Coal of Queensland Pty Ltd and Innovation and Science Australia (Taxation)

Coal of Queensland Pty Ltd and Innovation and Science Australia (Taxation) [2020] AATA 126 (30 January 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2017/1135
2018/0625

Re:Coal of Queensland Pty Ltd
APPLICANT

AndInnovation and Science Australia
RESPONDENT

DECISION
Tribunal:Deputy President Bernard J McCabe
Senior Member A Poljak

Date:30 January 2020
Place:Brisbane

The decisions under review are affirmed.
.................................[sgd].......................................
Bernard J McCabe, Deputy President
CATCHWORDS
TAXATION – research and development tax offset – activities relating to production of viable coking coal product – Fort Cooper Coal Measures – whether R&D activities are “core R&D activities” or “supporting R&D activities” within the meaning of Div 355 of the Income Tax Assessment Act 1997 (Cth) – activities come within the exception in s 355-25(2)(b) of the Income Tax Assessment Act 1997 (Cth) – activities conducted were prospecting, exploring or drilling minerals for purposes of determining size or quality of deposits – decision under review affirmed
TAXATION – overseas activity does not meet the conditions in s 28D of the Industry Research and Development Act 1986 (Cth) – design of a wash-plant beneficiation process – application for a further period to make an application for internal review pursuant to s 30C(3)(b) of the Industry Research and Development Act 1986 (Cth) – applicant’s failure to apply for internal review of decision its fault and within its control – decision under review affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth) ss 355-5, 355-25, 355-30
Industry Research and Development Act 1986 (Cth) ss 3, 4, 27A, 27J, 28A, 28C, 28D, 30C, 30D, 32A, 32C
Industry Research and Development Decision Making Principles 2011 ss 3.2, 3.3, 3.5
Mineral Resources Act 1989 (Qld) s 6
CASES
Docklands Science Park Pty Ltd and Innovation Australia [2015] AATA 973
Industry Research and Development Board v Coal & Allied Operations Pty Ltd [2000] FCA 979
Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120
RACV Sales and Marketing Pty Ltd v Innovation Australia [2012] 129 ALD 32
Rix’s Creek Pty Limited; Bloomfield Collieries Pty Limited and Innovation Australia [2017] AATA 645
REASONS FOR DECISION
Deputy President Bernard J McCabe and Senior Member A Poljak
30 January 2020
INTRODUCTION

