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‘Core R&D activities’: Moreton Resources wins in Federal Court

Moreton Resources wins in Federal Court

Angelina Lagana and Melissa Bader, who are the instructing solicitors for Moreton Resources Ltd, discuss the reasons behind the court’s decision.

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The Full Federal Court in Moreton Resources Ltd v Innovation and Science Australia [2019] FCAFC 120 handed down its decision on Thursday to allow an appeal made by Moreton Resources Ltd, with the matter remitted back to the Administrative Appeals Tribunal for determination.

The case concerned the question of whether activities undertaken in relation to an underground coal gasification pilot facility were core or supporting research and development activities pursuant to the provisions in Division 355 of the Income Tax Assessment Act 1997 (Cth).

The substantive issue on appeal was whether the Tribunal erred in its narrow construction of “core R&D activities”, and in doing so had implicitly rejected Moreton’s alternative submission that if the activities were not core, they were nonetheless “supporting R&D activities” because they were directly related to core R&D activities registered during an earlier income year.

Key findings

Importantly and in a welcome development for taxpayers, the Full Court held that the Tribunal’s narrow construction of “core R&D activities” in the first instance was in error and to be set aside. Davies, Moshinsky and Steward JJ held that:

  • The object of Division 355 of the ITAA 1997 is to encourage industry to conduct research and development activities and on the facts of this case, this object is served by activities that have the purpose of generating new knowledge with respect to the application of an existing technology at a new site.
  • For core R&D activities to be “experimental activities”, they do not need to go beyond being the type of activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information and experience; and that are conducted for the purposes of generating new knowledge – as set out in paragraphs (a) and (b) of subsection 355-25(1).
  • The words ”experimental activities” in the opening line of subsection 355-25(1) are not intended to narrow the interpretation of the provisions and these words have “have very little, if any, work to do” beyond reflecting the types of activities in paragraphs (a) and (b).
  • The Tribunal had incorrectly construed that “experimental activities” do not cover activities which have the purpose of generating new knowledge with respect to the application of an existing technology at a new site. In particular, the Full Court stated that the Tribunal’s construction “is not supported by the text, context or purpose of the provision” (at [151]). The Full Court found that the phrase in the legislation “experimental activities that are conducted for the purpose of generating new knowledge” is capable of applying to activities that are conducted for the purpose of generating new knowledge with respect to the application of an existing technology to a new site.
  • The Tribunal had also mischaracterised the pilot facility activities. The Full Court relied on contemporaneous documentation which supported the purposes of the pilot project and the novelty of the facility on a global scale which did not reconcile with the Tribunal’s findings.

Conclusion

The reasons provided by the Full Court in this case are significant and provide much needed clarity as to the application of the research and development provisions. The decision also reiterates the importance of maintaining contemporaneous evidence to support R&D activities.

This article was first published on KPMG Tax Now. 

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