GQHC and Commissioner of Taxation (Taxation)
[2024] AATA 409
•16 February 2024
GQHC and Commissioner of Taxation (Taxation) [2024] AATA 409 (16 February 2024)
Administrative Appeals Tribunal
ADMINISTRATIVE APPEALS TRIBUNAL ) ) No: 2020/0826 TAXATION AND COMMERCIAL DIVISION ) Re: GQHC
Applicant
And: Commissioner of Taxation
RespondentDIRECTION
TRIBUNAL: Senior Member DK Grigg
DATE OF CORRIGENDUM: 28 February 2024
PLACE: Brisbane
Pursuant to section 43AA of the Administrative Appeals Tribunal Act 1975 (Cth), and upon being satisfied that there are obvious errors in the text of the written statement of reasons for the decision herein dated 16 February 2024, the Registrar is directed to alter the text of the statement of reasons as follows:
1. In the Glossary at page 10, remove “Tax Assessment Act 1997 (Cth)” and replace with “Taxation Administration Act 1953 (Cth)”.
2. In footnote 3 at page 11, remove “
Mr B”.
3. At paragraph 28, remove “
Mr B”.
4. At paragraph 94, insert the word “year” after the words “specific income”.
5. At paragraph 144, remove “section 355-210” and replace with “section 355-205”.
6. At paragraph 157, remove “consist with Auctus” and replace with “consistent with Auctus:”
7. At paragraph 199, remove “Mr B’ background” and replace with “Mr B’s background”.
8. At paragraph 201, remove “the [the Group]’s breeder” and replace with “[the Group]’s breeder”.
9. At paragraph 292, remove “GQHC’s approach” and replace with “the applicant’s approach”.
10. At paragraph 343, remove “outcomes were corded in a report” and replace with “outcomes were recorded in a report”.
11. At paragraph 621, remove “On the last day of the hearing GQHC withdrew its applications for review with respect to the 2012 and 2014 activities” and replace with “On the last day of the hearing GQHC withdrew its application for review with respect to the 2012 activities. Following the hearing, GQHC withdrew its application for review with respect to the 2014 activities by way of notice of withdrawal dated 23 August 2024”.
12. At paragraph 753, remove the number “30”.
13. At paragraph 766, insert the word “processed” in quotation marks after the words “One of the issues was whether lobsters were”.
......................[SGD].......................
Senior Member DK GriggDivision:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2020/0826
Re:GQHC
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member Dominique K Grigg
Date:16 February 2024
Place:Brisbane
The Tribunal affirms the decision under review.
................................[SGD].....................................
Senior Member Dominique K Grigg
Catchwords
TAX – R&D Tax Incentive – where Commissioner determined applicant had not engaged in core research and development activities – where no findings made by Innovation and Science Australia - jurisdiction of Tribunal - whether activities undertaken by GQHC are eligible research and development activities under the Industry Research and Development Act 1986 (Cth) and Income Tax Assessment Act 1997 (Cth) – whether claimed activities were “experimental” activities – meaning of “hypothesis” – request to adduce late evidence – whether feedstock adjustment under section 355-465 applicable – decision under review affirmed
Legislation
Acts Interpretation Act 1901 (Cth)
Administrative Appeals Tribunal Act 1975 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Industry Research and Development Act 1986 (Cth)
Taxation Administration Act 1953 (Cth)Tax and Superannuation Laws Amendment (2013 Measures No 1) Act 2013 (Cth)
Cases
Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971
ASIC v Rich [2005] NSWSC 706
Australian Competition and Consumer Commission v PT Garuda Indonesia Ltd [2016] FCAFC 42; 244 FCR 190
Coal of Queensland Pty Ltd v Innovation and Science Australia [2021] FCAFC 54; (2021) FCR 186
Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; (2021) 284 FCR 294
Docklands Science Park Pty Ltd and Innovation Australia [2015] AATA 973
GHP 104 160 689 Pty Ltd and Commissioner of Taxation [2014] AATA 869; (2014) 99 ATR 955
GTK Trading Pty Ltd v Export Development Grants Board [1981] FCA 226; (1981) 40 ALR 375
Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503
Lakes Oil NL and Innovation and Science Australia (Taxation) [2023] AATA 811
Macquarie Bank Limited v Commissioner of Taxation [2013] FCAFC 119
Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120; (2019) 271 FCR 211
PKWK and Innovation and Science Australia (Taxation) [2021] AATA 206
Mount Owen Pty Limited and Innovation Australia [2013] AATA 573
Rix’s Creek Pty Limited; Bloomfield Collieries Pty Limited and Innovation Australia [2017] AATA 645
Royal Wins Pty Ltd and Innovation and Science Australia [2020] AATA 4320
Stevens v Kabushiki Kaisha Sony Computer Entertainment [2005] HCA 58; (2005) 224 CLR 193
SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362
TCXG and Minister for Foreign Affairs [2013] AATA 377
Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63Ultimate Vision Inventions Pty Ltd v Innovation and Science Australia [2022] FCA 606; (2022) 176 ALD 1
Secondary Materials
Explanatory Memorandum, Tax Laws Amendment (Research and Development) Bill 2010 (Cth)
Organisation for Economic Co-operation and Development, Frascati Manual 2015: Guidelines for Collecting and Reporting Data on Research and Experimental Development (OECD Publishing, 2015)Australian Taxation Office, Income tax research and development tax offset: feedstock adjustments (TR 2013/3, 20 February 2013)
REASONS FOR DECISION
Senior Member Dominique K Grigg
16 February 2024
TABLE OF CONTENTS
DECISION
REASONS FOR DECISION
TABLE OF CONTENTS
GLOSSARY
INTRODUCTION
PROCEEDING - SUMMARY
Orders Sought
Witnesses
Late Request for Leave to Adduce New Evidence
ISSUES FOR THE TRIBUNAL
Jurisdiction
R&D Activities - Eligibility
Feedstock Adjustment
Poultry Feed
Chickens
Scope of Subdivision 355-H
LEGISLATIVE BACKGROUND
IR & D Act
Board Findings
When is the Commissioner Bound?
Review of Decisions
ITAA 1997
What is a “Core R&D Activity” and “Supporting R&D Activity”?
What are “Experimental Activities”?
What is a “Hypothesis”?
R&D Expenditure
Feedstock Adjustment - Subdivision 355-G–Clawback of R&D Recoupments Feedstock Adjustments and Balancing Adjustments
Assessments
Burden of Proof
GQHC’S R&D APPLICATION/REGISTRATION PROCESS
Registered Activities - Overview
Registration Process
COMMISSIONER’S REVIEW OF THE CLAIMED ACTIVITIES/INCOME TAX RETURNS
Income Tax Returns
Expenditure on Feedstock Inputs Attributable to Feedstock Output
Notices of Assessment
GQHC’s Objections
ISSUE 1: JURISDICTION
GQHC’s Contentions
Commissioner’s Contentions
Conclusion on Jurisdiction
ISSUE 2: R&D ACTIVITIES
BACKGROUND – POULTRY FARMING
Breeding Stock
Breeding Sheds – Design and Operation
Egg Incubation
Broiler Farming
Broiler Chicken Feed
Chicken’s Digestive System
R&D CONTENTIONS – SUMMARY
GQHC’s Contentions
Commissioner’s Contentions
GQHC’S EVIDENCE – OVERVIEW
Mr A
Mr B
Accounts and Financial Records
R&D Activities
Dr E
Role with the Group
Key Performance Indicators in the Poultry Industry
Feedstock
R&D Activities
Ms D
Associate Professor Peter Groves
Associate Professor Dragana Stanley
COMMISSIONER’S WITNESSES – OVERVIEW
Professor Colin Scanes
Dr Isabelle Ruhnke
CONSIDERATION
Is GQHC an “R&D Entity”?
Were GQHC’s Activities “Core” or “Supporting” Activities?
“Principles of Established Science” (s 355-25(1)(a)(i))
The Scientific Method
“Hypothesis” (section 355-25(1)(a)(ii))
“New Knowledge” (section 355-25(1)(b))
Outcome of the Claimed Activity Cannot be Known or Determined Other Than by a Systematic Progression of Work (section 355-25(1))
INCUBATION/HATCHERY PROJECT
Overall Objective
“Hypothesis”
New Knowledge
Claimed Activities
2012 Year
2013 Year
Evidence – Incubation/Hatchery Project
Mr A
Dr E
Expert Evidence
Was the Progression of Work Based on Principles of Established Science?
CONSIDERATION - INCUBATION/HATCHERY PROJECT
Did the Claimed Activities Occur?
Contentions - Are the Claimed Activities “Experimental Activities”?
Were the Claimed Activities “Core Activities”?
Was There a Valid “Hypothesis”?
Was the Outcome Known in Advance?
New Knowledge
Evidence of Observation and Evaluation?
Was the Progression of Work Based on Principles of Established Science?
Findings
WATER QUALITY PROJECT
Overall Objective
New Knowledge
Claimed Activities
2012 Year
2013 Year
Evidence – Water Quality Project
Mr A
Expert Evidence
CONSIDERATION – WATER QUALITY PROJECT
Were the Claimed Activities “Core Activities”?
Was There a Valid “Hypothesis”?
Was the Outcome Known in Advance? New knowledge
Evidence of Observation and Evaluation?
Was the Progression of Work Based on Principles of Established Science?
Findings
SHED CLEANING PROJECT
Overall Objective
New Knowledge
Claimed Activities
2012/2013 Years
2013 Year
Evidence - Shed Cleaning Project
Mr A
Dr E
Expert Evidence
CONSIDERATION – SHED CLEANING PROJECT
Were the Claimed Activities “Core Activities”?
Was There a Valid “Hypothesis”?
Evidence of Observation and Evaluation?
Was the Claimed Activity Undertaken for the Purpose of Generating New Knowledge?
Was The Progression of Work Based on Principles of Established Science?
Findings
BROILER IMPROVEMENT PROJECT
Overall Objective
New Knowledge
Claimed Activities
2012/2013 Years
2013 Year
Evidence - Broiler Improvement Project
Mr Mr A
Dr E
Ms D
Expert Evidence
CONSIDERATION – BROILER IMPROVEMENT PROJECT
Were the Claimed Activities “Core Activities”?
Consideration
Wholegrain Wheat and Wholegrain Sorghum Trials
L’arginine Trials
Low Energy Ration
Organic Minerals
Findings
ISSUE 3: FEEDSTOCK ADJUSTMENT
Contentions – Summary
GQHC
Commissioner
Expenditure
“Transformed or processed”
Applicant’s Contentions
Commissioner’s Contentions
Is the Expenditure on Poultry Feed and Expenditure Acquiring Chicks “Feedstock Inputs” Within the Meaning of Section 355-465(1)(a)?
Is The Poultry Feed Transformed or Processed
Dr E
Associate Professor Dragana Stanley
Ms D
Dr Isabelle Ruhnke
Tangible Product
Conclusion
Findings – Feedstock Adjustment
Reasonably Attributable Amount
DECISION
GLOSSARY
Glossary Term
Definition
2013 Year
the 2013 financial year subject to review under Application 2020/0826
AAT Act
Administrative Appeals Act 1975 (Cth)
Board
Innovation and Science Australia
Broiler Improvement Project
Project 2011-04: Development of Novel Methods to Improve Broiler Performance and Yield
Explanatory Memorandum
Explanatory Memorandum on the Tax Laws Amendment (Research and Development) Bill 2010 (Cth)
FCR
feed conversion ratio
Group
The Group, under which GQHC and YZCQ are both companies
Incubation/Hatchery Project
Project 2009-07: Novel Improvements to Poultry Incubation and Hatchery Processes
ITR
income tax return
IR & D Act
Industry Research and Development Act 1986 (Cth)
ITAA 1936
Income Tax Assessment Act 1936 (Cth)
ITAA 1997
Income Tax Assessment Act 1997 (Cth)
Laying Period
between weeks 40 and 44 of the life of a breeder chicken when it usually lays its eggs
Registered Activities
The four relevant R&D projects registered for the 2013 Year: Incubation/Hatchery Project, Water Quality Project, Shed Cleaning Project, and Broiler Improvement Project
Relevant Year
The 2013 Financial Year subject to review under Application 2020/0826
R&D
research and development
R&D Applications
the application forms for the activities registered with the Board by GQHC pursuant to sections 27A and 27D of the IR & D Act in the Relevant Year.