Central Queensland contains some of the world’s richest deposits of high quality coal. But not all of the coal is of the same quality, and not all of it is easily won. Some of the coal deposits in the region are not mined because the cost of extracting and processing coal from those deposits is so high that a mine would not be commercially viable.
Coal of Queensland Pty Ltd, the applicant, holds an exploration permit covering an area in central Queensland that is known to contain unexploited coal deposits. The conventional wisdom is that features of those particular deposits - including the high ash content of the coal due to the presence of other minerals and the highly banded nature of the deposits - make extraction and processing difficult, and prohibitively expensive.
The applicant claims it saw an opportunity to challenge the conventional wisdom. It wanted to develop new mining and beneficiation processes that had the potential to transform the economics of the coal mining industry and make the deposits within its permit commercially viable. With that project in mind, it sought research and development incentives accessible under the Industry Research and Development Act 1986 (Cth) (the IRD Act).
On 30 April 2013, the applicant applied to register four core activities as R&D activities in connection with the project. It also applied to register a supporting activity that was closely connected to one of the four registered core activities. That application for registration was for the income period 1 July 2011 – 30 June 2012 (the 2011-2012 year).
A delegate of the respondent decided none of the registered core activities or the registered supporting activity in the 2011-2012 year were eligible to be considered as “core R&D activities” or as “supporting R&D activities” within the meaning of s 4 of the IRD Act, which incorporates ss 355-25 and 355-30 of the Income Tax Assessment Act 1997 (Cth) (the ITA Act) by reference. The decision was confirmed on review under s 30D(2)(a) of the IRD Act. The matter has now come before the Tribunal.
The applicant also applied to register activities as “core R&D activities” and “supporting R&D activities” in subsequent years of income, but those activities are not before us.
The respondent says the activities identified by the applicant in the 2011-2012 year did not answer the description of “core R&D activities” in s 355-25(1) of the ITA Act. The subsection describes core R&D activities as “experimental activities”; the respondent denies the relevant activities undertaken in this case were “experimental” because:
·the outcomes were not determined by applying a systematic progression of work, based on principles of established science, proceeding from hypothesis to experiment, observation and evaluation leading to logical conclusions; and
·the activities were not conducted for the purpose of generating new knowledge.
The respondent adds the claimed core R&D activities fall within the scope of an exclusion in s 355-25(2) of the ITA Act in any event. The exclusion extends to “prospecting, exploring or drilling for minerals” in certain circumstances. The respondent points out the applicant cannot register “supporting R&D activities” unless the “core R&D activities” are registered.
Our review of the evidence suggests the respondent has the better of the argument. We are not satisfied the applicant’s proposed core R&D activities meet the requirements of the legislation. That means the “supporting R&D activities” are ineligible as well. We must therefore affirm the reviewable decision made pursuant to s 30D(2)(a). We explain our reasons for this conclusion below. We also deal with the applicant’s separate application in proceedings number 2018/0625 to review a decision not to grant the applicant an extension of time to apply for internal review of what is known as an advance/overseas finding decision. We have decided to affirm that decision as well for reasons we will explain.
We will begin by identifying the area where the applicant was operating before pausing to outline the legal issues. We will then consider the expert evidence in relation to the applicant’s project. We will thereafter deal with the application of the law to the facts.
The applicant’s area of operations
The applicant has held an exploration permit for coal issued pursuant to the Mineral Resources Act 1989 (Qld) (EPC1235) since 2011. The permit covers approximately 120km² in the Bowen basin area in Queensland. The permit area is approximately 40km north east of the town of Emerald. The activities carried on by the applicant in the area of EPC1235 are known as the Wilton Project (Wilton Project).
The coal deposits found in the Wilton Project include part of what is known as the Fort Cooper Coal Measures (FCCM). The FCCM is a body of coal which sits between the Rangal Coal Measures (RCM) and the Moranbah Coal Measures (MCM). The RCM and MCM are highly profitable due to the high quality of the coal (it has relatively low levels of ash content, which is affected by the presence of other minerals) and the ease and relative low-cost at which the coal can be mined and processed. The coal found in the FCCM, in contrast, has a relatively high level of ash content, and the coal seams are banded. The characteristics of the FCCM mean the Wilton Project has not been commercially viable because of the cost and difficulty of using established methods for liberating the coal. Sometime around July 2011, the applicant surmised it might be possible to produce a viable coking coal product from the FCCM notwithstanding the conventional wisdom. To that end, it commenced a series of activities to investigate the nature and economic viability of mining the FCCM deposit. The applicant says those activities are R&D activities which give rise to the tax benefits provided for in the R&D regime.
It should be made clear that the applicant’s vision of new ways to mine and process coal would only be realised, if at all, over an extended period. The applicant anticipated the project would span several income years. But it is also important to realise – for reasons we will explain – we are not evaluating the multi-year project as a whole. We must focus on whether the activities registered and conducted in the year of income in question qualify as “core R&D activities” or “supporting R&D activities” within the meaning of the IRD Act and the ITA Act. We explain that legislative regime next.
The legislative regime governing research and development incentives and the application for registration of activities
Broadly speaking, if the applicant meets the requirements in the IRD Act, it becomes entitled to claim R&D tax offsets in accordance with Div 355 of the ITA Act. The ITA Act contains other requirements that must be satisfied before the R&D offsets can be accessed, but the taxpayer must in every case satisfy the provisions of the IRD Act first. This case is focused on whether the applicant complies with the requirements in the IRD Act – but one must have regard to concepts and definitions in the ITA Act because the two statutes operate as part of a coherent legislative scheme.
The objects of the scheme under which tax incentives are provided for R&D activities are explained in the IRD Act and amplified in Div 355 of the ITA Act. Section 3 of the IRD Act refers to objects including:
…(d) promoting the development, and improving the efficiency and international competitiveness, of Australian industry by encouraging R&D activities, innovation and science activities and venture capital activities.
Section 355-5 of the ITA Act elaborates as follows:
(1) The object of this Division is to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy.
(2) This object is to be achieved by providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form (including new knowledge in the form of new or improved materials, products, devices, processes or services).
The IRD Act contemplates that an R&D entity (e.g. the applicant) will apply to register that entity for R&D activities conducted in a particular year of income pursuant to s 27A. The R&D activities in question may be “core R&D activities” or “supporting R&D activities”. Those expressions are defined in ss 355-25 and 355-30 (respectively) of the ITA Act and incorporated into the IRD Act by s 4.
On 30 April 2013, the applicant applied to register certain activities as R&D activities as part of the project “Design and development of a new mining and beneficiation process” (the Project) (the application for registration). The application for registration was for the income period 1 July 2011 to 30 June 2012 (the 2011-2012 year). In its application, the applicant sought registration for four core activities (registered core activities):
·1.1 Design of selective mining process (Activity 1.1);
·1.2 Design of wash-plant beneficiation process (Activity 1.2);
·1.3 Design of ultra-fine processing and briquetting (Activity 1.3); and
·1.4 Design of the geochemistry model for environmental waste management (Activity 1.4).
The applicant also sought registration for one supporting activity being “Background research” claimed to be directly related to Activity 1.1 (registered supporting activity).
The applicant identified that the registered core activities and registered supporting activity were to be undertaken as part of the Project from July 2011 to June 2014.
On 27 November 2013, the applicant applied to register certain activities as “core R&D activities” and “supporting R&D activities” for the year ended 30 June 2013 (the 2012-2013 year). The application sought to register four core activities and two supporting activities as part of the same Project identified in the application for 2011-2012 year. The description of the activities in the application for the 2012-2013 year differed from the application for the 2011-2012 year. In particular, the core activity 1.1 significantly differed from that of Activity 1.1 identified in the 2011-2012 year registration application. Following a pre-registration review of 2012-2013 year registration application, the 2011-2012 year registration was chosen for compliance review.
On 28 May 2015, a delegate of the respondent decided that pursuant to s 27J of the IRD Act, none of the registered core activities and the registered supporting activity in the 2011-2012 year were eligible to be considered as “core R&D activities” or as “supporting R&D activities” within the meaning of s 4 of the IRD Act and ss 355-25 and 355-30 of the ITA Act. The applicant sought internal review of this decision.
In these proceedings, the applicant seeks review of the respondent’s internal review decision dated 27 January 2017 made pursuant to s 30D(2)(a) of the IRD Act, which confirmed the decision of the delegate dated 28 May 2015 that certain registered activities were not eligible R&D activities for the purposes of the ITA Act for the 2011-2012 year (proceedings number 2017/1135).
In addition, the applicant also seeks review in these proceedings of an internal review decision made by the respondent on 12 January 2018, confirming the decision of a delegate dated 2 November 2017 to refuse to grant the applicant a further period of time to apply for internal review for an advance/overseas finding decision dated 16 December 2014 (proceedings number 2018/0625).
APPLICATION 2017/1135
Scope of proceedings
A preliminary issue arose in regards to the scope of these proceedings as to whether the application for review of the s 30D decision confirming the delegate’s decision in respect of the 2011-2012 year limited the Tribunal’s review to the eligibility of the registration of the applicant in respect of activities for the 2011-2012 year only. The applicant sought to confine the proceedings to the 2011-2012 year if the respondent accepted that no decision had been made in regards to the 2012-2013 and 2013-2014 years and that the activities which took place after 30 June 2012 were relevant to the issues that arise in respect of the 2011-2012 year.
At hearing, the respondent accepted that the scope of these proceedings is limited to the eligibility for registration of activities registered by the applicant for the 2011-2012 year only, as the eligibility of other activities registered in the 2012-2013 and 2013-2014 years were not the subject of findings under the relevant s 27J decision. As a consequence, the registration of the activities in the later years has not been reviewed under s 30D in Pt 3 Div 5 of the IRD Act; and those activities are not the subject of these proceedings. However the respondent also accepted at hearing that activities that were conducted or were proposed to be conducted beyond 30 June 2012 may have some relevance in these proceedings but only in a very limited capacity as to the “character” of the claimed activities.
As dictated by s 27J of the IRD Act, consideration is to be had as to whether during the 2011-2012 year, all or part of the registered activities conducted were “core R&D activities” or “supporting R&D activities”. Regard is not to be had to the whole project but rather to the actual registered activities conducted in the relevant registration year. This distinction was considered in Industry Research andDevelopment Board v Coal & Allied Operations Pty Ltd [2000] FCA 979 at [46] to [49]. Lindgren J found that the Tribunal made an error when it referred to the project as a whole but had ultimately undertaken the correct analysis of the activities. At [47] Lindgren J said:
Notwithstanding the AAT’s dangerous frequent departures from the legislative’s term (“activities”) in favour of “project”, I think it is clear that the AAT applied the definitions criteria to the three categories of activity in dispute…
We are not looking at the project as a whole when determining the issues in these proceedings but focus instead on the actual (core and supporting) activities undertaken in the 2011-2012 year. Evidence of activities which fall outside of the 2011-2012 year is only relevant in so far as it sheds appropriate light on the characteristics of the activities conducted in the 2011-2012 year.
In the application for registration the applicant described the registered core and supporting activities as follows:
Activity 1.1 – Design of selective mining process
Practical experimentation with new technology:
2D seismic survey acquisition to help define resources, using the revolutionising onshore and shallow water acquisition technology - onSEIS;
SkyTEM electromagnetic survey to map the distribution of subsurface electrical conductivity via electromagnetic induction.
Analyse data collected from SkyTEM survey to identify the 3D voxel model of the base of weathering and seam subcrop geometries.
Collect and analyse real data from:
HQ/PQ Coring for coal quality and washability;
LD cores to allow washability testing of coals to be undertaken. The LD cores provide data on the specific banded nature of the coal seams, and in conjunction with the washability data, allow the definition of selective mining working sections; and
Chip holes to support/validate SkyTEM data.
Complete two investigative mining operations, (the costeans) for the scaled implementation and testing of theories developed about the ability of current mining equipment and operators to be able to selectively mine with any degree of success within the FCCM.
Refine strategies and techniques to establish selective mining process.
…
Activity 1.1.1 – Background research
Literature search and review of existing mining and beneficiation processes and technologies.
Geographical survey via 2D seismic survey and SkyTEM electromagnetic survey to help define resources.
Consultation with industry professionals and potential customers to determine the level of interest and commercial feasibility of such a project;
Preliminary equipment and resources review with respect to capacity, performance and suitability for the project;
Consultation with key component/part/assembly suppliers to determine the factors they consider important in the design, and to gain an understanding of how the design needs to be structured accordingly.
…
Activity 1.2 – Design of wash-plant beneficiation process
Assessment of ROM coal quality to determine beneficiation strategies:
Retrieval of samples for laboratory testing:
HQ/PQ coring for coal quality and washability;
LD coring for CQ and washability; and
CQ testing carried out to allow the compilation of conceptual models, simulations, possible prototyping etc.
Coal quality testing and yield assessment.
Examination of beneficiation process to optimise economic potential:
o Pre-treatment options to reduce waste feed to plant;
o Design of a large fine circuit for capturing fines and ultra-fines within the wash plant:
§ conceptual sketches;
§ CAD/3D design simulation;
§ rapid prototyping; and
§ review of design.
Feasibility test and final design of wash plant by external contractor.
Process beneficiation flow diagrams.
…
Activity 1.3 – Design of ultra-fine processing and briquetting
Research and testing for ash content and yield.
Research and testing for product handleability.
Research and testing for process scalability.

