Moreton Resources Limited v Innovation and Science Australia

Case [2019] FCAFC 120

FEDERAL COURT OF AUSTRALIA

Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120

File number: VID 1291 of 2018
Judges: DAVIES, MOSHINSKY AND STEWARD JJ
Date of judgment: 25 July 2019
Catchwords: TAXATION – research and development tax offset – underground coal gasification (UCG) facility – pilot project – where appellant undertook a pilot project to test the viability of using UCG technology at a particular site to produce UCG synthesis gas that would then be cleaned and stabilised for production of electricity using gas turbines – where pilot project failed – where registered activities for subsequent years included remediation of the site – whether the registered activities for the subsequent years were “supporting R&D activities” within the meaning of Div 355 of the Income Tax Assessment Act 1997 (Cth) – whether the registered activities constituting the pilot project fell within the definition of “core R&D activities” – whether the Administrative Appeals Tribunal erred in its construction of “core R&D activities”
Legislation:

Administrative Appeals Tribunal Act 1975 (Cth), s 44

Corporations Act 2001 (Cth), s 249D

Income Tax Assessment Act 1936 (Cth), s 73B

Income Tax Assessment Act 1997 (Cth), ss 355-1, 355-5, 355-20, 355-25, 355-30, 355-35

Industry Research and Development Act 1986 (Cth), ss 4, 27A, 27B, 27F, 27J, 27K, 27L, 30D, 30E, 39J

Tax Laws Amendment (Research and Development) Act 2011 (Cth)

Environmental Protection Act 1994 (Qld), ss 22, 193, 322, 324

Mineral Resources Act 1989 (Qld), ss 186, 208

Petroleum and Gas (Production and Safety) Act 2004 (Qld)

Petroleum and Gas (Production and Safety) Regulation 2004 (Qld)
Cases cited:

Cougar Energy Ltd v Debbkie Best, Chief Executive under the Environmental Protection Act 1994 [2012] QPELR 370; [2011] QPEC 150

Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503

Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42

Minister for Immigration & Multicultural Affairs v Al-Miahi (2001) 65 ALD 141; [2001] FCA 744

Re DBTL and Innovation Australia (2013) 137 ALD 88; [2013] AATA 573

Regional Express Holdings Ltd v Australian Federation of Air Pilots (2017) 262 CLR 456

Thiess v Collector of Customs (2014) 250 CLR 664
Date of hearing: 6 and 7 May 2019
Registry: Victoria
Division: General Division
National Practice Area: Taxation
Category: Catchwords
Number of paragraphs: 165
Counsel for the Applicant: Mr EF Wheelahan QC with Ms ML Baker
Solicitor for the Applicant: KPMG Law
Counsel for the Respondent: Ms S Pritchard SC with Mr T Prince
Solicitor for the Respondent: King & Wood Mallesons

ORDERS

VID 1291 of 2018
BETWEEN:

MORETON RESOURCES LIMITED (ACN 060 111 784)

Applicant
AND:

INNOVATION AND SCIENCE AUSTRALIA

Respondent

JUDGES:

DAVIES, MOSHINSKY AND STEWARD JJ

DATE OF ORDER:

25 JULY 2019

THE COURT ORDERS THAT:

1.Within 7 days, the parties file any agreed minute of proposed orders to give effect to these reasons (including as to costs).

2.In the absence of agreement, within 14 days each party file its minute of proposed orders to give effect to these reasons (including as…

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Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120
Case
[2019] FCAFC 120
Decision Date

CaseChat Overview and Summary

The case of Moreton Resources Limited v Innovation and Science Australia involves a dispute between Moreton Resources Limited and the Australian Taxation Office concerning the eligibility of certain activities for research and development (R&D) tax offsets under the Income Tax Assessment Act 1997 (Cth). The primary issue before the court was whether Moreton's activities related to a pilot project for underground coal gasification (UCG) were eligible for tax offsets as "core R&D activities" or "supporting R&D activities". Moreton argued that the pilot project, although it ultimately failed, constituted "core R&D activities" because it involved the application of existing technology to a specific site. Alternatively, Moreton contended that the subsequent remediation activities constituted "supporting R&D activities" related to the original pilot project.