Shed Cleaning Project
Project 2011-02: Techniques to Improve Laying Shed Cleaning Efficiency
SLT
Senior Leadership Team
TAA
Tax Assessment Act 1997 (Cth)
TR 2013/3
Taxation Ruling TR 2013/3 Income tax research and development tax offset: feedstock adjustments
Water Quality Project
Project 2010-04: New Water Treatment Processes to Improve Drinking Water Quality
INTRODUCTION
The Applicant, GQHC, is a company within the Group (Group), an 80-year-old family-owned poultry operation headquartered in Site E, Queensland.[1]
[1] Exhibit 1, Tribunal Book, Tab 12, Witness Statement of Mr A dated 13 December 2019 (First Mr A Statement), p 2674 at [15].
The Group is a non-consolidated vertically integrated chicken growing business. It operates rearing and egg laying farms and then grows the hatched chicks into what is referred to in the industry as a “broiler” chicken. A broiler is defined in the online Macquarie Dictionary as a “young chicken… that can be cooked by broiling”.[2]
[2] Macquarie Dictionary (online at January 2024) ‘broiler’.
The Group produces over 28 million broiler chickens annually.
The Group also produces breeder chickens.
Once broilers reach “consumption size”, they are sold to processing facilities and distributed to major retailers.[3] The Group has breeding facilities, broiler growing facilities, a stockfeed mill, hatcheries, and a transportation fleet.[4]
[3] Exhibit 1, Tribunal Book, Tab 10, Witness Statement of
Mr BMr B dated 13 December 2019 (First Mr B Statement), p 1024 at [10]; First Mr A Statement, p 2674 at [15].[4] First Mr B Statement, p 1024 at [9]; Exhibit 1, Tribunal Book, Tab 11, Supplementary Statement of Mr B affirmed on 11 November 2020 (Second Mr B Statement), p 1506.
GQHC conducts the poultry farming operation specialising in the production of the broiler chickens and the broiler breeder laying farms.[5]
[5] Second Mr B Statement, p 1505 at [4]; First Mr A Statement, p 2676 at [21]; Transcript of Proceedings, p 50 at [44]-[45].
Another entity in the Group, YZQC, operates the hatching operations.[6]
[6] First Mr A Statement, p 2676 at [21]; Transcript of Proceedings, p 51 at [1]-[4].
Each week the Group:[7]
(a)produces in excess of 2,000 tonnes of feed;
(b)produces 620,000 fertile eggs; and
(c)turns over 550,000 broiler chickens.
[7] First Mr A Statement, p 2674 at [15]; First Mr B Statement, p 1024 at [10].
GQHC contends that since 2006 it has engaged in eligible research and development activities as defined by the Industry Research and Development Act 1986 (Cth) (IR & D Act).[8] This matter concerns the eligibility of GQHC to claim a research and development tax offset under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) in relation to different activities claimed and engaged in during the 2013 financial year (Relevant Year/2013 Year).
[8] Exhibit 1, Tribunal Book, Tab 1, T9 Attachment: R&D Tax Incentive Application: Registration of R&D activities for the year ended 30 June 2012, p 106.
YZQC was originally a party to this proceeding and was represented by the same representatives as GQHC.[9]
[9] By directions made on 21 April 2020, the Tribunal ordered that the matters of GQHC and Commissioner of Taxation (2019/1296), GQHC and Commissioner of Taxation (2020/0826-7) and YZQC and Commissioner of Taxation (2020/1919-20) be heard together.
The hearing was conducted in person over six days and was held in private in accordance with section 14ZZE of the Taxation Administration Act 1953 (Cth) (TAA).
GQHC provided the following original application summary of the proceedings:[10]
[10] Exhibit 1, Tribunal Book, Tab 6, Applicants’ Statement of Facts, Issues and Contentions dated 11 September 2020 (Applicants’ Second SFIC), pp 986-987.
The 2012 financial year was originally included as part of the financial years under review in this matter. On the evening before closing submissions GQHC withdrew application number 2019/1296, which concerned its activities in the 2012 financial year.
After the hearing ended, in August 2023, YZQC withdrew all of its applications for review (application numbers 2020/1919 and 2020/1920) and, as a result withdrew in total from this matter. GQHC also withdrew its application concerning the 2014 financial year (application number 2020/0827).
Given the lateness of the withdrawal of YZQC’s applications and GQHC’s 2012 application, the hearing had been conducted on the basis that 2012 was a relevant year. The written closing submissions of both parties made reference to the 2012 year as a relevant consideration. Evidence regarding 2012, particularly expert evidence, is not easily, or at all, distinguishable from evidence concerning the 2013 and 2014 years. Some of the activities from 2012 continued into the 2013 Year. The evidence before the Tribunal was clearly meant to have general application across all of the originally claimed years. The Tribunal notes the Applicant’s evidence that the same approach and processes were applied across the 2012, 2013 and 2014 years.[11]
[11] Second Mr B Statement, p 1506 at [8].
Following YZQC’s withdrawal, the Tribunal asked the parties to confirm which documents/evidence remained before the Tribunal. The parties were able to agree on most items. There was limited disagreement in relation to the relevance of some documents/evidence concerning the 2012 financial year. In so far as the Tribunal has referred to the 2012 financial year in its decision, it is for the purpose of context or because the evidence was directed to both 2012 and 2013, and not for the purpose of making any findings.
What remains to be determined following the application withdrawals is whether the activities claimed for the 2013 Year are eligible research and development (R&D) activities.
The R&D scheme is managed by Innovation and Science Australia (Board) which was established by the IR & D Act.
The Tribunal usually hears appeals from decisions of the Board concerning an applicant’s registrability or whether activities are “R&D activities” as defined in the IR & D Act.
This is an unusual matter in that it is not an appeal from a decision of the Board. The Board has made no findings regarding the claimed registered activities. In this matter the Commissioner of Taxation issued income tax assessments pursuant to which the Commissioner, not the Board, determined GQHC had not engaged in eligible R&D activities.
The application under review is of a decision made by the Commissioner. This occurred because GQHC amended an income tax return (ITR) in 2012 after considering they were claiming an incorrect amount of feedstock allowance. The Commissioner considered the amended ITR, noting that a taxpayer can only claim a feedstock adjustment if they are engaged in eligible R&D activities. At this point the Commissioner decided to consider whether GQHC qualified for the R&D tax offset as part of its assessment.
One of the contentions of GQHC is that the Tribunal has no jurisdiction to determine whether certain activities constitute R&D activities within the meaning of section 355-20 of the ITAA 1997 in these circumstances.[12]
[12] Applicants’ Second SFIC, p 982 at [89].
In addition, and related, to R&D eligibility, this matter also concerns whether certain amounts should be included in GQHC’s assessable income as a “feedstock adjustment” pursuant to subdivision 355-H of the ITAA 1997.
PROCEEDING - SUMMARY
GQHC was represented by Mr D Marks KC and Ms C Nicholson of Counsel and the Commissioner was represented by Ms C Burnett SC and Mr E Chan of Counsel.
The Tribunal is very grateful to both parties for their detailed submissions and assistance throughout this matter.
Orders Sought
GQHC seek the following orders:[13]
(a)a declaration that the Tribunal does not have jurisdiction in the Proceeding to determine the eligibility of the R&D activities for the purpose of Division 355 of the ITAA 1997;
(b)the Commissioner’s objection decision be set aside and substituted with an order that the amount of assessable income included in GQHC’s assessments pursuant to section 355-465(2) of the ITAA 1997 is nil, with the consequential reduction of GQHC’s taxable income;
(c)the matter be remitted to the Commissioner to:
(i)make consequential changes to the assessment of GQHC’s assessment including GQHC’s entitlement to a tax offset; and
(ii)make consequential changes to GQHC’s assessment to increase any carried forward tax offsets in subsequent years.
[13] Exhibit 1, Tribunal Book, Tab 5, Applicant’s Statement of Facts, Issues and Contentions dated 13 December 2019 (Applicant’s First SFIC), p 984 at [98].
The Commissioner contends that GQHC have failed to discharge their burden of proving that the assessment is excessive, and the objection decisions should be affirmed.[14]
[14] Exhibit 1, Tribunal Book, Tab 5, Respondent’s Amended Statement of Facts, Issues and Contentions dated 8 June 2021 (Respondent’s Amended SFIC), p 995 at [8].
Witnesses
GQHC relied on the following witnesses:
APPLICANT’S WITNESSES STATEMENT DATE/S LAY/EXPERT RELEVANCE Mr BMr B[15]13.12.2019; 11.11.2020 Lay Mr B was the CEO of the Group during the Relevant Year. He retired in March 2023 and is currently a non-executive director.[16] Mr B was responsible for authorising R&D expenditure in the Group. Mr A[17] 13.12.2019; 14.02.2020; 11.09.2020; 02.07.2021; 13.08.2021;
30.09.2021Lay During the Relevant Year Mr A was the Development Manager of the Group. Mr A is responsible for overseeing all R&D activities within the Group.[18] Dr E[19] 14.02.2020; 04.02.2020 Lay and expert Dr E is a veterinary consultant, currently consulting to the Group. Associate Professor Peter Groves[20] 02.07.2021; 13.08.2021 Expert Associate Professor Groves is a veterinarian. He has a PhD in an epidemiologically based project on a poultry disease. Associate Professor Dragana Stanley[21] 13.12.2019 Expert Dr Dragana Stanley is an Associate Professor at Central Queensland University with a PhD in Microbiology/Molecular Biology and a Bachelor of Engineering (Pharmaceutical Engineering).[22] Ms D[23] 13.12.2019; 07.02.2020;
03.10.2021;
03.10.2021Expert Ms D is a poultry nutritionist and had some involvement in GQHC’s R&D activities. Ms D addresses chicken digestion which is relevant to the feedstock adjustment issue. COMMISSIONER’S WITNESSES
STATEMENT DATE/S
EXPERT
RELEVANCE
Professor Colin Scanes[24] 16.12.20 Expert Professor Scanes was Professor of Biological Science at the University of Wisconsin in Milwaukee.[25] Presently, he is an Affiliate Professor at the University of Arkansas and co-author of the textbook, Poultry Science. Professor Scanes has been an academic in the field of animal science since the early seventies. Dr Isabelle Ruhnke[26] 17.12.20; 12.08.21 Expert Dr Ruhnke is a Senior Lecturer at the University of New England. Her PhD focussed on evaluating the impact of feed technologies and feed particle size on broiler chickens and laying hens. [15] First Mr B Statement, pp 1022-1030; Second Mr B Statement, pp 1505-1511.
[16] Transcript of Proceedings, p 243 at [47].
[17] First Mr A Statement, pp 2672-2685; Exhibit 1, Tribunal Book, Tab 13, Supplementary Witness Statement of Mr A affirmed on 14 February 2020, pp 2914-2934 (Second Mr A Statement); Exhibit 1, Tribunal Book, Tab 14, Supplementary Witness Statement of Mr A affirmed on 11 September 2020, pp 3383-3393 (Third Mr A Statement); Exhibit 1, Tribunal Book, Tab 15, Supplementary Witness Statement of Mr A affirmed on 2 July 2021, pp 4000-4011 (Fourth Mr A Statement); Exhibit 1, Tribunal Book, Tab 16, Supplementary Witness Statement of Mr A affirmed on 13 August 2021, pp 4711-4726 (Fifth Mr A Statement); Exhibit 3, Sixth Supplementary Witness Statement of Mr A affirmed on 30 September 2021 (Sixth Mr A Statement).
[18] Transcript of Proceedings, p 49 at [13]-[21].
[19] Exhibit 1, Tribunal Book, Tab 17, Witness Statement of Dr E dated 14 February 2020, pp 4825-4839 (Dr E Witness Statement); Exhibit 1, Tribunal Book, Tab 18, Expert Report of Dr E dated 4 February 2020, pp 4980-5012 (Dr E Expert Report).
[20] Exhibit 1, Tribunal Book, Tab 22, Expert Report of Dr Peter Groves dated 2 July 2021, pp 5321-5389 (Groves Expert Report); Exhibit 1, Tribunal Book, Tab 23, Supplementary Report of Dr Peter Groves dated 13 August 2021, pp 5390-5410 (Groves Supplementary Expert Report).
[21] Exhibit 1, Tribunal Book, Tab 19, Expert Report of Dr Dragana Stanley dated 13 December 2019, pp 5214-5270 (Stanley Expert Report).
[22] Dr Stanley Report, pp 5253-5255.
[23] Exhibit 1, Tribunal Book, Tab 20, Expert Report of Ms D dated 13 December 2019, pp 5271-5303; Exhibit 1, Tribunal Book, Tab 21, Supplementary Expert Report of Ms D dated 7 February 2020, pp 5304-5320; Exhibit 2, Updated Expert Report (Ms D Expert Report) and Supplementary Report of Ms E (Supplementary Ms D Expert Report), both dated 3 October 2021 (originally dated 13 December 2019 and 7 February 2020 respectively), along with covering email.