We have not referred to the activities listed in Activity 1.4 because the applicant has not pressed its claim with respect to those activities. In those circumstances, the list of activities registered as “core R&D activities” and conducted during the 2011-2012 year which require evaluation can be summarised as follows:
·the SkyTEM survey;
·the 2D seismic survey;
·drilling to validate the survey results and provide samples to A&B Mylec and Sedgman for analysis; and
·the A&B Mylec and Sedgman analysis.
To be clear, these are the core activities subject to review in these proceedings. The supporting activity of background research encompassing literature searches, consultations, planning of costeans and geographical surveys is also relevant should related core activities be identified.
Issues for determination
The substantive issues for determination in these proceedings are whether for the 2011-2012 year:
·all or part of each of the registered core activities were “core R&D activities” within the meaning of that term in s 355-25 of the ITA Act; and
·The registered supporting activity was a “supporting R&D activity” within the meaning of the term in s 355-30 of the ITA Act.
The applicant also contends in its Statement of Facts, Issues and Contentions that issues may arise as to whether:
·part of any of the registered core activities found to be an activity referred to in s 355-25(2) of the ITA Act was for the purpose of paragraph 27J(1)(c)(iii) of the IRD Act, a “supporting R&D activity” conducted in the 2011-2012 year in relation to one or more specified core R&D activity (activities) yet to be conducted for which the entity could be registered in the 2011-2012 year if that activity was conducted in that year; and
·part of any of the registered core activities found to be an activity referred to in subsection 355-25(2) of the ITA Act ought to be registered as a supporting activity being an activity undertaken in the 2011-2012 year for the dominant purpose of supporting one or more core activities.
The key legislative provisions
Section 27J of the IRD Act sets out the respondent’s power to make findings about registered activities. The Tribunal steps into the respondent’s shoes and exercises these powers on review (although the Tribunal is formally reviewing the respondent’s subsequent decision made under s 30D(2)(a) to affirm its primary decision). Section 27J relevantly provides:
(1)The Board may make one or more findings to the following effect about an R&D entity’s registration under section 27A for an income year (the registration year):
(a)that all or part of a registered activity was a core R&D activity conducted during the registration year;
(b)that all or part of a registered activity was not an activity of a kind covered by paragraph (a);
(c)that all or part of a registered activity was a supporting R&D activity conducted during the registration year and in relation to:
(i)     one or more specified registered core R&D activities; or
(ii)    one or more specified core R&D activities for which the entity has been registered in an earlier income year; or
(iii)   one or more specified core R&D activities yet to be conducted for which the entity could be registered in the registration year if those activities were conducted during the registration year; or
(iv)   several specified core R&D activities, each covered by subparagraph (i), (ii) or (iii);
…
The criteria the respondent uses to evaluate whether activities are “core R&D activities” are contained in s 355-25 of the ITA Act which provides:
(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).
(2)However, none of the following activities are core R&D activities:
…
(b)Prospecting, exploring or drilling for minerals or *petroleum for the purposes of one or more of the following:
(i)     Discovering deposits;
(ii)    Determining more precisely the location of deposits;
(iii)   Determining the size or quality of deposits;
…
[emphasis in original]
Section 355-30 of the ITA Act sets out the criteria for assessing “supporting R&D activities”. That section provides:
(1)Supporting R&D activities are activities directly related to *core R&D activities.
(2) However, if an activity:
(a) is an activity referred to in subsection 355‑25(2); or
(b) produces goods or services; or
(c) is directly related to producing goods or services;
the activity is a supporting R&D activity only if it is undertaken for the dominant purpose of supporting *core R&D activities. [emphasis in original]
Evidence
The applicant relies on evidence from five lay witnesses and one expert witness, Dr Euston. The respondent relies on the evidence of one expert witness, Dr Vince.
Mr Cameron Vorias
Mr Vorias has been the director of the applicant since July 2011. He claims to have the most continuous connection to the activities that are subject of the present claim and as a director was most actively involved in monitoring the progress of the work. Upon joining the applicant in July 2011, and following the provision of a further qualified geologist’s statement prepared by Dr LeBlanc Smith in March 2011, Mr Vorias saw a real opportunity to extract good quality coking coal from the FCCM that had previously been considered as uneconomic. But this could only be achieved if the applicant made improvements to existing mining and beneficiation processes.
In his written statement dated 20 October 2017, Mr Vorias states that in order to produce coal that was suitable for the international market, it would be necessary to get the coal extracted from the Wilton Project to a specific ash level of less than 12%. He stated the main challenge was to get the coal to this acceptable level of ash impurity, at the right size, and without excessive moisture or other impurities. Mr Vorias outlined a statement of the hypothesis at [37] as follows:
…by the end of around July 2011, I (and I believe my fellow directors) had recognised that it might theoretically be possible for improvements to be made to existing coal mining and beneficiation processes, or new processes could be developed, that would enable the mining, processing and handling (transporting) of highly banded coal seams known to exist in the Bowen basin (such as the FCCM) and elsewhere to be achieved economically by achieving a combination of (a) the extraction of material with a higher yield of coal to waste than had been done previously, (b) the development of a crushing and washing plant configuration that would operate differently from those that had previously been used and that (c) would result in a product able to be handled and transported, which had not previously been thought possible. We recognised that if such improved or new processes could be developed, it might be possible to develop these types of deposits which had historically been regarded as unattractive by major mining companies… because they were thought to be an uneconomic due to high levels of ash and waste being present and the consequent need (based on existing technologies) for prohibitively expensive crushing, washing and drying facilities. In the balance of the statement I refer to the recognition of the matter is that I have described in this paragraph as the Hypothesis.
Mr Vorias confirmed the applicant embarked upon a series of activities to test that hypothesis. He explained:
…that in order to test the hypothesis, there would be a need for a bulk coal sampling program in order to undertake research and testing into the potential for new or improved mining methods and processing plant requirements. This would require survey work as well as some drilling and thereafter the excavation of test pits to enable bulk samples to be taken for the purpose of conducting experiments that would be directed to verifying or disproving the Hypothesis. It was important to me at this stage that the surveys and drilling could be undertaken as efficiently and on a limited basis as possible, as the main purpose of them at this stage, was to help in identifying the best locations within the EPC area at which the test pits could be excavated. A further purpose of undertaking these activities, was to test whether the survey methodologies, which were new, were able to provide accurate results. It was necessary in this respect to compare the results of survey data against drilling results. In addition, I was aware that the results of these works might assist in developing a profile of the ground which would assist in developing coal extraction methods that were better able to target and extract coal, while extracting less overburden and waste than would ordinarily be extracted by large-scale open cut mining methods…
Mr Vorias also stated that in August 2011, the 2D seismic survey was undertaken using technology known as OnSEIS. He said the seismic survey technology was only of limited effectiveness. It indicated the coal seams were at different depths underground from the depths known to be accurate from drilling results. He claimed the results of this work were not and could not have been known in advance on the basis of current knowledge.
The SkyTEM surveys were carried out between August and October 2011. Mr Vorias said he was informed the use of SkyTEM technology would enable predictions to be made as to the depth of weathering. In turn, this would enable predictions to be made as to whether coal would be “freshest” at a shallow depth. Mr Vorias stated that, from his perspective, the main purpose of the SkyTEM survey was to obtain data which would assist in determining where to excavate the test pits. However, a further purpose was to try the effectiveness of the technology, which prior to 2011 had not previously been used in the coal industry.
Mr Vorias said the main purpose of the drilling work at that stage, as well as the survey work, was to identify the optimal locations for the test pits/costeans. He explained samples from the drill cores were provided to A&B Mylec, a leading expert in coal preparation in Australia, for them to conduct washability testing. He anticipated that if the results were positive, larger bulk samples would have been provided for larger scale tests. In regards to the bulk samples, Mr Vorias’ accepted at hearing that the washability of the coal was a key criteria going to the quality of the coal and that the ease of handling – known in the trade as ‘handleability’ - went to the economic viability of transporting the coal to market.
