning of s 355-25(1) of the Income Tax Assessment Act 1997 (Cth)
- where the Tribunal found that the exclusion in s 355-25(2)(b) applied – activities comprising ‘prospecting, exploring or drilling minerals for purposes of determining size or quality of deposits‘
- where the Tribunal found that the activities were not “supporting R&D activities” within s355-30
- whether the Tribunal made findings for which there was ‘no evidence’
- whether the Tribunal applied the wrong legal test
- held: appeal dismissed
(Coal of Queensland Pty Ltd v Innovation and Science Australia  FCAFC 54, Full Federal Court, Logan, Griffiths and Moshinsky JJ, 23 April 2021.)