[24] Exhibit 1, Tribunal Book, Tab 24, Expert Report of Colin Scanes dated 16 December 2020, pp 5411-5493 (Scanes Expert Report).
[25] Professor Scanes was Professor of Biological Science at the University of Wisconsin during the Relevant Year: Transcript of Proceedings, p 39.
[26] Exhibit 1, Tribunal Book, Tab 25, Expert Report of Dr Isabelle Ruhnke dated 17 December 2020, pp 5494-5589 (Ruhnke Expert Report); Exhibit 1, Tribunal Book, Tab 26, Supplementary Report of Dr Isabelle Ruhnke dated 12 August 2021, pp 5590-5630 (Supplementary Ruhnke Report).
Other than Ms Dy and Associate Professor Stanley, the witnesses appeared at the hearing either in person or via video-link and were cross-examined.
Late Request for Leave to Adduce New Evidence
On day three of the hearing GQHC sought leave to introduce additional/new evidence of one of its expert witnesses, Ms D. GQHC contended the need for an additional statement from Ms D arose out of the evidence given by Mr A during cross-examination.
Mr A’s evidence concerned one aspect of the R&D activities originally under consideration concerning the development of novel methods to improve broiler performance and yield. The relevant R&D application claimed that the Group would develop and test the use of the wholegrain sorghum feed, as opposed to using a wholegrain wheat feed.
For reasons that need not be detailed here, GQHC had some concerns regarding Mr A’s evidence in relation to the feed trials and whether they occurred in the years originally under examination. GQHC said Ms D would address that issue in a new statement.
The Commissioner opposed the leave application.
The Tribunal decided not to grant leave for the following reasons based on considerations of procedural fairness, delay, and costs.
The introduction of this new evidence would have resulted in the hearing being adjourned and recommenced at some later date. To proceed without an adjournment would have resulted in forensic prejudice (see ASIC v Rich [2005] NSWSC 706 at [60], [69]-[70]).[27] The Commissioner would have needed to consider engaging a new expert and may have needed to obtain additional statements. This in turn would have inevitably resulted in GQHC also wishing to provide further statements.
[27] See also Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175.
Any adjournment at that stage of the hearing, given the number of parties, witnesses and legal representatives involved, would have resulted in a significant delay and would have been contrary to the Tribunal’s statutory objectives. One of the statutory objectives of the Tribunal is to act quickly: section 2A, Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act). Section 33 of the AAT Act also provides that Tribunal proceedings should be conducted as expeditiously as permitted. This matter has been listed for hearing twice before. Given the parties’, legal representatives’, and Tribunal’s availability, it took more than 12 months to have the matter relisted.
GQHC submitted that the evidence had taken them by surprise. The Tribunal did not accept that GQHC had been deprived of an opportunity to present additional material on this issue. The Commissioner had, from at least September 2021, when the Commissioner served its Outline of Opening Submissions, put GQHC on notice that the evidence indicated that sorghum trials may not have occurred.[28] GQHC had more than 12 months to put on additional evidence to address this issue if concerned its filed evidence was insufficient. Further, Ms D had already provided updated statements after the date of the Commissioner’s Outline of Opening Submissions and could have addressed the issue in one of those updated statements.
[28] Respondent’s Outline of Opening Submissions dated 20 September 2021 (Respondent’s Outline of Opening Submissions), p 44 at [136], which referred GQHC to the Scanes Report.
The application to file additional evidence was made in the middle of Mr A’s cross-examination, but the cross-examination on the issue concerning wholegrain feed trials had finished. The Tribunal noted that the Applicants’ Kings Counsel would have the opportunity to re-examine Mr A if there were aspects of his evidence that required clarification.
In relation to financial prejudice, the costs being incurred in this matter were significant. Each party had senior and junior counsel, in addition to teams of solicitors and party representatives. There were 12 people present in this hearing. There were a further 6 or more watching the proceeding via video link. To rearrange further hearing dates to accommodate everyone was likely to result in another year long delay. That is unacceptable. Further, unlike in a Court hearing where late applications can be to some extent compensated by costs orders, this is a no costs jurisdiction. The Tribunal was mindful that it was not only the Commissioner’s costs which would have been thrown away but also GQHC’s costs.
The entirety of GQHC’s case did not turn solely on findings regarding this one activity.
In the circumstances, the Tribunal determined that the consequences of granting leave were out of proportion to any benefit that would be gained from allowing evidence to be introduced in the middle of the hearing.
ISSUES FOR THE TRIBUNAL
The issues for determination by the Tribunal are set out below.
It is common ground that to succeed, GQHC must be successful on the feedstock adjustment issue and on either the jurisdiction or eligibility issue.[29]
[29] Respondent’s Outline of Opening Submissions, p 4 at [4]; Transcript of Proceedings, pp 28-29.
Jurisdiction
The jurisdiction issues are:
(a)whether the Commissioner has the power to assess or make decisions as to whether GQHC’s registered activities consisted of eligible R&D activities as defined in Division 355 of the ITAA 1997; and, therefore,
(b)whether the Tribunal has jurisdiction in the Proceeding to assess or make decisions as to whether GQHC’s registered activities consisted of eligible "R&D activities" as defined in Division 355 of the ITAA 1997.
R&D Activities - Eligibility
The issues are whether the claimed R&D activities meet the conditions for eligible core R&D activities or eligible supporting R&D activities pursuant to Division 355 of the ITAA 1997.
This will involve a consideration of whether:
(a)any of the claimed activities:
(i)are an activity listed in section 355-25(2) of the ITAA 1997;
(ii)are an experimental activity:
1. whose outcome could not be known or determined in advance on the basis of current knowledge, information or experience but could only be determined by applying a systematic progression of work based on principles of established science that proceeded from hypothesis to experiment, observation and evaluation, and led to logical conclusions as required by section 355-25(1)(a) of the ITAA 1997;
2. which was conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes, or services) as required by section 355-25(1)(b) of the ITAA 1997; and
(b)any of the claimed supporting activities are supporting R&D activities which were:
(i)directly related to an eligible core R&D activity; and
(ii)to the extent that the activity produced, or was directly related to producing, goods or services, or is an activity listed in section 355-25(2), undertaken for the dominant purpose of supporting core R&D activities.
Feedstock Adjustment
The issue is whether amounts should be included as assessable income of GQHC pursuant to section 355-465(2) in subdivision 355-H of the ITAA 1997.
Are the income tax assessments for the Relevant Year excessive, and should they be amended by reducing the taxable income of GQHC by the amount included as assessable income pursuant to subdivision 355-H of the ITAA 1997 (or, alternatively, part thereof)?
This involves consideration of the issues below.
Poultry Feed
Whether expenditure incurred on poultry feed fed to chickens during R&D activities is not expenditure on “feedstock inputs” in accordance with section 355-465(1) of the ITAA 1997.
Whether expenditure incurred on poultry feed fed to chickens is expenditure to which section 355-465(2) of the ITAA 1997 applies.
If expenditure incurred on poultry feed fed to chickens is expenditure to which section 355-465(2) of the ITAA 1997 applies, to what extent is that expenditure reasonably attributable to the production of a feedstock output.
Whether the poultry feed or some part/s or proportion of it is an energy input directly into the transformation or processing of the chickens (noting GQHC deny that the chickens were transformed or processed), for the purposes of section 355-465(1)(b)(ii) of the ITAA 1997, and if so, what part/s or proportion was a direct energy input.
Chickens
Whether expenditure incurred acquiring the chickens during R&D activities is not expenditure on “feedstock inputs” in accordance with section 355-465(1) of the ITAA 1997.
Whether expenditure incurred acquiring the chickens is expenditure to which section 355-465(2) of the ITAA 1997 applies.
Scope of Subdivision 355-H
Whether subdivision 355-H of the ITAA 1997 applies to the farming activities of growing and raising livestock and crops.
LEGISLATIVE BACKGROUND
IR & D Act
The object of the IR & D Act, as stated in section 3 is:
… to position Australia as a leading innovation nation by:
(a) facilitating the provision of independent strategic advice about investment in industry, innovation, science, and research; and
(b) supporting and encouraging collaboration in the development and delivery of programs relating to industry, innovation, science, and research; and
(c) authorising spending on programs relating to industry, innovation, science, and research; and
(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.
Pursuant to the IR & D Act, entities can register R&D activities with the Board. If those R&D activities are eligible, a tax offset may be claimed.
The Board:
(a)administers the registration of entities and their R&D activities; and,
(b)assesses registered entities’ eligibility to claim an R&D tax offset under Division 355 of the ITAA 1997 for the activities.
Pursuant to section 27A of the IR & D Act, an entity may apply to be registered for a particular financial year for “core R&D activities” and “supporting R&D activities”. The Board must make a decision, on such an application, whether to register or refuse to register the activity/ies: section 27A(1), IR & D Act. An application must be in the approved form (section 27D).
Section 4 of the IR & D Act provides the terms “core R&D activities” and “supporting R&D activities” have the same meaning as in the ITAA 1997 (see paragraph 83 below).
Board Findings
Section 27B of the IR & D Act is concerned with findings about whether activities described in an R&D entity’s applications were core or supporting R&D activities.
Section 27J of the IR & D Act is concerned with findings about whether a registered activity was a core or supporting R&D activity. Findings made under section 27J(1) are “reviewable decisions” (section 30A).
Section 28E of the IR & D Act is concerned with findings about whether technology is “core technology”.
Section 27B sets out findings the Board “may make” when considering an application under section 27A. There is no obligation on the Board to make findings. This is reflected in section 27C which specifically notes that the Board only needs to inform applicants of findings if it made any.
Sections 27B, 27C and 28E provide:
Section 27B Findings about applications for registration
(1) The Board may make one or more findings to the following effect when considering an R&D entity's application for the purposes of subsection 27A(1):
(a) that all or part of an activity mentioned in the application was a core R&D activity conducted during the income year;
(b) that all or part of an activity mentioned in the application was not an activity of a kind covered by paragraph (a);
(c) that all or part of an activity mentioned in the application was a supporting R&D activity conducted:
(i) during the income year; and
(ii) in relation to one or more specified core R&D activities for which the entity has been or could be registered under section 27A for an income year;
(d) that all or part of an activity mentioned in the application was not an activity of a kind covered by paragraph (c).
Note 1: A finding is reviewable (see Division 5).
Note 2: The Board could make a finding under paragraph (b) if, for example, the Board has insufficient information to make a finding under paragraph (a). Similarly, the Board could make a finding under paragraph (d) if it has insufficient information to make a finding under paragraph (c).
Note 3: The Board may also make findings after registration (see subsection 27J(1)).
(2) If the Board makes a finding under subsection (1) in relation to the R&D entity's application, the Board may specify in the finding the times to which the finding relates.
Example: A finding under paragraph (1)(a) could specify the times during the income year that an activity was a core R&D activity.
(3) This section has effect subject to section 32B (findings cannot be inconsistent with any earlier findings).
Section 27C Notice of decision about registration
(1) The Board must notify an applicant in writing of the Board's decision under subsection 27A(1) about the application.
(2) The notice must include a certificate for each finding (if any) made under subsection 27B(1) for the application. The certificate must set out:
(a) a description of the finding; and
(b) the Board's reasons for the finding; and
(c) the activity affected by the finding; and
(d) the matters (if any) specified in regulations made for the purposes of this paragraph.
The notice and certificate may set out other matters.
Note: The notice could also mention the applicant’s right to have the finding reviewed under Division 5 (see section 30B).
(3) The Board must give the Commissioner a copy of the notice if the notice includes one or more certificates.
(4) A failure to comply with this section does not affect the validity of the decision or finding.
28E Findings about whether technology is core technology
(1) If an R&D entity has acquired, or has acquired the right to use, particular technology wholly or partly for the purposes of one or more R&D activities conducted, or to be conducted, during one or more income years, the Board may:
(a) find that the technology is core technology for the R&D activities; or
(b) find that the technology is not core technology for the R&D activities; or
(c) if justified in accordance with the decision making principles—refuse to make a finding about the technology and the R&D activities.
Note 1: A finding, or a refusal to make a finding, is reviewable (see Division 5).
Note 2: A finding under paragraph (a) means that a tax offset will not be available for expenditure incurred in acquiring, or in acquiring the right to use, the technology for the R&D activities (see subsection 355 225(2) of the Income Tax Assessment Act 1997).
Note 3: Section 32A deals with the decision making principles.
(2) Particular technology is core technology for one or more R&D activities if:
(a) a purpose of the R&D activities was or is:
(i) to obtain new knowledge based on that technology; or
(ii) to create new or improved materials, products, devices, processes, techniques or services to be based on that technology; or
(b) the R&D activities were or are an extension, continuation, development or completion of the activities that produced that technology.