Mr Vorias hoped the tests undertaken by A&B Mylec would demonstrate a viable coking coal product, with acceptable levels of ash impurities, could be produced from the FCCM. Unfortunately, the testing done by A&B Mylec predicted unfavourable outcomes. As a result, Sedgman was engaged to review the procedures A&B Mylec had adopted and comment upon their processes and results. Ultimately, when their final reports were provided in June 2012, the A&B Mylec and Sedgman work confirmed the coal was unviable and the hypothesis was disproved. The results suggested crushing and washing was unable to release enough ash to guarantee a quality that would be in accordance with internationally traded coking product ash levels. Mr Vorias believed at this point that the applicant needed to reassess its approach and devise a new approach to manage
·the nature and quality of the overburden;
·the depositional nature of the target coal seams;
·the washability of the product; and
·the eventual handleability of the coal.
Mr Vorias claimed that although the results of A&B Mylec and Sedgman were consistent with conclusions reached from early work done in relation to the FCCM, the outcomes of the work undertaken were not known or able to be known in advance.
Following receipt of the disappointing results confirmed by the reports from A&B Mylec and Sedgman, Mr Vorias said the applicant began to investigate alternatives. One of the possibilities considered was whether it might be feasible to process the coal by crushing it into very fine particles and undertaking further processing to remove impurities and then combining the coal particles into briquettes, which would be acceptable as meeting coking coal standards with respect to ash levels. Mr Vorias advised that on 2 July 2012, it was agreed samples from the Wilton Project would be provided to Barrow Resources Pty Ltd (Barrow) for testing. The conclusions reached by Barrow supported the view that a viable coking coal product could be produced, although Barrow was concerned with whether the results of the laboratory testing could credibly be extended to justify the conclusions they had reached and whether their proposals could be used to develop a process that could be practically implemented. Mr Vorias said the uncertainty over whether the results obtained by Barrow could be replicated on a larger scale involving the other coal deposits in the Wilton Project ultimately resulted in the applicant’s board deciding not to proceed further with Barrow’s proposals. Mr Vorias advised a number of other possibilities were considered including dry processing. None of those options were considered to be viable. The possibility of briquetting was also not pursued.
On 12 October 2012, at Mr Vorias’ request, Taggart provided a proposal to evaluate the coal washing characteristics and the potential for suitable liberation techniques to be developed. Mr Vorias said he instructed Taggart to proceed with the work. Over the period December 2012 to January 2013, once the locations had been identified and the necessary approvals and land access obtained, the applicant began excavation of two costeans which targeted different points in the Wilton Project lease area. The samples from the costeans and drilling were delivered to Taggart and Virginia Tech for testing in early 2013. On or around 24 January 2014, a Liberation Study Report was delivered by Taggart and provided to the applicant. Mr Vorias said that from the results of the testing carried out by Virginia Tech, Taggart were able to design a wash plant system that would be able to optimise the yield of coking coal. He said these results indicated it may be possible to develop a process that would make mining the FCCM viable for the production of coking coal and that this was a very significant advancement in knowledge and was not something that was known in advance. In his oral evidence at hearing, Mr Vorias explained it was the work that Virginia Tech undertook to identify an acceptable “crushing point” of the coal which was the significant discovery and “major win”. Taggart then designed a wash plant that was able to wash the coal at that level. In his statement dated 3 August 2018, Mr Vorias advised the patent application was lodged to protect the results of the experimental work performed by Virginia Tech on behalf the applicant. He stated the results of the work done by Virginia Tech created a process for liberating coal that was markedly different from standard coal liberation processes.
Dr Andrew Vince
Dr Vince holds bachelor and doctoral degrees in chemical engineering from the University of Exeter, United Kingdom, and is a Chartered Engineer as well as a Fellow of the Institute of Chemical Engineers. He has over 33 years of domestic and international industrial experience in the coal industry, including nearly 20 years with BHP, with the last seven years as Superintendent Coal Processing Improvement with responsibilities for 10 BHP coal preparation plants in Queensland, New South Wales and Indonesia.
In his written expert report dated 26 March 2018, Dr Vince provided an overview of his understanding of the applicant’s registered core activities and registered supporting activity. He stated:
1.9 The difficulty with the FCCM measures has been generally and widely known in the public domain for many years… and is generally accepted by Mr Vorias.
…
1.12 It is my opinion that this set of activities form part and parcel of normal mining and mine development activities. That is, they are, in my opinion, business as usual activities for a coal mining company attempting to make a business from a new tenement acquisition. They are not, in my opinion, activities that may be regarded as or related to scientific R&D. This is primarily because the Scientific Method was not, in my opinion followed. This is evidenced by the overt absence of properly formulated hypothesis statements and proactive, interactive project or activity plans.
1.13 The activities I have examined are, in my opinion, a set of loosely associated practical events whose purpose was to acquire measurement data. There was no R&D plan followed that I could identify associated with any of the [applicant’s] activities I examined.
1.14 It is my opinion that the activities undertaken by [the applicant] comprise making measurements of important quantities and not scientific experiments. Such measurements are very important for the development of the mine, but did not, in my opinion, constitute scientific experiments. [emphasis added]
Dr Vince outlined the numerous purported hypothesis statements contained in the applicant’s evidence in the pre-amble to his report. He detailed, based on his experience, what he considered to be a formulation of a workable hypothesis statement in an R&D context. He described what comprised a scientific experiment and explained it would be centred on a well-defined hypothesis and progressed through an R&D plan. He opined that a “hypothesis statement is an initial building block in the scientific method upon which all R&D needs to be soundly based”. In regards to Mr Vorias’ hypothesis contained in his statement dated 20 October 2017, at [37], Dr Vince opined it did not meet this requirement as it is “extraordinarily long, imprecise, ill-defined and is so nebulous and all-encompassing that it is difficult… to recognise it as a meaningful scientific hypothesis statement”. In regards to all the other hypothesis statements identified by Dr Vince in his report, he opined that they were all equally vague and were not scientific hypothesis statements for the current scientific R&D context. Rather they were all statements of aims and objectives of the relevant activities. Dr Vince also opined that an R&D plan should be clearly documented prior to undertaking activities, should be forward-looking and expressed in the future tense.
In relation to Activity 1.1, Dr Vince considered, in summary at [1.19.1]:
(b) … The seismic and aerial survey activities will provide data that better define the coal measures but, pre-existing historical data relating to [the applicant’s] Wilton Project tenement, and neighbouring properties, will allow very reasonable predictions to be made about coal quality and its poor distribution within the measures.
(c) The actual extent of the better definition the surveys provide will not be known until all data are received, interpreted and reported. This, in my opinion, is the conventional way the coal mining business manages and controls the acquisition of important information.
(d) In the case of recovery of bore core samples, the data collected therefrom will, in my opinion, very likely also be consistent with historical records and result only in an improved level of characterisation detail. This is because... coal is laid out in seams on the ground and, in the main, presents in predictable layers.
…
(g) it is my opinion… The outcome of activity 1.1 could in general terms have been predicted and determined by appropriately qualified personnel in advance.
(h) The uncertainty, in my opinion, will be in the detail of the characteristics of the coal measures that will be determined following routine analysis and measurement procedures. In addition, a carefully designed bore core drilling strategy will lead to minimal risks in the efficacy of the data determined.
(h) In the case of small-scale mining operations, personnel will make it almost certain that the activity will be undertaken correctly. Whilst the exact nature of that outcome will not be known prior to conducting it, the general outcome is readily predictable, and the detailed outcome will add to the body of information and data to be considered in the mine development plan.

