Moreton Resources Ltd v Industry Innovation and Science Australia – ‘pilot plant’ was relevantly ‘experimental’ and remediating the failed plant was ‘supporting R&D activities’

 

The AAT has found that various activities in relation to the remediation of a underground coal gasification (Underground) site were “supporting R&D activities” for the purposes of the R&D tax offset.

The facts were these.

• In or about 2006, the taxpayer set out to develop an Underground facility, comprising a gas processing plant and a gas turbine power plant to produce electricity.
• The taxpayer undertook a pilot project to test the viability of using UCG technology to produce Underground synthesis gas (syngas) that would then be cleaned and stabilised for production of electricity using gas turbines.
• Ultimately, the pilot project failed and the Qld Environmental Protection Agency ordered that the facility be shut down.

In the AAT (the first time – [2018] AATA 3378) it concluded that many of the taxpayer’s registered activities in relation to the pilot project were excluded from the definition of “core R&D activities”:

• by virtue of s 355-25(2)(f) of the ITAA 1997, on the basis that they were “activities associated with complying with statutory requirements or standards”.
• Further, as the pilot project did not meet the definition of “core R&D activities”, the relevant activities were not “supporting R&D activities” either.

The Full Federal Court held in Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120, that the AAT had erred in its construction of the definition of “core R&D activities” in s355-25 and remitted the matter to the AAT to be heard again (see relevant TT Article). In essence, this was a case about whether a ‘pilot plant’ can ever involve ‘R&D activities’ and if so, whether this case did. The Full Federal Court said that a Pilot Plant could involve activities were relevantly ‘experimental’ and did involve relevantly generating ‘new knowledge’ and it remitted the matter back the Tribunal to determine whether the facts, in this case, cleared those hurdles.

The AAT has now;

• decided that the disputed 2010 registered activity, namely “testing and evaluation of gas production and plant performance … to ensure environmental standards are met”, went to the core or heart of the experimental activities and thus should not be excluded under s 355-25(2)(f).
• The AAT then concluded that the remaining activities in dispute (in the 2012, 2013 and 2014 income years) were “supporting R&D activities”, for the purposes of Div 355, in relation to “core R&D activities” of and for the 2010 income year. These activities included environmental monitoring and rehabilitation, designing and verifying a procedure for rehabilitation of the underground cavity, investigating ground water movement, undertaking ongoing water monitoring activities, investigating and developing processes to decommission the pilot plant and project management and administration.

(Moreton Resources Ltd v Industry Innovation and Science Australia [2022] AATA 3804, AAT, O’Loughlin DP, 21 September 2022. Note: the first AAT was constituted by a different member: DP Forgie.) [LTN 219, 16.11.22]

 

Tax Technical Article on the Full Federal Court Case

The relevant law, was as follows.

355-25 Core R&D activities

(1) Core R&D activities are experimental activities:

(a) 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:

(i) is based on principles of established science; and

(ii) proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and

(b) that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).

355-25(2) – However, none of the following activities are core R & D activities :

(f) activities associated with complying with statutory requirements or standards, including one or more of the following:

(i) maintaining national standards;

(ii) calibrating secondary standards;

(iii) routine testing and analysis of materials, components, products, processes, soils, atmospheres and other things;

In the above TT Article, I reported as follows.

The IR&D Board and later the AAT found that a pilot plant merely applied existing technology and couldn’t relevantly generate any ‘new knowledge’.

But the Court went on to conclude that it was possible for a ‘pilot plant’ to be relevantly ‘experimental’ (and satisfy s355-25(1)), even though the new knowledge gained as about how to apply an existing technological process. The Court put it this way [at 151]

151.   In our respectful opinion, the Tribunal misconstrued the words “experimental activities” in the opening line of s 355-25(1) by treating these words as not covering activities having the purpose of generating new knowledge with respect to the application of an existing technology at a new site (at least in circumstances such as those of the present case). The Tribunal’s construction is not supported by the text, context or purpose of the provision: see …. The text of the provision, whether one looks at the words “experimental activities” or the text of paragraph (b), does not impose any such limitation. Paragraph (b) refers to experimental activities “that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services)”. These words are capable of applying, depending on the circumstances, to activities that are conducted for the purpose of generating new knowledge with respect to the application of an existing technology at a new site. Further, the exceptions to the definition of “core R&D activities” set out in subsection (2) of s 355-25 do not support the Tribunal’s construction. [emphasis added]

Having found against the IR&D Board and the Tribunal, on this fundamental point, the Court remitted the matter to the Tribunal for determination again, but this time in accordance with this finding about the meaning of the Act.

In this Article I had idea that (albeit a vague one) that the taxpayer would succeed (as it did, here) on being referred back to the AAT. I said:

Those with a technical bent will be interested in the detail in the Court’s reasons, but it is hard to escape the degree of technological information not known, and had to be innovated, in establishing and operating the Pilot Plant. And the fact that the Plant was not expected to fail, and then did fail, suggests that that there was much that was unknown.

 

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