(3) The Board must make a finding under paragraph (1)(a) or (b) if requested by the Commissioner to make a finding under this section.
(4) In addition to subsection (3), the Board:
(a) may make a finding under subsection (1) on its own initiative; and
(b) must make a decision under subsection (1) if the R&D entity applies for a finding under this section.
Note: For requirements of applications, see section 28G.
(5) This section has effect subject to section 32B (findings cannot be inconsistent with any earlier findings).
(emphasis added)
The Board may request further information from an R&D entity applicant (section 27E).
The Board may examine an R&D entity’s registration on its own initiative (section 27F(2)) and may then make one or more of the following findings under section 27J(1):
(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);
(d) that all or part of a registered activity was not an activity of a kind covered by paragraph (c).
An applicant can apply for the Board to make section 27J findings (section 27G).
The Board’s section 27J findings are then communicated to the R&D entity (section 27K).
When is the Commissioner Bound?
Section 27J findings are binding on the Commissioner of Taxation (see section 355-705, ITAA 1997) for the purposes of the ITAA 1997.
Section 355-705 provides relevantly:
(1) If:
(a) a certificate given to the Commissioner under the Industry Research and Development Act 1986 sets out:
(i) a finding under section 27B of that Act about an *R&D entity's application for registration under section 27A of that Act for an income year; or
(ii) a finding under section 27J of that Act about an R&D entity's registration under section 27A of that Act for an income year; or
(iii) a finding under section 28E of that Act about an R&D entity and one or more *R&D activities conducted or to be conducted during one or more income years; and
(b) the finding was made within 4 years after the end of the income year or the last of the income years (as appropriate);
the finding binds the Commissioner for the purposes of assessments of the R&D entity for the income year or years (as appropriate).
Note: Section 28E of the Industry Research and Development Act 1986 deals with findings that technology is core technology for particular R&D activities. Expenditure incurred in acquiring such technology is not deductible under this Division (see subsection 355-225(2)).
(emphasis added)
Pursuant to section 355-705, the Commissioner is bound to follow “findings” made under specified sections of the IR & D Act, namely sections 27B, 27J and 28E.
Section 355-710 deals with the amendment of assessments where a certificate containing findings has been given. In those circumstances the Commissioner is not constrained by the time limits provided for in section 170 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).[30] Section 355-710 provides:
[30] The Commissioner’s ability to amend an assessment is generally limited by the time periods specified in s 170 of the Income Tax Assessment Act 1936 (Cth).
Dealing with findings of Industry Innovation and Science Australia
(1) If:
(a) a certificate given to the Commissioner under the Industry Research and Development Act 1986 sets out:
(i) a finding under section 27B of that Act about an *R&D entity's application for registration under section 27A of that Act for an income year; or
(ii) a finding under section 27J of that Act about an R&D entity's registration under section 27A of that Act for an income year; or
(iii) a finding under section 28A or 28C of that Act made on application by an R&D entity during an income year; or
(iv) a finding under section 28E of that Act about an R&D entity and one or more R&D activities conducted or to be conducted during one or more income years; and
(b) the finding was made within 4 years after the end of the income year or the last of the income years (as appropriate);
despite section 170 of the Income Tax Assessment Act 1936, the Commissioner may amend the R&D entity's assessment for an income year affected by the finding at any time for the purposes of giving effect to the finding.
(2) However, the Commissioner may only do so within 2 years after the Commissioner is given the certificate if giving effect to the finding would increase the R&D entity's liability.
Review of Decisions
The Commissioner may apply for an internal review of a “reviewable decision”: sections 30C and 30D, IR & D Act.
A “reviewable decision” is defined in section 30A and includes:
(a)decisions registering or refusing to register an entity for activities: section 27A(1);
(b)findings made when considering an application for registration of activities: section 27B(1);
(c)findings made about a registration of activities: section 27J(1); and
(d)finding, or refusing to make a finding, about particular technology: section 28E(1).
An entity may request an internal review of a reviewable decision (section 30C(1)), following which an entity may apply for a review to the Administrative Appeals Tribunal (section 30E).
ITAA 1997
Provisions concerning R&D are set out in Division 355 of the ITAA 1997.
Section 355-5 sets out the object of the Division 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).
(emphasis added)
Section 355-1 provides that an “R&D entity” may be entitled to a tax offset for “R&D activities”.
An “R&D entity” includes a body corporate incorporated under Australian law (section 355-35).
“R&D activities” are “core R&D activities” or “supporting R&D activities” (section 355-20).
What is a “Core R&D Activity” and “Supporting R&D Activity”?
“Core R&D activities” and “supporting R&D activities” are defined in the ITAA 1997 as follows:
Section 355-25 - Core R&D Activities
(1) Core R&D activities are experimental activities:
(a) whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
(i) is based on principles of established science; and
(ii) proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
(b) that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).
(emphasis added)
Section 355-30 - Supporting R&D Activities
(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.
The key elements which must be satisfied under section 355-25 are:
(a)The activities in question must be experimental activities;
(b)The outcome of the activity in question cannot be known or determined in advance;
(c)The outcome of the activity in question can only be determined by a systematic progression of work;
(d)That progression of work must be:
(i)based on principles of established science; and
(ii)proceed from hypothesis to experiment, observation, and evaluation, and leads to logical conclusions; and
(e)the work must be conducted for the purpose of generating new knowledge.
What are “Experimental Activities”?
The Full Court in Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120; (2019) 271 FCR 211 (Moreton Resources) determined (at [148]):
(a)the words “experimental activities” in the opening line of section 355-25(1) of the ITAA 1997 are merely activities that meet the descriptions in subparagraphs (a) and (b);
(b)activities must meet the descriptions in both subparagraphs to satisfy the defined expression “core R&D activities”;
(c)given the detail and content of the description in subparagraphs (a) and (b), it is difficult to envisage activities that would meet the description in subparagraphs (a) and (b) but would not be considered “experimental activities”;
(d)the word “experimental” in the opening line of the subsection is at least, descriptive of the types of activities that are described in subparagraphs (a) and (b) of section 355-25(1).
What is a “Hypothesis”?
The word “hypothesis” contained in section 355-25 should be given its ordinary meaning in light of its context and purpose.[31] Its context is within “principles of established science”: section 355-25(1)(a)(i).
[31] Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28;(1998) 194 CLR 355, 381 at [69]; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue[2009] HCA 41; (2009) 239 CLR 27, 31 at [4], 46-47 at [47]; Federal Commissioner of Taxation v Consolidated Media Holdings Ltd[2012] HCA 55; (2012) 250 CLR 503, 519 at [39]; SZTAL v Minister for Immigration and Border Protection[2017] HCA 34; (2017) 262 CLR 362, 368 at [14].
This issue is discussed further at paragraphs 257-285 below.
Outcome Cannot be Known or Determined in Advance
Whether an outcome can only be determined through the application of systematic progression of work based on scientific principles is an objective determination from the perspective of a competent professional in the field. The Explanatory Memorandum on the Tax Laws Amendment (Research and Development) Bill 2010 (Cth) (Explanatory Memorandum) explains that:[32]
2.13 The requirement for the scientific method establishes a threshold for the knowledge gap and the degree of uncertainty that an eligible experiment must seek to address. The threshold will not be met if the knowledge of whether something is scientifically or technologically possible, or how to achieve it in practice, is deducible by a competent professional in the field on the basis of current knowledge, information, or experience.
(emphasis added)
[32] See Explanatory Memorandum, Tax Laws Amendment (Research and Development) Bill 2010 (Cth) (Explanatory Memorandum), pp 21-22 at [2.13]-[2.15].
This issue is discussed further at paragraphs 291-294 below.
R&D Expenditure
Notional Deductions
An R&D entity can notionally deduct its expenditure on registered R&D activities for which certain conditions are met: section 355-200, ITAA 1997.
Section 355-205 sets out when notional deductions for R&D expenditure arise:
When notional deductions for R&D expenditure arise
(1) An *R&D entity can deduct for an income year (the present year) expenditure it incurs during that year to the extent that the expenditure:
(a) is incurred on one or more *R&D activities:
(i) for which the R&D entity is registered under section 27A of the Industry Research and Development Act 1986 for an income year; and
(ii) that are activities to which section 355-210 (conditions for R&D activities) applies; and
(b) if the expenditure is incurred to the R&D entity's *associate--is paid to that associate during the present year.
Note 1: If the matters in subparagraphs (a)(i) and (ii) are not satisfied until a later income year, the R&D entity will need to wait until then before it can deduct the expenditure for the present year.
Note 2: The R&D activities will need to be conducted during the income year the R&D entity is registered for those activities (see sections 27A and 27J of the Industry Research and Development Act 1986 ).
Note 3: The entity may also be able to deduct expenditure incurred to an associate in an earlier income year (see section 355-480).
Note 4: Expenditure incurred in income years starting on or after 1 July 2011 may be deductible for activities registered for income years starting before 1 July 2011 (see section 355-200 of the Income Tax (Transitional Provisions) Act 1997).
(2) This section has effect subject to section 355-225 (excluded expenditure), Subdivision 355-F (integrity rules) and subsection 355-580(3) (CRC contributions).
Entitlement to Tax Offset (Subdivision 355-C)
With exceptions which are not relevant here, an R&D entity is entitled to a tax offset for an income year equal to the percentage, set out in the table within the ITAA 1997, of the total of the amounts (if any) that the entity can deduct for the income year for section 355-205 (R&D expenditure): section 355-100, ITAA 1997. Where an R&D entity has an aggregated turnover of more than $20,000,000, as is the case here, the relevant percentage is 40%.
The deductions in this subdivision are notional only: section 355-100, ITAA 1997.
Registered activities must be registered for a specific income for the notional deduction to be claimed for that year.
Catch Up Deductions for Balancing Adjustment Events for Assets Used for R&D Activities (Subdivision 355-H)
Subdivision 355-H of the ITAA 1997 reduces the concessional effect of allowing a tax offset for expenditure on registered R&D activities, where these activities involve the production of one or more tangible products.
Section 355-465(1) provided as follows at the relevant time:
This section applies to an R&D entity for an income year (the present year) if:
(a) it incurs expenditure in one or more income years in acquiring or producing goods or materials, (the feedstock inputs) transformed or processed during R&D activities in producing one or more tangible products (the feedstock outputs); and
(b) it obtains under section 355-100 tax offsets for one or more income years for deductions under this Division:
(i) for the expenditure, or
(ii) for expenditure it incurs on any energy input directly into the transformation or processing,
(iii) for the decline in value of assets used in acquiring or producing the feedstock inputs, and
(c) during the present year a feedstock output or a transformed feedstock output (the marketable product) is:
(i) supplied by the R&D entity to another entity, or
(ii) applied by the R&D entity to the R&D entity's own use, other than use for the purpose of transforming that production for supply.
The Australian Taxation Office has prepared a taxation ruling to provide guidance on the application of section 355-465 in relation to feedstock adjustments, Taxation Ruling TR 2013/3: Income tax research and development tax offset: feedstock adjustments (TR 2013/3). TR 2013/3 provides relevantly as follows:
Division 355
4. Generally Division 355 allows an R&D entity that has engaged in registered R&D activities to claim either:
• a refundable tax offset calculated as 45% of the notional deductions it is entitled to under the Division, where its aggregated turnover is less than $20 million (and it is not controlled by one or more exempt entities); or
• a non-refundable tax offset calculated as 40% of its notional deductions (see generally section 355-100).
Subdivision 355-H
5. Subdivision 355-H reduces the concessional effect of allowing a tax offset for expenditure on registered R&D activities, where these activities involve the production of one or more tangible products. Subdivision 355-H applies to all activities for which the three conditions for a feedstock adjustment outlined in paragraphs 9 and 121 of this Ruling are met, including where only one tangible product is produced. The key effect of the Subdivision is to include an amount in the assessable income of the R&D entity conducting these activities (as calculated under subsection 355-465(2)). This is the ' feedstock adjustment' to which the heading of Subdivision 355-H refers.
…
18. … the first condition does not apply to expenditure on the transformation or processing activities themselves. This limitation is consistent with the fact that where section 355-465 intends to bring such expenditure into the calculation of a feedstock adjustment it does so expressly; and then only where it is incurred on energy input directly into transformation or processing; see subparagraph 355-465(1)(b)(ii). This limitation also applies to expenditure on goods and materials which are merely acquired or created to subject other goods and materials to transformation or processing during R&D activities. Such items represent a cost of the process of transforming or processing other goods or materials, rather than something to be transformed or processed in their own right.