In his report, Dr Vince discussed in detail the activities undertaken by the applicant in relation to Activity 1.1. He opined that the surveys of the resource using SkyTEM and onSEIS technologies involved the application of relatively new but existing technology to the normal mining business activity of resource exploration with a view to turning the resource into a reserve. He stated he did not see an R&D plan driving the activities nor any mention of a hypothesis being tested. Dr Vince saw the analysis of the data collected by the SkyTEM technology as a conventional activity to determine a workable understanding of the resource geology and as part of conventional mine planning activities. In regards to the bore core samples collected and analysed, Dr Vince stated this occurred using conventional coal characterisation methodologies. He did not regard the activities as “experimental activities whose outcome could not have been known or determined in advance, or whose outcome could only be determined by applying a systematic progression of work that proceeds from hypothesis to experiment, observation and evaluation”. He stated his opinion is based on the “distinct lack of an associated hypothesis statement and because the samples were analysed in routine ways by commercial techniques following conventional protocols”.
Dr Vince opined that the activities could not be regarded as activities that were conducted for the purposes of generating new knowledge because “the practical tasks generated new data only on coal measures that have been known for many years”. In his opinion this was “useful to add to the already considerable databank relating to the FCCM, but did not generate any new knowledge”. He said the 2D seismic survey, aerial survey, drilling and costean planning activities were clearly related to discovering deposits, determining the location of deposits and determining the size and quality of deposits. He stated that all of these activities are routine aspects of exploration and mine development to change a coal deposit classification from a resource to a reserve. He said that in his mind, these activities are a routine part of exploration and mine planning and cannot be considered as R&D.
In relation to Activity 1.2, Dr Vince said in summary at [1.19.2]:
In my opinion, an appropriately qualified professional would be expected to know that the highly banded nature of the coal measures would cause poor yields, but that the exact value of the expected yield would have to be determined by analysing and measuring samples of the coal. The analysis procedures to be adopted for [the applicant’s] mine planning and coal preparation activities were, in my opinion, routine and common to all coal mines around the world.
It is also my opinion that an appropriately qualified professional would anticipate yield increases to be achieved by initiating liberation via crushing the coal…
Once again, the exact effect of crushing on the extent of liberation would need be determined by conducting practical characteristic measurement activities. The procedures that should be adopted for such characterisations are routine and readily available at commercially engageable contract facilities…
In his report, Dr Vince stated the issue report compiled by A&B Mylec was reflective of routine coal analysis. He said he could not identify a scientifically formulated hypothesis statement for the activity, nor could he identify a properly formulated R&D plan linking the activity to the wider activities. Dr Vince confirmed the second opinion report by Sedgman did not alter the nature of the original A&B Mylec report functions. As to the activities related to the examination of a beneficiation process, specifically the design of a wash plant, Dr Vince opined that such activities are routinely associated with any coal mine and coal beneficiation plant development.
In regards to Activity 1.3, Dr Vince stated in summary at [1.19.3]:
The outcome of liberating the FCCM by crushing would be the generation of ultra-fine coal particles and the subsequent need for ultra-fine coal processing techniques. I would expect this to be anticipated by appropriately qualified personnel and also that the options available to effect efficient beneficiation processing to be understood.
This is because the methods of beneficiating fine coal particles are commonplace in the contemporaneous industry… In the extension to the ultra-fine sizes is a natural progression on the theme that also has been achieved at an industrial scale for many years…
Therefore, it is my opinion that the board outcome of the Core Activity 1.3 relating to beneficiating ultra-fine coal could be known or determined in advance of undertaking the activity. The fine details would be ascertained by limited or focused practical measurement activities. Such activities I would not regard as experimentation, but routine practical activities to determine variables to be used as inputs to established design processes.
Once ultra-fine coal has been beneficiated, it is necessary to enlarge the size of the particle matrix to enhance the marketability of the product. The approach chosen to do this was the well-known tried and tested technology of briquetting, and since this is a well-known technology in commercial application… it requires only a limited amount of practical measurement activities. Such activity is routine and does not involve experimentation. It requires practical work to elaborate on the details of the final design.
In his report, Dr Vince noted samples were sent to Barrow for testing and analysis. He pointed out there was no linkage to an R&D plan or a scientific hypothesis statement. He stated he did not regard this activity as experimental, but as “routine practical test work to determine variables to be used as inputs to established design processes”.
In regards to each of the claimed “core R&D activities” registered in the 2011-2012 year, Dr Vince stated the applicant had not followed a systematic progression of work and opined the applicant “followed and applied pre-existing processes” such that there was no need for them to follow a systematic process to achieve their outcomes. He was of the opinion that the applicant applied “an ad-hoc approach, cherry picking activities as and when they were thought of, because the outcomes were focused on acquiring data and making measurements as would typically be expected in due diligence-type investigations”. Dr Vince said in summary:
1.27 If the Scientific Method cannot and has not been applied to a particular activity, then it is my strong opinion that such an activity cannot be considered an R&D activity from a scientific or engineering perspective.
1.28 The main reason for me forming the opinion that [the applicant] has not followed the conventional Scientific Method is that I could not find within the documentation provided to me is scientifically formulated hypothesis statement or scientifically formulated hypothesis statements.
1.29 I could not identify a single scientifically formulated hypothesis statement that I could associate with [the applicant’s] activities. I have identified a number of statements that purport to be hypothesis statements in the material that have considered in this matter but, for the reasons I have described in the main body of this report, they do not conform to my understanding of a scientifically formulated hypothesis statement. They all are, in my opinion, statements of the objective of the activity and do not include any testable component to the purported hypothesis statements. These purported hypothesis statements are, in my opinion, statements relating to the hopes and aspirations of the activity and are akin to those I would be expect to be included in a project proposal.
In his report, Dr Vince stated he could not identify within the documentation provided to him a single scientifically formulated hypothesis statement that he could associate with the applicant’s activities. He noted he identified a number of statements that purported to be hypothesis statements in the material which he considered, however he opined the statements were merely statements of the objective of the activity and did not include any testable component.
In summary, Dr Vince did not regard the registered core activities and registered supporting activity as experimental, but as “routine practical measurements to determine variables to be used as inputs to established design processes”. He was of the opinion that the activities were conducted following standard approaches in the mining business but he could not identify a “proactively developed and monitored R&D plan encompassing a scientifically formulated hypothesis for activities relating them to the overarching project”.
In regards to the systematic progression of work, Dr Vince said in his report that there are individual tasks that were carried out for, or by the applicant, that in his opinion showed a steady progress towards an overall objective. However the lack of an R&D plan and scientific hypothesis statement meant these activities were not conducted in a systematic way. He said there were individual groupings of activities which within themselves followed routine analysis procedures such as testing for washability or liberation, but there was no proactive R&D plan covering their coordination.
In regards to “existing knowledge or experience”, Dr Vince stated in his report that, for him:
…new knowledge would represent a major departure from the current level of understanding or a discovery of something new. I would be looking for a step-change in our level of understanding, but what I see is a continuous incremental increase in the data and information that adds incrementally to the pre-existing body of knowledge.
Dr Vince addressed each registered core activity and the registered supporting activity in his report. In summary, he said:
1.18 … in general broad terms the outcome of the activities could have been predicted using historical and experiential evidence and data. In my opinion the predictions would be sufficient to be used for a rough examination of the phenomena involved, and so in that context, it is my opinion that the outcome could have been known in advance. Such predictions would give good broad and sufficiently precise estimates of the values of parameters and information design in the given situations.
1.19 This is particularly the situation in the coal mining business which is very mature and has the luxury of many decades of characterisation data to draw upon. However, defining specific details require practical characterisation and measurement activities to be conducted.
Additionally, in regards to each of the claimed “core R&D activities” registered in the 2011-2012 year, Dr Vince stated:
In general, much data has been generated but there are no clear indicators that cite the new knowledge was generated from the activities or that the data has been converted to knowledge. Significant data was generated relating to better defining the resource in characterising the coal therein, but in my opinion, this does not constitute knowledge, it is just information and data to be used for commercial purposes…
… These activities, in my opinion, generated data for mine and processing plant design purposes only, and that, in my opinion, does not constitute new knowledge.
Dr Jeffrey Alan Euston
Dr Euston holds a first class honours degree in mineral processing and a PhD in fine coal processing. He has worked in the Australian coal industry since 1985 and has held positions in research and development, process engineering, plant design and equipment supply. He has provided a number of written statements in these proceedings dated 20 December 2017, 12 April 2018 and 26 July 2018.
In his report dated 20 December 2017, he advised the 2D seismic survey was performed to “discover the extent and distribution of the coal within the FCCM” and would be expected to produce “accurate information on the size, variability and quality of the coal deposits”. He said the use of SkyTEM for evaluating coal deposits was a “novel application for this method of surveying” and that the drilling associated with the surveys “is an accepted component of the evaluation of any mineral or coal deposit” and was “required to accurately assess the size, quality and variability of the FCCM coal deposit and to assist in the location of the most representative costean sites”. Similarly, he said the costean planning and excavation was a required component of the detailed resource model. Dr Euston advised that:
[28]…For all coal and mineral deposits, seismic and other surveys in the drilling of test holes can contribute to the ultimate generation of a physical model of the coal or mineral deposit. These tests result in an accumulation of knowledge about the deposit, necessary to carry out all further activities such an economic evaluation of the deposit and ultimately, mine planning…
[30] A core component of the hypothesis is that selective mining methods could be used to remove only the fresh coal and leave the weathered coal behind. In my opinion the four activities described above, (i) to (iv) in the list, together form a logical set of experiments and activities necessary to develop an accurate knowledge of the deposit and in turn to enable the hypothesis to be validated or disproved. The sequence of activities with appropriate reviews between them have followed the scientific method…
In regards to the A&B Mylec and Sedgman work, Dr Euston stated:
[32]…A&B Mylec have around 30 years’ experience in coal testing and analysis and would be very familiar with the Bowen Basin coal deposits. I would assume that with this experience they would have anticipated a less than favourable outcome from their work with the FCCM. The quality of these coals is well documented, and I’m confident that A&B Mylec would have been aware of this work. However, the use of an experiment “to demonstrate a known fact” is an accepted purpose for an experiment. It was a logical input to the testing of the hypothesis to confirm that conventional coal preparation methods would probably not be effective. In this case, the activities leading up to the collection of the costean samples ensured that a representative sample of fresh coal was to be tested by A&B Mylec, something which previous, less rigorous sampling and testing had not achieved.
[33]… The work carried out by A&B Mylec and subsequently confirmed by Sedgman (Activity (V)) closely followed the standard and accepted methods for coal testing and analysis. The work to that stage had focused on determining the size and quality of the FCCM coal deposit. This work was aimed at determining how the coal is to be mined and the expected variability in quality…
[49] …A&B Mylec would more than likely have been aware of the likely outcome of their work. As such the results could have been predicted, but not accurately known, in advance. As a result, I believe that this was a necessary step in the experimental process. Prior to embarking on subsequent activities, it was appropriate to formally discount the conventional thinking. [emphasis added]
Dr Euston said the outcomes of the work performed by Taggart and Virginia Tech could not have been known in advance. He said this was a “pivotal point in the project timeline” when “conventional thinking has been replaced by new concepts”. He described the Taggart and Virginia Tech work as going to the next stage of detailed testing and that it represented “a return to the first principles of coal and mineral beneficiation”. In his report dated 20 December 2017, Dr Euston formulated his own project summary/plan of the activities performed by Taggart and Virginia Tech. That summary or plan included a hypothesis, a description of the experiment, observation/evaluation and conclusion.
In his statement dated 12 April 2018, Dr Euston accepted Mr Vorias’ purported hypothesis statement and opined that there was an overriding hypothesis and concept for the project and for the individual activities. Dr Euston opined that an essential component of the scientific method was the inclusion of a number of feedback loops. He explained:
…at one or more stages the researcher is required to question the outcome or the value of the experiment. If necessary, the research [sic] can return to the hypothesis and adjust the plan to conduct further experiments.
Dr Euston went on to explain:
[a] formal R&D plan is not necessary for the work to be described as systematic progression of work based on principles of established science that proceeded from hypothesis to experiment, observation and evaluation, leading to logical conclusions.
Dr Euston added Dr Vince’s concept of an R&D plan was “idealistic and not what would normally occur in the course of an industry-based research program”.
At hearing, Dr Euston accepted the initial surveys and the costeans were all done as part of the exploration of the coal resources at FCCM. He stated it was “part of the process” to ensure that when large bulk samples were taken, the sample is representative of what could be mined in much larger quantities during commercial operations.
Other lay witness statements
At the hearing before the Tribunal, the applicant tendered the witness statements of Tom O’Malley dated 23 October 2017 and Kate Elizabeth Hine dated 20 October 2017. These statements were admitted into evidence without objection. No party required the witnesses for cross examination. We refer to the statements later in these reasons, in discussing the Tribunal’s consideration of the evidence.
In addition, the applicant tendered the witness statements of Dr Tobias Krull dated 20 October 2017 and Dr Peter J Bethell dated 23 October 2017. The evidence was admitted with objection by the respondent. No party required the witnesses for cross examination. We give these witness statements limited weight due to relevance. Both relate to activities conducted outside of the 2011-2012 year - namely, the work conducted by TUNRA in 2015 and the work conducted by Virginia Tech and Taggart.
General observations about the application of the legislation
For the activities to satisfy the defined expression “core R&D activities”, they must meet the descriptions in both paras (a) and (b) of s 355-25(1) of the ITA Act. "Supporting R&D activities” are associated activities directly related to “core R&D activities”. Therefore, the order of consideration is to determine firstly whether the activities registered and conducted in the 2011-2012 year are “core R&D activities”. If not, no “supporting R&D activities” will exist.
In regards to the nature of the activities, particularly whether the activities are “experimental”, as stated in s 355-25(1) of the ITA Act, the Full Federal Court in Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120 (Moreton) observed at [148] that:
…The words “experimental activities” in the opening line of s 355-25(1) have very little, if any, work to do beyond reflecting the type of activities described in paragraphs (a) and (b) of the subsection. Paragraphs (a) and (b) contain a detailed description of activities. Activities must meet the descriptions in both paragraphs to satisfy the defined expression “core R&D activities”. The word “experiment” is used in paragraph (a): this paragraph refers to an outcome that can only be determined by applying a systematic progression of work that, among other things, “proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions”. Given the detail and content of the description in paragraphs (a) and (b), it is difficult to envisage activities that would meet the description in paragraphs (a) and (b) but would not be considered “experimental activities”. This is not to say that the word “experimental” in the opening line of the subsection is wholly superfluous. It is, at least, descriptive of the types of activities that are described in paragraphs (a) and (b). [emphasis added]

