Coal of Queensland Pty Ltd v Innovation and Science Australia – R&D: surveys and drilling activities by coal miner not ‘core R&D activities’ or ‘supporting R&D activities’ – appeal dismissed

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. The High Court dismissed the taxpayer’s appeal (see related TT article).

See below for further details.

[Tax Month – April 2021]

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 [2020] 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:

1. the AAT did not apply the wrong tests in concluding that the:
   1. outcome “could have been determined in advance”, within the meaning of s 355-25(1)(a), and
   2. taxpayer’s activities were not conducted “for the purpose of generating new knowledge”, within the meaning of s 355-25(1)(b).
2. Further, it was open on the evidence for the AAT to come to those conclusions; and
3. 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.

Catchwords

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 [2021] FCAFC 54, Full Federal Court, Logan, Griffiths and Moshinsky JJ, 23 April 2021.)