…
173. The text of subsection 355-465(1) indicates that other types of expenditure incurred in the conduct of such transformation or processing (that is, what might be called the 'cost of conducting the actual R&D activities', as distinct from the expenditure on acquiring or producing the inputs to those activities), are not intended to come within the first and second conditions. An example of such expenditure is an amount expended on employees of the R&D entity engaged in carrying out the transformation or processing in question.
(citations removed)
Feedstock Adjustment - Subdivision 355-G–Clawback of R&D Recoupments Feedstock Adjustments and Balancing Adjustments
Pursuant to section 355-445 of the ITAA 1997, an adjustment known as a “feedstock adjustment” must be made to an R&D entity's assessable income in certain circumstances. Section 355-445 sets out when this provision applies as follows:
(1) This section applies to an *R&D entity for an income year (the present year) if:
(a) it incurs expenditure in one or more income years in acquiring or producing goods, or materials, (the feedstock inputs) transformed or processed during *R&D activities in producing one or more tangible products (the feedstock outputs); and
(b) it obtains under section 355-100 *tax offsets for one or more income years for deductions under this Division:
(i) for the expenditure; or
(ii) for expenditure it incurs on any energy input directly into the transformation or processing; or
(iii) for the decline in value of assets used in acquiring or producing the feedstock inputs; and
(c) during the present year, a feedstock output, or a transformed feedstock output, (the marketable product) is:
(i) supplied by the R&D entity to another entity; or
(ii) applied by the R&D entity to the R&D entity’s own use, other than use for the purpose of transforming that product for supply.
(2) The *R&D entity’s assessable income for the present year includes an amount equal to 1/3 of the lesser of:
(a) the *feedstock revenue for the feedstock output; and
(b) so much of the total of the amounts deducted as described in paragraph (1)(b) that is reasonably attributable to the production of the feedstock output.
Note: This subsection applies separately for each of the feedstock outputs.
(3) Subsection (2) does not apply to the feedstock output if:
(a) it becomes, or is transformed into, a feedstock input; or
(b) that subsection already applies to the feedstock output because of the application of paragraph (1)(c) to:
(i) an earlier time during the present year; or
(ii) an earlier income year.
Assessments
Power to Issue Assessments
Section 166 of the ITAA 1936 provides the Commissioner must make an assessment of the taxable income of a taxpayer based on the ITRs and any other information in his possession.
“Assessment” is defined in section 6 of the ITAA 1936 as:
(a) the ascertainment:
(i) of the amount of taxable income (or that there is no taxable income); and
(ii) of the tax payable on that taxable income (or that no tax is payable); and
(iii) of the total of a taxpayer's tax offset refunds for a year of income (or that the taxpayer can get no such refunds for the year of income)
Under section 167 of the ITAA 1936, the Commissioner has the power to make default assessments of the amount upon which in his judgment income tax ought to be levied which will be taken to be the taxable income of that person for the purpose of section 166 of the ITAA 1936, if:
(a) any person makes default in furnishing a return; or
(b) the Commissioner is not satisfied with the return furnished by any person; or
(c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income.
Amended assessments are taken to be “assessments” for the purposes of the ITAA 1936: section 173, ITAA 1936.
Deemed Assessments
Pursuant to section 166A(1) of the ITAA 1936, an assessment is deemed to have been made in the following circumstance:
(1) Where a taxpayer that is a relevant entity within the meaning of former Division 1B of Part VI furnishes a return in respect of income of a year of income to which that Division applied:
(a) the Commissioner is taken to have made, on the day on which the return is furnished, an assessment of the relevant taxable income or net income, as the case may be, and of the tax payable on that taxable income or net income, being those respective amounts as specified in the return; and
(b) on and after the day on which the Commissioner is deemed to have made the assessment, the return is deemed to be a notice of the deemed assessment and to be under the hand of the Commissioner; and
(c) the notice referred to in paragraph (b) is deemed to have been served on the entity on the day on which the Commissioner is deemed to have made the assessment.
Objections to Assessments
Section 175A of the ITAA 1936 sets out when a taxpayer can object to an assessment. It provides:
(1) A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953.
(2) A taxpayer cannot object under subsection (1) against an assessment ascertaining that:
(a) the taxpayer has no taxable income; or
(b) the taxpayer has an amount of taxable income and no tax is payable.
(3) Subsection (2) does not prevent the taxpayer from objecting against an assessment if the taxpayer is seeking an increase in:
(a) the taxpayer's liability; or
(b) the total of the taxpayer's tax offset refunds.
Burden of Proof
Section 14ZZK(b)(i) of the TAA provides that GQHC has the burden of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been. The reason for this, as explained by Logan J in Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971 at [115], is that “the Commissioner, unlike a participant, is a stranger to transactions forming the taxable facts”.
In Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63, Latham CJ found (at 88 [2]), as a general rule:
…the taxpayer must… show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right.
GQHC’S R&D APPLICATION/REGISTRATION PROCESS
Registered Activities - Overview
GQHC have purportedly been engaged in various R&D activities over a number of years. The financial year under consideration is the 2013 Year. For the reasons outlined earlier the 2012 year is also referred to in this decision.[33]
[33] The Full Federal Court clarified in Coal of Queensland Pty Ltd v Innovation and Science Australia [2021] FCAFC 54 (at [131]) that whether the overall purpose of the activities should, or more importantly can, be taken into account in assessing whether registered activities in the relevant financial years are R&D activities, regard is not to be had to the whole project for the purpose of section 27J of the IR & D Act, and activities which occur outside the years under consideration are relevant only if they shed light on the matters under consideration.
During the Relevant Year, the relevant registered R&D projects and activities are (Registered Activities):
(a)2009-07: Novel improvements to poultry incubation and hatchery processes (Incubation/Hatchery Project);
(b)2010-04: New water treatment processes to improve drinking water quality (Water Quality Project);
(c)2011-02: Techniques to improve laying shed cleaning efficiency (Shed Cleaning Project);
(d)2011-04: Development of novel methods to improve broiler performance and yield (Broiler Improvement Project).
The following tables (prepared by GQHC) set out which entity is said to have engaged in which activity in which year for each project under consideration.[34] GQHC also indicated the amounts of feedstock expenditure when relevant:
[34] This information is not in dispute: Respondent’s Amended SFIC, pp 997 at [25] and [28], and 1011-1013.
GQHC’s ITRs for the Relevant Year included the amounts contained in the R&D Tax Incentive Schedules, as set out in the Applicant’s second Statement of Facts, Issues and Contentions dated 11 September 2020.[35]
[35] At Appendix 1, p 990 of the Applicants’ Second SFIC.
The evidence of the quantum of project expenditure for GQHC is set out in the Applicant’s first Statement of Facts, Issues and Contentions dated 13 December 2019,[36] as adopted in the Applicant’s second Statement of Facts, Issues and Contentions.[37]
[36] At pp 977-978 of the Applicant’s First SFIC.
[37] At p 987 [8] of the Applicants’ Second SFIC.
Registration Process
GQHC registered its activities with the Board pursuant to sections 27A and 27D of the IR & D Act as “research and development activities” (R&D Applications).[38] The Registered Activities were made up of activities defined as “core activities” and “supporting activities” (refer to definitions set out in paragraph 83 above).
[38] GQHC registered its activities for the 2012, 2013 and 2014 financial years, YZQC registered its activities for the 2013 and 2014 financial years: First Mr B Statement, p 1028 at [42]; Exhibit 1, Tribunal Book, Tab 1, T9: Email correspondence from the GQHC to the Commissioner, together with attachments, pp 98-131; Second Mr B Statement, p 1508 at [22]; Exhibit 1, Tribunal Book, Tab 2, T19: Application for Registration of R&D Activities submitted by GQHC - year ended 30 June 2013, pp 362-389; Exhibit 1, Tribunal Book, Tab 2, T22: Application for Registration of R&D Activities submitted by GQHC - year ended 30 June 2014, pp 404-418.
Following requests for further information and the exchange of information between the Group and Board,[39] the claimed R&D activities were registered.
[39] Exhibit 1, Tribunal Book, Tab 2, T25: Response of Company A to AusIndustry's Request for Information in respect of year ended 30 June 2014, p 433; Exhibit 1, Tribunal Book, Tab 3, T9: Response of Company A to AusIndustry's Request for Information in relation to year ended 30 June 2014, p 692; Exhibit 1, Tribunal Book, Tab 4, ST1: Response of YZQC to AusIndustry request for information in respect of year ended 30 June 2013, p 836; Exhibit 1, Tribunal Book, Tab 4, ST2: Email from Ms Natalie Pluta to the Respondent, with the following attachments, pp 961-967.
On 27 February 2015, the Board informed the Group that no further activity was anticipated in relation to the 2012 year. The Board informed the Group that registration of the claimed activities did not equate to a determination those activities were eligible or complied with the R&D tax incentive requirements.[40]
[40] Letter from AusIndustry to the Group titled ‘R&D Tax Incentive Registration 2012/13’, 27 February 2015.
On 13 February 2017, the Board informed the Group that no further activity was anticipated in relation to the 2013 and 2014 years. The Board informed the Group registration of the claimed activities does not equate to a determination those activities are eligible or comply with the R&D Tax Incentive requirements.[41]
[41] Letter from AusIndustry to the Group titled ‘R&D Tax Incentive Registration 2013/14’, 13 February 2017.
The Board did not make any section 27B or 27J findings. No certificates of any findings were issued by the Board to the Commissioner pursuant to sections 27C and 27K of the IR & D Act.
COMMISSIONER’S REVIEW OF THE CLAIMED ACTIVITIES/INCOME TAX RETURNS
Income Tax Returns
On 11 January 2013, the Group lodged its ITR for the 2012 financial year.[42] GHQC then amended its 2012 ITR on 11 October 2013, accompanied by the R&D Tax Incentive Schedule (Amended 2012 ITR).[43] The reason for the amendment was to include the amounts contained in the R&D Tax Incentive Schedules, as set out in Appendix A.[44]
[42] Exhibit 1, Tribunal Book, Tab 1, T3: Original income tax return for the year ended 30 June 2012, pp 20-28.
[43] Exhibit 1, Tribunal Book, Tab 1, T4: Amended income tax return for the year ended 30 June 2012, pp 29-37.
[44] Applicant’s First SFIC, p 978 at [65].
On 23 April 2013, the Group also lodged its Scheduled Research and Development Form for the 2012 year with the Board.[45]
[45] Exhibit 1, Tribunal Book, Tab 1, T5: Research and Development tax incentive schedule for the year ended 30 June 2012, pp 38-40.
On 28 April 2014, the Group lodged its ITR for the 2013 financial year accompanied by the R&D Tax Incentive Schedule.[46]
[46] Exhibit 1, Tribunal Book, Tab 2, T20: GQHC's Income Tax Return for year ended 30 June 2013, pp 390-400; Exhibit 1, Tribunal Book, Tab 2, T21: GQHC's Income Tax Research and Development (R&D) Schedule for year ended 30 June 2013, pp 401-403.
Expenditure on Feedstock Inputs Attributable to Feedstock Output
The following table summarises the components of each of the amounts for “Expenditure on feedstock inputs attributable to feedstock output” reported by GQHC by reference to the purported R&D activities:[47]
[47] Respondent’s Amended SFIC, p 1003 at [39].
The following table summarises the components of each of the amounts for “Expenditure on feedstock inputs attributable to feedstock output” reported by GQHC by reference to the breakdown between expenditure on poultry feed and expenditure on chick acquisition:[48]
[48] Respondent’s Amended SFIC, p 1003 at [40].
Notices of Assessment
On 23 October 2013, the Commissioner issued a notice of amended assessment for the 2012 year to reflect the amendments made in the Amended 2012 ITR and increased the taxable income from nil to $4,169,650 (2012 NOA).[49]
[49] Exhibit 1, Tribunal Book, Tab 1, T5A: Notice of amended assessment – year ended 30 June 2012, pp 41-42.
For the 2013 and 2014 years, GQHC’s deemed assessments were taken to have been made on the dates the ITRs were filed pursuant to section 166A of the ITAA 1936 (2013 NOA/2014 NOA).
GQHC’s Objections
On 10 January 2017, GQHC lodged an objection to the 2012 NOA concerning feedstock inputs in relation to R&D activities for 2012 income year.[50] On 27 April 2018, GQHC lodged an objection to the 2013 NOA.[51]
[50] Exhibit 1, Tribunal Book, Tab 1, T6: Objection, pp 43-62.
[51] Exhibit 1, Tribunal Book, Tab 2, T28: Objection in relation to year ended 30 June 2013, pp 513-525.