The “outcome” referred to in s 355-25(1)(a) must be one that cannot be known or determined in advance on the basis of current knowledge, information or experience. If the “outcome” is known or able to be determined in advance, there will be no “core R&D activities” for that reason alone. Moreover for activities to be “core R&D activities”, the outcome of the “experimental activities” can only be determined by applying a systematic progression of work that is based on principles of established science; proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and are conducted for the purpose of generating new knowledge. The term “hypothesis” as included in s 355-25(1)(a)(ii) is not defined and should be given its ordinary meaning: see RACV Sales and Marketing Pty Ltd v Innovation Australia [2012] 129 ALD 32.
In regards to s 355-25(1)(b), the Full Federal Court held in Moreton at [151] that:
… 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…
Section 355-25(2)(b) of the ITA Act relevantly provides that activities which are properly characterised as prospecting, exploring or drilling for minerals for the purposes of (i) discovering deposits; (ii) determining more precisely the location of deposits; and/or (iii) determining the size or quality of deposits; are not “core R&D activities”.
The term “mineral” is not defined in s 355-25(2)(b) of the ITA Act. The ordinary meaning of “mineral” includes coal. The Macquarie Dictionary relevantly defines “mineral” as:
Mineral
2. any of a class of substances occurring in nature, usually comprising inorganic substances (as quartz, feldspar, etc.) of definite chemical composition and definite crystal structure, but sometimes taken to include aggregations of these substances (more correctly called rocks) and also certain natural products of organic origin, as asphalt, coal, etc. [emphasis added]
This is consistent with the treatment of coal as a mineral under state legislation. The applicant held its exploration permit EPC1235, under which it conducted the 2011-2012 activities, under the Mineral Resources Act 1989 (Qld). The term mineral is defined in s 6 of that Act as including a substance that is part of, or may be extracted from, the earth’s crust. That definition plainly includes coal.
We note the exclusion in s355-25(2)(b) is for a defined purpose, namely that exploration, prospecting or drilling is for the purpose of determining more precisely the location of deposits, discovering deposits, or determining the size or quality of deposits. The terms “exploring” and “prospecting” for minerals are not defined and should be given their ordinary meaning in this context. The Macquarie Dictionary relevantly defines the terms “exploring” and “prospecting” as follows:
Exploring
…
2. to look into closely; scrutinise; examine.
…
Prospecting
1. the exploration of a region in search of precious metal, as gold, silver, etc.
The application of the criteria to the specific activities undertaken
The respondent’s primary contention is that the core activities conducted and registered in the 2011-2012 year all come within the exception in s355-25(2)(b) as they were simply part and parcel of the ordinary exploration activities a company with a mining tenement undertakes in order to ascertain the location, quality and size of the coal resources so it can progress to the point of mining the coal. The applicant submits the activities were directed to obtaining samples from known deposits for conducting experiments to determine whether economically viable processes could be developed to enable the commercial exploitation of the known resource. If the applicant is right, the activities do not fall within the ordinary meaning of exploring or prospecting for minerals.
As we have already explained the core activities in question in these proceedings are the activities registered as “core R&D activities” and conducted during the 2011-2012 year, namely the 2D seismic survey; the SkyTEM survey; drilling to validate the survey results and provide samples to A&B Mylec and Sedgman for analysis; and the A&B Mylec and Sedgman analysis.
The 2D seismic survey was performed to discover the extent and distribution of the coal within the FCCM to aid the production of accurate information on the size, variability and quality of the coal deposits. The drilling activities were undertaken to validate the survey results.
The evidence of Kate Hine, a geophysicist at Groundprobe Geophysics Pty Ltd (Groundprobe Geophysics) during the relevant time, is that the use of SkyTEM for evaluating coal deposits was a novel application for the method of surveying. Prior to 2011, the SkyTEM technology for coal projects was completely untested. Testing of SkyTEM’s effectiveness as a survey technique in greenfield coal sites was the research project of Groundprobe Geophysics. The applicant agreed to participate in this trial. For the applicant’s purposes, the results generated by the use of the SkyTEM technology enabled them to identify the depth of weathering within the FCCM, which in turn enabled them to predict whether the coal would be “freshest” at a shallow depth. As expected, this assisted the applicant in identifying the ideal location for drilling and the excavation of test pits. It is plain that although the use of the SkyTEM technology in the Wilton Project was a novel use of the technology, this aspect was not part of the applicant’s activities but rather a research project conducted by Groundprobe Geophysics. The applicant’s use of the results produced by the SkyTEM survey merely contributed to the accumulation of knowledge about the extent, location and quality of the coal within the FCCM. This is further supported by the evidence of Tom O’Malley, a geologist who participated in the conduct of the 2D seismic and SkyTEM surveys, who advised that the survey work enabled the applicant to “identify where the better areas of coal were located in the permit area”.
It is generally well accepted that coal found in the FCCM has high ash content and is uneconomical to mine using current processes. Despite the available knowledge about the FCCM, the 2D seismic survey, SkyTEM aerial survey and drilling activities undertaken by the applicant enabled a more detailed and exhaustive exploration of the coal deposits in the FCCM. The activities enabled the applicant to discover the extent and distribution of the coal within the FCCM by mapping more precisely the location of the deposits including the depth, the depth of weathering, and the quality of those deposits. All of these activities could contribute to the ultimate generation of a physical model of the coal deposit in the FCCM and result in an accumulation of knowledge about the deposit. That would assist the applicant to identify ideal locations to obtain bulk samples for further testing. The work undertaken by A&B Mylec and Sedgman flowed from these processes.
The evidence shows the work undertaken by A&B Mylec was routine coal analysis in accordance with Australian Standards. A&B Mylec were engaged to undertake testing on bulk samples to better determine the washability and handleability of the coal deposits within the FCCM. The washability of the coal went directly to quality and the handleability provided an indication as to the ease with which the coal could be transported to market. Unsurprisingly, given the evidence, the results of the tests undertaken by A&B Mylec were unfavourable. Sedgman was engaged to confirm the results of A&B Mylec’s work, which again, unsurprisingly, were unfavourable. The experts are in agreement that the outcome of the work undertaken by A&B Mylec and Sedgman was predictable based on experience and the current knowledge available about the FCCM, could have been determined in advance and did not generate any new knowledge.
The disappointing yet predictable results from A&B Mylec and Sedgman confirmed the coal was unviable. The results suggested that crushing and washing the coal was unable to release enough ash to guarantee a quality that would be in accordance with internationally traded coking product ash levels. According to Mr Vorias’ evidence, it was only after these unfavourable results from A&B Mylec and Sedgman that the applicant reassessed its approach and devised a new approach to manage the nature and quality of the overburden; the depositional nature of the target coal seams; the washability of the product; and the eventual handleability of the coal. This new approach involved an investigation into whether it might be feasible to process the coal by crushing it into very fine particles and undertake further processing to remove impurities, evaluate the coal washing characteristics and develop suitable liberation techniques. This led to the Barrow, Taggart and Virginia Tech work. As Dr Euston explained, the Taggart and Virginia Tech work “was a pivotal point in the project timeline when conventional thinking has been replaced by new concepts”. There was plainly a step change in the thinking after the A&B Mylec and Sedgman results such that a new project was instigated by the applicant.
The applicant predominantly relies on the hypothesis statement of Mr Vorias (and numerous iterations in similar terms) to shed light on the ultimate purpose and basis for the activities registered and undertaken by the applicant in the 2011-2012 year. Having carefully considered the outcome of the activities, it is apparent they do not marry well with the hypothesis statement. While the activities appear to involve a logical progression of activities to acquire knowledge about the FCCM, there are no R&D plans or documentation to demonstrate the activities were carried out by applying a systematic progression of work based on principles of established science; or that they proceeded from the purported hypothesis to experiment, observation and evaluation, leading to logical conclusions: see Rix’s Creek Pty Limited; Bloomfield Collieries Pty Limited and Innovation Australia [2017] AATA 645; Docklands Science Park Pty Ltd and Innovation Australia [2015] AATA 973. Nor were the activities in question conducted for the purpose of generating new knowledge. As Dr Euston characterised the activities, they merely built on the body of knowledge already available about the FCCM. The activities were appropriate in so far as they formally checked the conventional thinking before other activities and concepts could be pursued. It was only after the disappointing yet predicable results of A&B Mylec and Sedgman that the applicant turned its mind to new concepts to identify improvements to be made to existing coal mining and beneficiation processes, or new processes which could be developed to enable the mining, processing and handling (transporting) of the coal in the highly banded coal seams in the FCCM. It may be that those activities conducted by the applicant could be said to be in line with the purported hypothesis statement. However those activities fall outside of the 2011-2012 income year.
