A resources company has failed to satisfy the AAT that various activities, in connection with a project to develop an Underground Coal Gasification Pilot Plant, were “R&D activities” and therefore, it was not entitled to the R&D tax incentive.
The taxpayer was a company in the Australian resources sector. It sought to have various activities registered as R&D activities for each of the 2012, 2013 and 2014 income years. The activities were undertaken in connection with 3 projects:
- the Kingaroy Project – the objective was to design and develop an underground coal gasification (Gasification) generated syngas cleaning and power generation pilot plant by integrating known technologies for the first time;
- the Wandoan Project – the objective was to use the learnings from Kingaroy to design and develop a second Gasification syngas processing plant and to determine the most appropriate economical uses for syngas; and
- the New Project – the objective was to develop “a conceptual water model and rehabilitation plan following Gasification pilot plant experimentation Project”.
By way of overview, the R&D Tax Incentive is, subject to certain conditions, available to an entity if it is an “R&D entity” and conducts “R&D activities” in respect of which it is registered under the Industry Research and Development Act 1986. The incentive takes the form of a refundable or non-refundable tax offset depending on the annual turnover of the entity. Innovation and Science Australia (the Authority) is responsible for the registration of activities and for determining whether activities are R&D activities. The Commissioner of Taxation is responsible for determining whether an entity is an R&D entity entitled to apply for an R&D Tax Incentive and for determining the expenditure incurred and claimed.
The Authority eventually decided that the activities in question were not “R&D activities” as defined in s 355-20 of the ITAA 1997. “R&D activities” consist of “core activities” and “supporting activities”. ‘Core activities’ is defined in s355-25 of the ITAA 1997 and ‘supporting R&D activities’ is defined in s355-25 of the ITAA 1997.
The activities in question included:
- investigating the overall technical objective to design and develop a Gasification generated syngas cleaning and power generation pilot plant;
- environmental monitoring, including the installation and monitoring of pressure sensors installed underground to ensure the underground cavity remained at a lower pressure than surrounding coal to mitigate the possibility of water contamination;
- designing and verifying a procedure for rehabilitation of the underground cavity consistent with environmental guidelines of the monitored natural attenuation;
- testing and evaluation of gas production and plant performance to test the viability of the coal seam and to ensure environmental standards could be met; and
- investigating ground water movement and the extent of plume in upper and lower aquifers.
The AAT concluded that none of the activities were “core activities“ within the terms of s 322-25. This was essentially because they were not “experimental activities”, whose outcome could only be determined by applying “a systematic progression of work”, conducted for the purpose of generating new knowledge.
(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).
In addition, the AAT said that none of the activities could be supporting activities as there were no core activities.
(Moreton Resources Ltd v Innovation and Science Australia  AATA 3378, AAT, File No: 2016/0604, Forgie DP, 10 September 2018.)
[LTN 182, 20/9/18; Tax Month – September 2018]
CPD questions (answers available)
- Is the R&D tax incentive regime based entirely on the Commissioner of Taxation’s assessment?
- Was the taxpayer’s fight with the Commissioner?
- Were the activities, claimed to be ‘R&D activities’, in connection with a project to develop an Underground Coal Gasification Pilot Plant?
- Were the activities sufficiently ‘experimental’ to be regarded as ‘R&D activities’?