The GQHC objections sought the following adjustments primarily on the basis that expenditure on poultry feed was not expenditure on “feedstock input” and thus, should not be included in any feedstock adjustment to assessable income for the purposes of section 355-465 of the ITAA 1997:[52]
[52] Respondent’s Amended SFIC, p 1004 at [42]; Exhibit 1, Tribunal Book, Tab 1, T6: Objection dated 10 January 2017, pp 53-54; Exhibit 1, Tribunal Book, Tab 2, T28: Objection in relation to year ended 30 June 2013, pp 518-519..
GQHC submitted that:[53]
3.2 The taxpayer submits that poultry feed was incorrectly classified as feedstock input expenditure, for which a feedstock adjustment was made when the broilers were sold. In light of the recent case of Commissioner of Taxation Vs GHP 104 160 689 Pty Ltd [2014] MTA 515 ("the GHP case") the feed should instead have been classified as 'direct-other' as it is a cost of the process of transforming or processing the broilers in research and development ("R&D activities"), rather than being transformed or processed in its own right.
3.3 In the event that the Commissioner determines that the feed represents energy inputs directly into the transformation/processing of the broilers in R&D activities (without admission), then the taxpayer asserts that a feed conversion ratio ("FCR") needs to be considered in calculating the amount of feed that should be considered feedstock Input expenditure.
(emphasis added)
[53] Exhibit 1, Tribunal Book, Tab 1, T6: Objection dated 10 January 2017, p 54 at [3.2]-[3.3].
On 14 January 2019, GQHC received the Commissioner's objection decision and his reasons for decision.[54] The Commissioner disallowed GQHC’s objections and determined that expenditure incurred on poultry feed fed to chickens during the R&D activities was properly considered to be expenditure on “feedstock inputs” in accordance with section 355-465(1) of the ITAA 1997. That is, the Commissioner determined that the poultry feed expenditure being a feedstock input is “transformed or processed” in producing the feedstock output, that is the broiler. The Commissioner also determined that a feed conversion ratio (FCR) should not be used in calculating the amount of feed that is properly considered as a feedstock input expenditure.[55]
[54] Exhibit 1, Tribunal Book, Tab 1, T2: Reason for decision, pp 13-19; Exhibit 1, Tribunal Book, Tab 1, T16: Notice of objection decision, p 314.
[55] Exhibit 1, Tribunal Book, Tab 1, T2: Reason for decision, pp 13 at [3], 17 at [38].
On 6 March 2019, GQHC applied to this Tribunal for a review of the internal Review Decision dated 14 January 2019 (former Tribunal Matter No. 2019/1296).[56]
[56] Exhibit 1, Tribunal Book, Tab 1, T1: Application for Review, pp 5-12.
On 23 July 2019, the Commissioner notified GQHC of his intention to include an additional issue in contention, namely whether the registered activities consist of eligible “R&D activities” for the purpose of Division 355 of the ITAA 1997.
On 24 October 2019, the Tribunal made orders allowing GQHC to amend its grounds of objection in relation to the issue of R&D eligibility.
On 5 February 2020, the Commissioner disallowed the Group’s objections in relation to the 2013 and 2014 years.[57]
[57] Exhibit 1, Tribunal Book, Tab 2, T18: Reasons for decision in lieu of section 37 Statement – Income years ended 30 June 2013 and 30 June 2014, pp 350-361; Exhibit 1, Tribunal Book, Tab 2, T38: Notice of Decision on Objection for years ending 30 June 2013 and 30 June 2014, p 584.
On 11 February 2020:
(a)GQHC applied to this Tribunal for a review of the Commissioner’s objection decision dated 5 February 2020[58] disallowing GQHC’s objection for the income years ending 30 June 2013 and 2014 (Tribunal Matter Nos 2020/0826-0827);[59] and,
(b)YZQC applied to this Tribunal for a review of the Commissioner’s objection decision dated 7 February 2020[60] disallowing YZQC’s objection in relation to deemed notices of assessment dated 28 April 2014 and 11 December 2014 for the 2013 and 2014 Years (Tribunal Matter Nos 2020/1919-1920).[61]
[58] Exhibit 1, Tribunal Book, Tab 2, T18: Reasons for decision in lieu of section 37 Statement – Income years ended 30 June 2013 and 30 June 2014, pp 350-361; Exhibit 1, Tribunal Book, Tab 2, T38: Notice of Decision on Objection for years ending 30 June 2013 and 30 June 2014, p 584.
[59] Exhibit 1, Tribunal Book, Tab 2, T17: Application for review of Decision, pp 318-349.
[60] Exhibit 1, Tribunal Book, Tab 3, T2: Reasons for decision in lieu of section 37 Statement, pp 620-631; Exhibit 1, Tribunal Book, Tab 3, T21: Notice of Decision in respect of objections for years ending 30 June 2013 and 30 June 2014, p 833.
[61] Exhibit 1, Tribunal Book, Tab 3, T1: Application for review of Decision, pp 588-619.
As referred to earlier, GQHC withdrew application number 2019/1296 after the evidence had closed, and subsequent to the hearing GQHC withdrew application number 2020/0827 and YZQC withdrew all of its applications.
The 2013 Year in relation to GQHC remains. The tables set out above indicate which of the claimed activities are covered by the 2013 Year. It can be seen that some activities span the 2012 and 2013 financial years. The 2014 year is no longer under consideration. Therefore, the claimed activity of “experimentation with single stage incubation temperature profiles” will not be considered.
ISSUE 1: JURISDICTION
GQHC’s Contentions
GQHC contends that the Commissioner does not have the power to assess or make decisions as to whether GQHC’s Registered Activities consisted of eligible “R&D activities” as defined in Division 355 of the ITAA 1997. GQHC submits this is within the sole purview of Board. If the Commissioner does not have jurisdiction, there is no decision under review which would fall within the Tribunal’s jurisdiction.
GQHC submitted:[62]
[62] Applicant’s First SFIC, pp 982-984 at [90]-[97].
(a)the R&D scheme, across the IR & D Act and the ITAA 1997, provides for separate and distinct decision-making roles for the Board and the Commissioner;
(b)the Board is empowered to make decisions relating to applications for registration of R&D activities, including under:
(i)section 27A of the IR & D Act, the power to register R&D activities for the purpose of Division 355 of the ITAA 1997;
(ii)section 27B of the IR & D Act, the power to make findings about applications for registration; and,
(iii)section 27J of the IR & D Act, the power to make findings about registrations under section 27A of the IR & D Act;
(c)the Commissioner:
(i)is bound by the Board's findings for the purposes of the relevant assessments of an R&D entity, under section 355-705 of the ITAA 1997;
(ii)may amend an R&D entity's assessments to give effect to the Board's findings, under section 355-710 of the ITAA 1997;
(iii)may only amend an R&D entity's assessments to give effect to the Board's findings if within the required period of time, similar to the time limits applicable to the Commissioner's power under section 170 of the ITAA 1936 to amend assessments; and
(iv)has standing to seek internal review from the Board of a reviewable decision, under section 30C(4) of the IR & D Act.
In GQHC’s view, enabling the Commissioner to make decisions of eligibility in the same way as the Board, could lead to inconsistent and absurd results.
GQHC stated providing the Commissioner with a concurrent power to that of the Board:[63]
(a)would be inconsistent with the provisions setting out the Commissioner's ability to apply to the Board for internal review of a reviewable decision pursuant to section 30C(4) of the IR & D Act;
(b)would be inconsistent with Parliament's intention to provide certainty and finality for taxpayers as the provisions which limit the period of time during which findings of the Board bind the Commissioner or during which findings of the Board can be given effect to by the Commissioner would be frustrated.
[63] Applicant’s First SFIC, p 983 at [93].
GQHC contends that eligibility of activities for R&D was not challenged by the Board and that the Commissioner is not empowered to assess or make decisions as to whether the Registered Activities were eligible R&D activities as defined in Division 355 of the ITAA 1997.[64] The Board is empowered to make those decisions. GQHC stated that the Commissioner is then bound by the Board’s findings:[65]
48. If the Tribunal were to decide that a taxpayer had discharged the evidential onus, having been put to proof on the eligibility of the R&D activities, and the Board thereafter issued a negative finding, applying section 355-705 of the 1997 Act the Commissioner would on the Commissioner's construction be bound to apply the finding, as res judicata does not apply to Tribunal decisions.
49. That Parliament saw the Commissioner as having the need of an express power to seek internal review of a reviewable decision of the Board supports GQHC’s contention. It should not be presumed lightly that Parliament intended two separate administrative decision-makers to have concurrent power.
50. While the income tax system is a self-assessment system, Parliament intended the R&D tax incentive to operate differently, as provided by the role of a separate statutory board, including in the requirement for the Board to decide whether to register R&D entities for R&D activities under section 28A of the IRD Act, and accordingly such decisions must therefore be made by a single decision maker, and not the Commissioner
[64] Applicants’ Outline of Submissions dated 6 September 2021 (Applicants’ First Outline), p 9 at [38]-[41].
[65] Applicants’ First Outline, pp 11-12 at [46]-[47].
Commissioner’s Contentions
Dr E accepted during cross-examination that the relative shape and size of the chicken’s components will change in comparison to each other as the chick matures.[691] Dr E also accepted that the farmer is trying to maximise the genetic potential of the chicken.[692]
[691] Transcript of Proceedings, p 255.
[692] Transcript of Proceedings, p 253.
In terms of feed, Dr E accepted that depending on the feed formulation, enzymes in the digestive tract will change.[693] Dr E agreed that GQHC’s broilers are controlled to a very high degree by human management and have very different lives from chickens in the wild.[694]
[693] Transcript of Proceedings, p 255.
[694] Transcript of Proceedings, p 256.
Dr E did not accept that its cellular form changes as it matures. He stated it is just “increased numbers of cells”.[695]
[695] Transcript of Proceedings, p 255.
Associate Professor Dragana Stanley
Associate Professor Stanley was not cross-examined on her report.
In summary her explanation of digestion included:[696]
Microbiota is the leader in feed digestion, they produce exogenous enzymes that can break down the food the host cannot otherwise digest; without microbiota approximately 30% of energy from the feed would be lost. In the poultry industry, this translates to massive loss as the feed is a significant cost in poultry production. Moreover, microbial degradation of indigestible carbohydrates produces metabolites that have been shown as substantial drivers of chicken health and immunity. The challenge of standardising and optimising intestinal microbiota in industrial chicken production is a foremost issue that needs more knowledge and must often be tailored to each breed and individual production conditions. The microbiota manipulation is possible by controlling early colonisation, feed formulation and biosecurity.
Digestibility of feed is an important factor to consider in feed formulation. Feed with high digestibility primes the gut to high nutrient retention and good growth performance, while feed that has low digestibility often results in low nutrient retention and poor performance. Nutrient digestibility in poultry is adversely influenced by higher levels of indigestible components.
(emphasis added)
[696] Stanley Expert Report, p 5216.
The chicken’s gastrointestinal microbiota are being manipulated by the chosen feed formulation. Associate Professor Stanley reported that the feed formulation used has a direct impact on digestibility and the performance and quality of the produced broiler.
Ms Ms D
Metabolic Process of a Chicken
Ms D reported that “broiler feed ingredients do not directly (without change) become part of the body”.[697]
[697] Ms D Expert Report, p 25.
Ms D explained that as part of the chicken’s digestive process, food is broken down into compounds. These compounds may be used by the chickens.[698] She reported:[699]
The feed ingredients do not undergo any change whereby part of the molecules of the original ingredient become part of the body of the chicken. The ingredients do, however, break down into critical components used by digestive, physiological and metabolic processes whilst not becoming part of the body of the chicken in their original form.
[698] Ms D Expert Report, p 25.
[699] Ms D Expert Report, p 25.
Ms D explained the metabolic process of a chicken in detail in her report.[700] Chemical energy is derived during the metabolic process as the feed is broken down. The chemical process of digestion involves the extract of energy and alteration of molecules. Ms D explained:[701]
For the broiler to maintain function and structure, it must continuously ingest feed and expend energy at a cost to the bird. The two main energy costs being for maintenance requirement and production requirement.
…
…In reality, however, the energy metabolism pathways and reactions are biologically complex in a growing broiler.
…
The broiler feed containing wheat and sorghum as carbohydrates, poultry oil as lipids and soybean meal as protein all provide energy to the broiler.
These nutrient components are broken down in the digestion process from complex molecular structure to the most basic sugar and non-sugar molecules. These end products from the metabolic pathway of Krebs cycle are then used by the broiler in many metabolic reactions to meet the maintenance requirement and the balance is used in pathways for meat production.
(emphasis added)
[700] Ms D Expert Report, p 20.