We are satisfied the activities undertaken by the applicant up to and including the A&B Mylec and Sedgman results were focused on determining the size and quality of the FCCM coal deposit and were aimed at determining more precisely the expected variability in quality. They were all generic exploration activities undertaken in the initial exploration stages which a company with a mining tenement would undertake in order to ascertain the location, quality and size of the coal resources so it can progress to a point of being able to mine the coal. Accordingly, we find the core activities registered and conducted during the 2011-2012 year, namely the 2D seismic survey, the SkyTEM survey, the drilling to validate the survey results and provide samples to A&B Mylec and Sedgman for analysis, and the A&B Mylec and Sedgman analysis, were not core R&D activities and all come within the exception in s 355-25(2)(b) of the ITA Act.
The applicant contends in the alternative that the drilling and survey activities were “supporting R&D activities” because they were conducted for the dominant purpose of supporting a core R&D activity, namely, the excavation of costeans. It is accepted that the preparation for the location of the test pits may have begun in the 2011-2012 year and that the survey and drilling activities lead logically to this next step, however, we consider these steps were taken in the course of exploration within the FCCM and therefore come within the exemption in s 355-25(2)(b) of the ITA Act. The excavation of the costeans was undertaken in late December 2012/January 2013. The material dug from the costeans was sent to Taggart and Virginia Tech for detailed coal quality assessment. There is no evidence supporting a finding that digging the costeans satisfies any of the requirements of a core R&D activity nor does the ultimate use of the costeans impart to the activity that of an experimental activity within s 355-25(1). At hearing, Mr Vorias’ agreed there was nothing particularly novel about the technology involved in the digging of a costean and that it was just to get a bulk sample. Dr Euston understood that “costeaning refers to the practice of extracting small test pits to extract sufficient sample for analysis and testing” and that it was “one of the contributing factors to the body of knowledge required to fully determine the size and quality of a deposit”.
APPLICATION 2018/0625
Background
On 30 June 2014, the applicant submitted an application under ss 28A and 28C of the IRD Act seeking an advance/overseas finding in respect of activities associated with the project titled “Design and development of a mining and beneficiation process for the coal resource within the Fort Cooper Coal Measures (FCCM)”, comprising:
Activity 2- Design of a wash-plant beneficiation process (Australian); and
Activity 3- Design of a wash-plant beneficiation process (overseas)
The advance/overseas finding was sought for the income year is 2013-2014, 2014-2015 and 2015-2016.
On 16 December 2014, the respondent made a decision which determined, pursuant to ss 28A and 28C of the IRD Act, that activities submitted by the applicant for an advance/overseas finding with respect to income years 2013-2014, 2014-2015 and 2015-2016 were not “core R&D activities”; were not “supporting R&D activities”; and in respect of the activities to be conducted overseas (Activity 3), that it did not meet the relevant conditions in s 28D of the IRD Act (advance/overseas finding decision).
The applicant was notified of the advance/overseas finding decision by letter dated 16 December 2014.
On 29 September 2017, the applicant requested a further a period of time in which to make an application for internal review of the advance/overseas finding decision (extension of time request). On 2 November 2017, the decision made under s 30C(3)(b) of the IRD Act refused to grant the applicant a further period of time to apply for internal review of the advance/overseas finding decision. An internal review dated 12 January 2018 confirmed the decision to refuse to grant the applicant’s extension of time request pursuant to s 30D(2)(a) of the IRD Act. This is the decision under review in these proceedings.
Relevant legislative provisions
Under s 28A(1) of the IRD Act the respondent must make advance findings of the nature of certain activities upon application by an R&D entity. Under s 28C(1) of the IRD Act, the respondent must also make findings about activities to be conducted outside Australia.
Pursuant to s 30C(3)(a) of the IRD Act, a R&D entity has 28 days after which it is notified of a decision to make an application for internal review. The R&D entity may also seek a further period of time to make an application for internal review; s 30C(3)(b).
In deciding whether to grant a further period of time for an application for internal review, regard must be had to Pt 3 of the legislative instrument, Industry Research and Development Decision Making Principles 2011 (the Decision Making Principles) pursuant to s 32A of the IRD Act. Relevantly, ss 3.2, 3.3 and 3.5 of the Decision Making Principles provide:
3.2 When extension of time must, or may, be given
(1) The Board must allow a thing to be given by an interested person within a further period of up to 14 days if, before the thing is due to be given (as specified in the relevant provision of the Act), the interested person explains to the Board:
(a) why the thing cannot be given by the time specified in the relevant provision of the Act; and
(b) that the thing can be given to the Board within 14 days after that specified time.
(2) The Board may also allow a thing to be given by an interested person within a further period only if the act, omission or event that led to the need for the further period was not the fault of the interested person and was not within the interested person’s control.
3.3 Considering reason extension of time is required
When considering whether to allow a thing to be given by an interested person within a further period under subsection 3.2 (2), the Board must decide, based on information given to the Board by the interested person, if the need for the further period has arisen because of:
(a) an act or omission of the Board; or
(b) any other reason, including the following:
(i) an act or omission of the interested person;
(ii) an act or omission of another person;
(iii) an event for which no one is responsible.
...
3.5 If there is some other reason an extension is required
(1) For paragraph 3.3 (b), if the need for the further period has arisen because of a reason other than an act or omission of the Board, the Board, in considering the further period to be allowed, must take into account:
(a) any delay by the interested person in requesting the further period and the reasons (if any) for that delay; and
(b) the amount of time that will pass between when the thing is due to be given (as specified in the relevant provision of the Act) and when the interested person proposes that it should be given.
(2) The Board must be satisfied that any extension of time it allows is in proportion to the severity of the interested person’s level of inability to give the thing at the time specified in the relevant provision of the Act.
(3) For subsection (2), the longer the further period of time requested by the interested person:
(a) the higher the level of inability of the interested person to give the thing at the time specified must be; and
(b) the stronger the evidence of the level of inability the interested person must provide.
Evidence and contentions
The applicant was notified of the advance/overseas finding decision by letter dated 16 December 2014, which was sent by email of that date. Under s 30C(3)(a) of the IRD Act, the applicant was required to make an application for internal review of the decision by 13 January 2015, being 28 days after the applicant was notified of the decision. The applicant’s extension of time request was submitted on 29 September 2017, over 30 months after the statutory deadline of 13 January 2015 (the further period).
The applicant’s position, as set out in its Statement of Facts, Issues and Contentions, is that the act, omission or event leading to the need for an extension of time was that the respondent led it to believe that the 2011-2012 registration compliance review and the advance/overseas finding decision would be considered together. The applicant contends that the nature of the respondent’s correspondence with (and statements to) the applicant, in particular the Summary of Understanding dated 26 October 2016, led it to understand that the respondent’s view of the 2011-2012 registration was combined with the advance/overseas finding decision. In the alternative, the applicant contends it did not seek internal review within the statutory timeframe due to the failure of its legal representative, Swanson Reed, to take appropriate action on its behalf. The applicant’s Statement of Facts, Issues and Contentions states the applicant’s intention was to “undertake whatever steps were necessary to ensure that each of the adverse findings of the advance/overseas finding decision were contested so that they would be subject to internal review”, and that these intentions were communicated to Swanson Reed.