[701] Ms D Expert Report, pp 20-21.
In Ms D’s opinion “[b]roiler feed ingredients do not directly (without change) become part of the body of the chicken”. She explained:[702]
…the ingredients are fully broken down into many nutrient components. The feed ingredients do not undergo any change whereby part of the molecules of the original ingredient become part of the body of the chicken. The ingredients do, however, break down into critical components used by digestive, physiological and metabolic processes whilst not becoming part of the body of the chicken in their original form.
(emphasis added)
[702] Ms D Expert Report, p 25.
Ms D noted that the company which supplied the broiler specifically advises the “farmer” about feed formulation requirements for production and maintenance of the broiler. This advice is “based on their own and industry research”.[703] This information was provided to GQHC. Ms D said the formulations provided to GQHC “will ensure the feed contains enough energy to maintain the above system functions and processes and additional energy to support growth and meat production”.[704]
[703] Supplementary Ms D Expert Report, p 11.
[704] Supplementary Ms D Expert Report, p 11.
Ms D stated that different ingredients in the feed formulation have different physical, chemical and nutrient properties. Ms D reports these ingredients undergo “many reactions and conversions within the chicken and the end products are distinctly different to the source ingredient”.[705]
[705] Supplementary Ms D Expert Report, p 13.
Ms D described the ingredients in GQHC’s feed as “digested and completely broken down to molecular components for absorption across the intestinal wall for use in… chicken meat production”.[706]
[706] Supplementary Ms D Expert Report, p 15.
Ms D described the process as:[707]
…a very complex continuous cycle of metabolic processes, chemical reactions, degradation, depletion, cell division, replenishment and accretion occurring in the broiler. There are losses in heat and faeces and there are gains in maintenance, growth and development. The feed consumed by the broiler facilitates these processes by replenishing nutrient losses to keep the cycle continuous at an optimum rate.
[707] Supplementary Ms D Expert Report, p 16.
Dr Isabelle Ruhnke
The Commissioner relied on the expert evidence of Dr Ruhnke. Dr Ruhnke is currently an Adjunct Associate Professor at the University of New England and gastrointestinal discover manager at Royal Canin.
No challenge was made to Dr Ruhnke’s expertise.
Dr Ruhnke expressed her opinion more directly than some of the other experts. This is probably because of the way the questions were framed. Dr Ruhnke was expressly asked whether, in her opinion, “the poultry feed was ‘transformed or processed’ when fed to the chickens and in the process of producing the broilers”. Ms D was instead asked, inter alia, whether:
(a)the feed ingredients “directly, without change, become part of the body of the chicken”;
(b)“the molecules of these ingredients as eaten become part of the body of the chicken”.
The question asked of Dr Ruhnke is the question the Tribunal has to answer.
Dr Ruhnke’s opinion was that:[708]
… poultry feed is transformed or processed when fed to chickens and also in the process of producing broiler meat.
[708] Ruhnke Expert Report, p 5504 at [3].
Dr Ruhnke stated this is because the nutrients in poultry feed are:[709]
… mechanically and chemically digested, which describes the process of breaking down (transforming and/or processing) these nutrients into small molecules …
[709] Ruhnke Expert Report, p 5504 at [3].
The molecules are then used by the chicken to generate energy.
Although they may have expressed themselves differently, the Tribunal’s assessment of the expert evidence is that the experts agree with the digestive and metabolic processes which are occurring when feed is given to the chickens.
Dr Ruhnke stated after the chicken digests the molecules, they are metabolised, which constitutes the “feed processing and transform[ing]…within a living organism”.[710] Some of the molecules “become part of the body after being transformed or processed”.[711]
[710] Ruhnke Expert Report, pp 5504, 5515, 5518 at [1], [17], [23].
[711] Ruhnke Expert Report, pp 5526-5527 at [45]-[46].
Dr Ruhnke stated poultry feed is also transformed or processed by broiler breeders/layers as well in the process of producing the egg. The energy that becomes available from the transformation or processing is used for “body maintenance and performance (producing eggs or fertilised eggs in case of a broiler layer)”.[712]
[712] Ruhnke Expert Report, p 5519 at [24].
Dr Ruhnke stated chickens undergo “fundamental changes from a day-old chick to slaughter age” including changes to body weight, gross structural changes of the body’s composition, structural and functional changes of the gastrointestinal tract and changes of the integument (feathers).[713] There is no dispute amongst the experts about this.
[713] Supplementary Ruhnke Expert Report, pp 5597, 5599-5616, at [1], [5]-[12], [17]-[23], [24]-[28].
Dr Ruhnke provided the following summary of her conclusions and opinions:[714]
Question 1: Is the poultry feed “transformed or processed” when fed to the chickens and in the process of producing the broilers
Summary of the relevant conclusion:
1. Yes, poultry feed is transformed or processed when fed to chickens and also in the process of producing broiler meat. This transformation is commonly called digestion and includes the process of mechanical and chemical breakdown of feed ingredients outside of the cell to make the large insoluble food molecules accessible for the avian body. These small water-soluble nutrient molecules (glucose, amino acids, fatty acids) can then be absorbed and utilised by metabolic pathways of the body to maintain body function, but also for growth (production of broilers). Metabolism refers to the chemical processes such as feed processing and transformation that occur within a living organism (after the feed molecules have been digested and absorbed) in order to maintain life. As such, the feed as eaten does not become part of the body, but some of the feed molecules become part of the body after being processed and transformed (which may include metabolism).
2. The feed composition (amount of fibre, protein and fat), feed physicality (particle size and shape) and feed processing method (milling method, heat treatment such as pelleting) determine how efficiently the feed can be digested. For example, coarse feed particles such as whole grain stimulate the gizzard (muscular stomach) to grind the feed particles into very small components which increases the nutrient uptake in the small intestine. In contrast, feed grains that are finely ground by a mill or pelleted do not stimulate gizzard activity and as such pass through the intestine less ground resulting in reduced feed efficiency.
(emphasis added)
[714] Ruhnke Expert Report, p 5504.
Dr Ruhnke goes on to describe the technical chemical and mechanical transformation and processing of feed through the chicken’s digestion process.
Dr Ruhnke was asked about the impact of poultry feed on the quality and quantity of transformation and processing when being fed to the chicken. She stated:[715]
14. The digestibility of feed is a measure of the efficiency (quality and quantity) to which the feed is processed and transformed when being fed to the chicken. Measuring the digestibility of the feed is commonly done in many animal species including the chicken. In order to do so, an undigestible marker is added to the feed in a certain concentration. The percentage of the feed nutrient of interest (e.g. protein/amino acid, carbohydrate or fat) is also measured in the feed. Then, the concentration of the marker and the nutrient of interest are measured in the intestinal digesta (after the digesta has passed the small intestine but before microbiota processing occurs in the large intestinal tract). …
15. The higher the digestibility, the more quantities of the specific nutrient were transformed and processed, ultimately digested and absorbed by the animal and are then available for the metabolic processes.
16. The ability and efficiency of feed processing and transformation can therefore be demonstrated by comparing the nutrient digestibility and subsequently calculating the energy that is then available to the animal. The nutrient digestibility and therefore available nutrients or available metabolisable energy depend on several factors including: animal factors (species, age, health status); plant factors (chemical composition, plant variety, stage of harvest); dietary factors such as the feed composition (amount of fibre, protein and fat); feed physicality (particle size and shape); and feed processing method (milling method, heat treatment such as pelleting). …
(emphasis added)
[715] Ruhnke Expert Report, p 5513.
Dr Ruhnke stated the way feed is processed (such as particle size) also has an impact on the way feed is transformed by the chicken and impacts their health.
In relation to broilers, it was Dr Ruhnke’s opinion that feed is also transformed and processed in the production of the broilers:[716]
[716] Ruhnke Expert Report, pp 5515-5517.
17. In order for poultry feed to be utilised for production energy such as for growth or growing broilers, the feed needs to be transformed and processed as outlined above. Once broken into its smallest molecules (glucose, amino acids, monoglycerides, fatty acids), the different nutrients can be converted into chemical energy (adenosine tri phosphate- ATP, the universal energy currency), stored for later use (mainly in the form of fat or glycogen) or converted into each other (de novo synthesis). These metabolic pathways are essential parts of complex transformation and processing within the bird’s body and therefore this report will provide a general overview about the most relevant anabolic pathways. Anabolism is the set of metabolic pathways that construct molecules from smaller units.
18. When producing broilers, newly hatched chickens are fed until slaughter weight, usually until they are 35-56 days of age. During this time the animals grow rapidly, from 35g hatching weight until up to 4kg. This translates to a human that is born with 3.5kg body weight to weigh 400kg within 56 days. The growth of a chicken refers not simply to an increase in body weight but also to changes in body composition and conformation (Maruyama et al., 1978). The rapid growth demands tissue of all qualities: skeletal muscle, bones, connective tissue for the gastrointestinal tract and skin, feathers and various organs. The overall composition of the body of a young chicken was calculated by Scanes (2015 a) …
19. …the body of a young broiler (which is genetically selected to produce meat) is mostly composed of protein. As mentioned previously, proteins are composed of amino acids. The amino acids that circulate in the blood system enter the cells of organs and are then available for de-novo synthesis of proteins. The predominant site for de-novo amino acid synthesis is the liver. While some amino acids are essential components of proteins and must be taken up with the chicken feed, other amino acids can be synthetised by the avian body itself using specific molecules or converted into each other.
As mentioned before, amino acids can also be transformed into glucose or other biochemic functional compounds (purines, uric acid, neurotransmitters, pigments, etc) and modified for signalling and specific chemical reactions.
20. Overall, the protein synthesis and amino acid turnover in a growing animal like a broiler chicken is relatively high
…
21. Optimal nutrition results in the highest turnover of muscle protein synthesis. …
if a chicken is fed a diet deficient of an essential amino acid, it cannot build up protein regardless of the total protein content of its diet.
(emphasis added)
Dr Ruhnke was asked whether, in her opinion, the poultry feed “transformed or processed” when fed to the broiler breeders and layers and/or in the process of producing the egg, or fertilised egg. In her opinion the poultry feed is transformed in this circumstance. She explained:[717]
Summary of the relevant conclusions
24. … The energy that becomes available from the feed processing/transformation is used for body maintenance and performance (producing eggs or fertilised eggs in case of a broiler layer).
Various nutrient molecules are also required for this laying performance including individual amino acids, fat triglycerides and minerals. This build-up of performance products is commonly called “anabolism”. The anabolic pathways relevant for egg and fertile egg production are outlined below.
…
Feed transformation and processing in the process of producing the egg, or fertilised egg
32. … It obviously requires significant processing and transformation of chicken feed to create a product (egg) of very different composition than the initially fed diet (Johnson, 2015). Egg yolk is usually deposited in concentric bands that result from a non-uniform pattern of daily feed intake. Functional components present in egg yolk include maternal antibodies responsible to passing on passive immunity to the hatched chicken (Anton, 2013; Tesar et al., 2008).
(emphasis added)
[717] Ruhnke Expert Report, pp 5519-5521.
Dr Ruhnke reported she agreed with the evidence and concepts provided by Ms D. Dr Ruhnke stated Ms D:[718]
(a)“provides clear evidence and facts commonly known and taught, supported by the reports reference list and also the independent literature review that I conducted and attached to my report”; and
(b)“explains how the feed ingredients are broken down and used by the chicken and how the ingredients become part of the body after these break down processes. No further clarification is needed.”
[718] Ruhnke Expert Report, p 5523, 5528.
Apart from two minor instances which do not need to be outlined, Dr Ruhnke agreed with the report of Dr Stanley.
During cross-examination it was put to Dr Ruhnke that the changes she described in her report are simply the changes expected during the life span of the broiler chicken if the chick grew in the wild. She disagreed with this proposition and explained:[719]
These changes are because the chicken is growing up under those conditions and it’s this type of chicken, and with this level of care.
…it is quite complex, as you can see the multiple influences, and the lots of infrastructure around growing the chickens.
…we try to meet the need of the bird, and allowing the bird to grow in the best direction that we want for 30 human nutrition. So you want the most chicken breast out of it, so you feed it that the protein deposition is best, maximised, so when you kill it you have most meat.
[719] Transcript of Proceedings, p 354-355.
Tangible Product
The term “tangible product” is not defined in the Act and therefore its ordinary meaning, in context, should be applied.
The Commissioner submits there is no limitation in the text or context which “limits ‘tangible products’ to things that relate to manufacturing, fabrication or some involvement of an external agent (force or effect) being applied to an object” [720] and that tangible products can be biological or agricultural for example. The proviso is that whatever the product is it must be tangible.