The respondent contends it did not do anything that led to the need for the applicant to seek an extension of time. It treated the compliance review of the 2011-2012 registration and the advance/overseas finding decision as separate processes and submits it was clear in its conduct with the applicant as to that separation. And this is demonstrated by its decision to suspend the progress of the compliance review into the 2011-2012 registration while it considered the applicant’s application for an advance/overseas finding. The respondent further contends the correspondence between the parties demonstrated that the processes were considered separate and that the respondent’s advice to the applicant was consistent in this regard.
In a statement dated 28 November 2017, Mr Vorias advised that the applicant retained Swanson Reed to prepare the advanced finding R&D activity registration for the 2013 and 2014 years and that they were also tasked with the preparation of the application for the advance/overseas finding. He stated, “it was certainly my understanding that these issues were to be combined with the original Decision - that is, that they were the subject of the review which had commenced on 17 December 2014”. It was his understanding that “it was always the Applicant’s position that the negative overseas finding would be reviewed as they were so connected with the Core activities for which the initial claim was made, that they needed to be included as a part of the whole claim” and that “at all relevant times, I believe the issues being considered in respect of Innovation Australia’s review concerned both the 2012 registration review as well as the advance/overseas findings”. In regards to instructions provided to Swanson Reed about seeking review of the advance/overseas finding decision, Mr Vorias said in his written evidence:
I can’t recall (and have no knowledge of) whether this firm may have made a request for review, orally. I surmise that the request was communicated – in some fashion and that it was acted upon… I can positively state the Applicant’s intentions (which were notified to Swanson Reed) were to undertake whatever steps were necessary to ensure that each of the adverse findings were contested in order that they might form part of this review.
Between 5 February 2014 and 16 June 2015, Christopher Clark, a Case Manager at AusIndustry Business Services, a division of the Department of Industry, Innovation and Science (the Department), was the main point of contact for the applicant and its representatives in relation to, and otherwise was responsible for progressing, the 2011-2012 registration compliance review and the advance/overseas finding. In a statement dated 3 May 2018, Mr Clark provided copies of correspondence with the applicant and the applicant’s representatives. He said at [48]-[50] that:
There is nothing in the correspondence between myself and the Applicant’s representatives, nor in the file notes of my telephone conversations and site visits with the Applicant and its representatives, that suggests that an internal review of the Advance/overseas finding was sought by the Applicant or its representatives. I note that it was my practice to keep a written record of all oral conversations that I had with the Applicant… whether by email or by keeping file notes.
I can further confirm… that AusIndustry has no record of the Applicant or its representatives submitting a request for internal review of the Advance/overseas finding during the period between 16 December 2014 and 13 January 2015, being the statutory timeframe for requesting review of that finding, whether made in writing or orally.
The only point which I’m aware that the Applicant has raised request for internal review of the advance/overseas finding is in its 2017 correspondence requesting an extension of time to seek internal review of the advance/overseas finding as set out in the Tribunal documents filed in these proceedings.
The parties drew our attention to specific pieces of correspondence, relevantly, the Statement of Understanding issued to the applicant on 17 December 2014, which plainly identifies issues only in relation to the 2011-2012 registration and not in relation to the advance/overseas finding decision. Following receipt of the Statement of Understanding, a representative from Swanson Reed sent an email to Mr Clark dated 17 December 2014, asking questions in regards to the protocol for resubmission. In addition, the email contained a separate question about the implications of the “Advance/overseas Finding”, namely, whether the advance/overseas finding decision handed down only applied to the 2014 year or to subsequent/prior years. In an email of the same date, Mr Clark advised that the advance/overseas finding decision would apply to the 2013-2014, 2014-2015 and 2015-2016 income years for the relevant activities. There is nothing to suggest from this correspondence that the issues were conflated.
On 26 October 2016, the respondent sent an email to the applicant’s then representative, KPMG, which stated that:
The review findings will be about the activities as described in Annexure A…
… As this is an overseas finding, the Australian activities must be assessed to identify eligibility for significant scientific link and expenditure comparison. [emphasis added]
Annexure A was a Summary of Understanding, which included a heading that read “Annexure A: Based on the application for overseas finding”, and a description of relevant activities that included “Activity 3: Design of wash-plant beneficiation process (Overseas) is an overseas activity claimed as core R&D (for Finding)” [emphasis in original].
The content of the activity description in the 26 October 2016 version of the Summary of Understanding replicated the descriptions of activities as detailed in the advance/overseas finding application. However, the respondent contends the internal review requested by the applicant was in relation to the respondent’s decision of 28 May 2015, which concerned the 2011-2012 registration, and as such these descriptions were in error. On 10 November 2016, the respondent sent an email to KPMG which provided a Summary of Understanding. The content of the activity descriptions in the 10 November 2016 Statement of Understanding appears to replicate the descriptions of activities as detailed in the 2011-2012 registration.
Consideration
The applicant was provided notice of the advance/overseas finding decision on 16 December 2014. In that notice, the applicant was advised it had 28 days within which to seek internal review of the decision. There is no evidence that the applicant was in any way limited in its capacity to seek internal review during that 28 day period. The failure of the applicant to seek internal review within the statutory timeframe was the result of an oversight on its part, which was entirely the fault of the applicant and within its control.
We are not convinced the applicant’s failure to seek an extension of time was a result of an omission of the respondent. The applicant has indicated it did not make an application for internal review of the advance/overseas finding decision as it understood the decision would be reviewed together with a review of the 2011-2012 registration. However, we are not satisfied on review of the correspondence before us that the respondent suggested the issues were conflated. While the correspondence and Summary of Understanding emailed to the applicant’s then representative, KPMG, on 26 October 2016 contained numerous references to the advance/overseas findings, this is insufficient to establish such a finding. We are not satisfied any correspondence prior to this is sufficient to indicate the advance/overseas finding decision was being reviewed with the 2011-2012 registration. No application for review of the advance/overseas finding decision had been made by the applicant prior to 29 September 2017. As a Summary of Understanding relevant to the 2011-2012 registration was sent to the applicant on 10 November 2016, we consider the references to advance/overseas finding decision in the correspondence of 26 October 2016 were made in error.
The applicant’s alternative contention is that its failure to seek internal review of the advance/overseas finding decision within the statutory timeframe was the failure of its representative, Swanson Reed. While Mr Vorias’ evidence is that the applicant’s intention was to undertake whatever steps were necessary to contest the advance/overseas finding decision, the evidence does not support a finding that these instructions were properly made. It is Mr Vorias’ evidence that he could not recall whether Swanson Reed made the request orally, but he surmised the request was “communicated – in some fashion”.
Despite the applicant being represented by Swanson Reed at the relevant time, the applicant remains responsible for its failure to seek internal review of the advance/overseas finding decision within the statutory timeframe. There is no evidence before us to establish the applicant took steps to ensure (a) an application for internal review was made prior to the statutory deadline, (b) it communicated with Swanson Reed to confirm it took relevant steps on the applicant’s behalf or (c) it engaged with Swanson Reed as to the progress of the review application for the advance/overseas finding decision. Accordingly, any failure of Swanson Reed to make an internal review application on the applicant’s behalf was the result of the applicant failing to take appropriate steps to inform itself about the nature and requirements of the R&D Tax Incentive scheme, and to either make an application for internal review or ensure such an application was made on its behalf.
The applicant’s failure to make a request for internal review of the advance/overseas finding decision by 13 January 2015 was its fault and within its control.
DECISION
In regards to application 2017/1135, all of the activities claimed for, and conducted in the 2011-2012 year, namely the 2D seismic survey; the SkyTEM survey; drilling to validate the survey results and provide samples to A&B Mylec and Sedgman for analysis; and the A&B Mylec and Sedgman analysis, come within the exemption in s 355-25(2)(b) of the Income Tax Assessment Act 1997 (Cth) and are not “core R&D activities”. The decision under review dated 27 January 2017 is affirmed.
In regards to application 2018/0625, the decision under review is affirmed.

I certify that the preceding 116 (one hundred and sixteen) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe and Senior Member A Poljak

.............................[sgd]......................................
Associate
Dated: 30 January 2020

Date(s) of hearing: 6 - 10 and 13 August 2018

Counsel for the Applicant: Mr A T Broadfoot QC and Mr A J Bailey

Solicitors for the Applicant: Holding Redlich

Counsel for the Respondent: Ms M M Brennan QC and Ms L J Allen

Solicitors for the Respondent: Maddocks Lawyers

[2020] AATA 126

30 January 2020

Key Legal Topics

Areas of Law

Tax Law

Statutory Interpretation

Administrative Law

Legal Concepts

Statutory Construction

Judicial Review

Procedural Fairness

Appeal

Standing

Date(s) of hearing:	6 - 10 and 13 August 2018
Counsel for the Applicant:	Mr A T Broadfoot QC and Mr A J Bailey
Solicitors for the Applicant:	Holding Redlich
Counsel for the Respondent:	Ms M M Brennan QC and Ms L J Allen
Solicitors for the Respondent:	Maddocks Lawyers