[720] Respondent’s Outline of Opening Submissions, p 60 at [187]-[188].
Here the issue is whether the chickens are tangible products.
As previously identified, GQHC contends that a chicken cannot transform into a new chicken simply because it has grown.[721] GQHC submits the chickens do not become a tangible product because:[722]
(a)“as a matter of statutory construction, the term ‘tangible product’ imports notions of manufacture or fabrication”; and
(b)“the chickens' natural growth over the period of between approximately 5 weeks and 7 weeks and the limited nature and magnitude of the intervention by human agency do not involve the requisite element of manufacture or fabrication.”
[721] Applicants’ First Outline, p 38 at [190].
[722] Applicant’s First SFIC, pp 981-982 at [86](a)-(b).
The evidence of Dr Ruhnke is that the chick and the chicken are “different” structurally and physically.[723]
[723] Supplementary Ruhnke Report, pp 5597, 5600-5604, 5609-5616 at [1], [5]-[12], [17]-[28].
GQHC referred the Tribunal to GHP 104 160 689 Pty Ltd and Commissioner of Taxation [2014] AATA 869; 99 ATR 955.[724] The Tribunal is concerned about the application of this decision in circumstances where it is based on the interpretation of a section with significantly different wording. The Tribunal does not consider it necessary to refer to this decision.
[724] Applicants’ First Outline, pp17-18 at [82]-[84].
Conclusion
Assuming GQHC had engaged in R&D activities, are the other elements of section 355-465(1)(a) satisfied?
There is no dispute that GQHC has incurred expenditure on poultry feed and the acquisition of chickens.
The issue is whether that expenditure constitutes a feedstock input that has been transformed or processed.
The transformation or processing must take place during the course of R&D activities. The Tribunal has found there were no R&D activities. Presuming GQHC had engaged in eligible R&D activities, were the feed or chicks transformed in the process of producing a tangible good? The tangible good must be the egg or the chicken meat.
As already outlined, GQHC submits the feed and chicks are not transformed or processed. They contend that the section is limited to some form of manufacture or fabrication. The Commissioner submits the plain reading of the section does not import this feature. Further, the Commissioner submits that if R&D concerned with chicken rearing and egg laying can possibly constitute R&D activities (as GQHC clearly believed when it lodged its R&D Applications), there is no reason to exclude industrial agricultural activities from the feedstock regime.[725]
[725] Respondent’s Outline of Opening Submissions, p 35 at [173].
The Explanatory Memorandum explains the feedstock adjustment is not confined to mass production activities.[726] No limitation or exclusion can be found in relation to agriculture or livestock in the relevant provisions.
[726] Explanatory Memorandum, p 89 at [3.148].
In an older case, GTK Trading Pty Ltd v Export Development Grants Board [1981] FCA 226; (1981) 40 ALR 375 (GTK Trading), the issue of what is meant by “processed” was addressed in the context of lobster farming. GTK Trading had claimed grants under the Export Expansion Grants Act 1978 in respect of the value of live lobsters which it exported to Japan, but the Export Development Grants Board disallowed the applications. GTK Trading applied to the Tribunal and the matter ultimately came before the Full Federal Court. One of the issues was whether lobsters were. For the live lobsters to satisfy the definition of “eligible goods” it was agreed that they had to have been “produced or processed”. As here, there was no express exclusion in the statute concerning livestock or agricultural products. The Court decided it was necessary, in order to determine this issue, to understand “what had happened to the lobsters during the process of breeding and catching or at any stage until they were exported”. It is this process that has been the subject of these proceedings, namely breeding and growing chickens for the sale of chicken parts – eggs or meat. The Court in GTK Trading described the process as involving three things:[727]
An analysis of what happens to them between being caught and beginning their journey to Japan indicates a number of things occur which, apart from sorting, packing and grading, are designed to preserve them live and fit for human consumption when they reach Japan. The retention of them in the tanks, their immersion in extremely cold water and the subsequent keeping of them at low temperatures until they leave appear to be aimed at this.
[727] GTK Trading Pty Ltd v Export Development Grants Board [1981] FCA 226; (1981) 40 ALR 375, 381 [35].
Similarly, here, the steps/processes undertaken by GQHC are for the ultimate aim of production of chickens and eggs for consumption.
The Court considered the ordinary meaning of the verb “process”, according to various dictionaries, meant to treat or subject something to a particular or special method. The Court found that “the operations in question are, in our opinion, properly described as a ‘process’”:[728]
The lobsters are subjected to a series of operations or treated by a special method. In this sense they are processed or subjected to a special series of operations which, in this case, are designed not only to pack them but to preserve them live for human consumption in Japan. The success of the process is the fact that 98% of them survive the journey.
[728] GTK Trading Pty Ltd v Export Development Grants Board [1981] FCA 226; (1981) 40 ALR 375, 381-382.
GTK Trading has been praised as a good example of the application of section 15AA of the AIA in that the “construction of the Act was adopted by the Court with an eye aimed at clearly promoting the purpose and object underlying the section”.[729]
[729] Teng v Minister for Immigration and Border Protection [2015] FCCA 1197, at [26]. See also, Australian Competition and Consumer Commission v PT Garuda Indonesia Ltd [2016] FCAFC 42; 244 FCR 190, at [152]-[153].
The Full Federal Court in Australian Competition and Consumer Commission v PT Garuda Indonesia Ltd [2016] FCAFC 42; 244 FCR 190 cited GTK Trading as indicating that a strict or narrow meaning of a term need “need not be adopted if the proper construction of the relevant statutory provision suggests otherwise”.[730]
[730] Australian Competition and Consumer Commission v PT Garuda Indonesia Ltd [2016] FCAFC 42; 244 FCR 190, at [152]-[153].
There is no basis to adopt the narrower meaning proposed by GQHC. As GTK Trading identifies, animals can be considered to be processed, when subject to a series of steps taken for their wellbeing and growth for the purposes of ultimate human consumption.
The purpose of the feedstock adjustment is explained in the Explanatory Memorandum as follows:
3.142 The feedstock adjustment is intended to ‘claw back’ the incentive component of the R&D tax offset that is enjoyed on the recouped feedstock expenditure. The incentive component is the excess of the tax offset over the company tax rate – that is, the excess over the tax benefit that would otherwise have been obtained from normal tax deductions without the incentive.
3.143 The intended net outcome is that the R&D incentive is effectively enjoyed on feedstock expenditure to the extent that it is not offset by feedstock revenue. This is achieved by basing the adjustment on the lesser of feedstock expenditure and feedstock revenue.
• Where feedstock revenue exceeds the feedstock output’s related feedstock expenditure, the feedstock adjustment will be based on the feedstock expenditure – because the effective net cost of the feedstock inputs and energy was nil; and
• Where feedstock revenue is less than the feedstock output’s related feedstock expenditure, the feedstock adjustment will be based on the feedstock revenue – because the effective net cost of the feedstock inputs and energy was reduced by that amount.
The R&D regime was intended to capture a wide range of activities.[731] There is no indication that a narrow view of the meaning of transformed or processed should be applied.
[731] Explanatory Memorandum, pp 11-12 at [1.5]-[1.10].
The Tribunal finds that the activities and operations undertaken by GQHC in relation to the chickens involved subjecting the chickens to a method or process. The chickens are processed for the purpose of human consumption through a series of steps.
The feed is transformed and processed through digestion and is either absorbed, excreted, or metabolised. The feed is transformed or processed in relation to the laying chickens and results in the production of a fertilised egg.
Broiler chickens are transferred from a zero-day-chick to slaughter age at 5 to 7 weeks.
However, the chickens are not left by GQHC to grow “naturally”, without intervention. They are “grown” in an entirely controlled environment. Their food and water intake, amount of light, and temperature conditions are all modified and controlled in a strict process in order to achieve a chicken of a desired weight within the desired time frame to minimise costs and maximise return.
Findings – Feedstock Adjustment
The chicken feed given to the chickens has been tailored and prepared (either by the manufacturer or by GQHC in the case of the Broiler Improvement Project). That is, the feed has been processed. The feed was treated through the addition and combination of grains, minerals and so on, specifically chosen for the efficient and effective production of poultry products for human consumption. The experts were not in dispute about this.
The chicken is fed the feed (the feedstock input) and then undergoes a biological transformation, through digestion and metabolisation, where the feedstock (the chicken feed) is converted (digestively transformed) into an agricultural product (chickens for meat or eggs). The statute does not restrict the transformation to only non-biological. However, here, the biological transformation, as orchestrated by GQHC, is tweaked and contrived.
The chickens here are not growing au natural. Every stage of their short life is controlled, particularly in relation to their nutrient intake. Significant steps have to be taken by the poultry farmer to produce a product fit for human consumption. There is the consideration of the type and constituents of feed, the amount and timing of the feed, how the feed is mixed and processed (evidence was given of the trialling of pellets vs crumbled feed, for example). This is evidenced by the expertise on display during the hearing and the significant research that has been engaged in by industry and academia in relation to poultry science.
The Tribunal finds the feed and chickens were transformed and processed during the Registered Activities.
The chicken is the beneficiary of the feedstock. The output is the chicken meat and eggs.
Reasonably Attributable Amount
GQHC submit alternatively that if the feed is a feedstock input, less than 100% of the expenditure on the feed is reasonably attributable because:[732]
(a) only part of the feed is used for the creation of new cells for growth;
(b) some of the feed is wasted or consumed for heat or maintenance;
(c) there is a rate of mortality of about between 3% and 5% in each batch of chickens, prior to the transfer of ownership of the chickens;
(d) only some parts of some of the molecules created by absorption of the feed ultimately forms part of the broiler by the time the broiler is sold (other parts having been replaced or used and excreted or not used and excreted).
[732] Applicant’s First SFIC, p 980 at [82]. See also, Applicants’ First Outline, pp 39-41 at [195]-[203].
Section 355-465(2)(b) of the ITAA 1997 provides:
(2) The *R&D entity’s assessable income for the present year includes an amount equal to 1/3 of the lesser of:
(a) the *feedstock revenue for the feedstock output; and
(b) so much of the total of the amounts deducted as described in paragraph (1)(b) that is reasonably attributable to the production of the feedstock output.
Note: This subsection applies separately for each of the feedstock outputs.
(emphasis added)
GQHC contends that if the Tribunal finds that expenditure on poultry feed was expenditure on feedstock inputs (section 355-465(1)(a)) or energy inputs (section 355-465(1)(b)(i)), the amount reasonably attributable to producing the chickens is less than the full amount of expenditure incurred for the purpose of section 355-465(2)(b).[733]
[733] Applicant’s First SFIC, p 980 at [82]; Applicants’ First Outline, pp 39-41 at [195]-[203].
The Commissioner submits that 100% of such expenditure is reasonably attributable to producing the feedstock output (being the chicken whether in the form of a broiler or embryo in an egg).
GQHC submits, referring to the report of Ms D,[734] that:[735]
196. The macro components of chicken feed are carbohydrates, protein, and lipids. Additional components are minerals and vitamins. The components can be divided into those that are used for energy and those that are used for growth.
(citations removed)
[734] Ms D Expert Report, pp 17-20.
[735] Applicants’ First Outline, p 39 at [196].
GQHC’s argument is that not all of the components of chicken feed are used in the chicken’s growth. For example, carbohydrates and lipids, unlike proteins, are used up entirely for energy and do not become part of the chicken. Whereas, proteins and minerals can become part of the chicken.
GQHC submits that only a small amount of the entire amount of feed the chicken has consumed during its life remains in the chicken, and therefore the amount of expenditure incurred on feed that is reasonably attributable to the chicken is less than 100%.
The Tribunal does not accept this argument. It is uncontroversial that a proportion of feed is used by the chicken as part of its complex metabolic processes. However, assuming the proportion of feed remaining in the chicken at sale could be calculated with accuracy, it ignores the fact that 100% of the quantity of the feed has to be given to the chicken in order to produce the final tangible product. It is artificial to break this down in the way contended by GQHC.
DECISION
The Tribunal affirms the decision under review.
I certify that the preceding 791 paragraphs are a true copy of the reasons for the decision herein of Senior Member Dominique K Grigg
............................[SGD].....................................
Associate
Dated: 16 February 2024
Date/s of hearing: 1, 2, 5, 6, 7, 8 and 9 December 2022, 21 September 2023 Date last submissions received: 20 November 2023 Counsel for GQHC: Mr D W Marks KC and Ms C Nicholson Solicitors for GQHC: Clayton Utz Counsel for the Commissioner: Ms C Burnett SC and Mr E Chan Solicitors for the Commissioner: Minter Ellison
(Kenny, Robertson and Thawley JJ).
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