The court considered whether the Administrative Appeals Tribunal (AAT) correctly interpreted the definition of "core R&D activities" in the context of Moreton's pilot project. The tribunal had ruled that the pilot project did not qualify as "core R&D activities" because it was merely testing the application of existing technology at a particular site. Moreton challenged this decision, arguing that the tribunal erred in its construction of the definition, thus excluding the pilot project from the scope of "core R&D activities". The court found that the tribunal's interpretation was too narrow and did not align with the broader intent of the legislation, which aims to encourage experimental activities related to the application of existing technologies.

The court concluded that the tribunal's decision should be set aside, as it had misinterpreted the definition of "core R&D activities". The court held that the pilot project, despite its failure, involved experimental activities whose outcomes were unknown and which related to the application of existing technology. Consequently, these activities should have been considered "core R&D activities". As a result, Moreton's appeal was upheld, and the tribunal's decision was quashed. The matter was remitted back to the tribunal for reconsideration in light of the court's findings.

Orders

Orders of the court

1. Within 7 days, the parties file any agreed minute of proposed orders to give effect to these reasons (including as to costs).

2. In the absence of agreement, within 14 days each party file its minute of proposed orders to give effect to these reasons (including as to costs) and a written submission (of no more than three pages) in support of the proposed orders.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Div 5 of Pt III of the IR&D Act deals with review of decisions of the Board. Section 30D provides for a process of internal review. Section 30E deals with external review by the Tribunal of internal review decisions.Background facts The following statement of the background facts is substantially based on the findings set out in the Reasons. There was no disagreement before the Tribunal about these matters: see the Reasons at [24]. We note that the Reasons contain some findings relating to a facility at Wandoan. It is unnecessary to refer to these for the purposes of the appeal. We also note that it is not necessary for present purposes to set out the facts in as much detail as in the Reasons.Moreton’s assessment of sites for UCG technology In or about 2006, Moreton (then known as Cougar Energy Ltd) started to access Australian coal deposits that might be suitable for exploitation using UCG technology. In very general terms, UCG is a process involving the in-situ conversion of coal into a gas by means of a combustion process. This is achieved by igniting a coal seam and injecting oxidants, gasifying the coal and bringing the gas to the surface through drilled production wells. The gas is then used as a fuel for power generation, industrial heating and the manufacture of petrochemical products and other chemicals. In or about March 2007, Moreton announced that it had identified a coal resource near Kingaroy and some 160 kilometres northwest of Brisbane in Queensland (Kingaroy site) that it considered suitable for a potential UCG project.The pilot project Moreton went on to plan and develop the pilot project “to test the viability of using UCG technology at the Kingaroy site to produce syngas that is then cleaned and stabilised for production of electricity using gas turbines” (Reasons, [27]). In order to carry out the pilot project, Moreton had to obtain a Mineral Development Licence (MDL) under the Mineral Resources Act 1989 (Qld) (MR Act) and an Environmental Authority (EA) under the Environmental Protection Act 1994 (Qld) (EP Act). On 30 April 2008, pursuant to s 193 of the EP Act, the EPA issued an EA for a non-code compliant Level 1 Mining Project to Moreton as the Principal Holder and to SE Qld Energy Pty Ltd (SEQEPL) as the Joint Holder in respect of the Kingaroy site. The EA took effect from the date on which the mining tenement, MDL No. 385 (MDL385), was granted to Moreton and SEQEPL (referred to below). Moreton released a document named the “Kingaroy Pilot UCG Project Front End Engineering Definition” on 27 May 2008 (the FEED document). The Tribunal stated at [29] of the Reasons that the primary purpose of the FEED document was to define Moreton’s requirements in relation to the pilot facility. The FEED document, which was quoted by the Tribunal in the Reasons and is referred to in Moreton’s submissions on the appeal, stated that:To date there are no UCG facilities of this scale in the world, and none utilising a gas turbine to make electricity from the UCG syngas. Once the pilot facility has achieved its aims, the process will be scaled up. Experience with the pilot scale plant and other factors will determine the size and configuration of the first commercial scale gas turbine installed. Options include a nominal 39MW open cycle turbine, a nominal 115MW open cycle turbine or a nominal 176MW combined cycle turbine. Further turbines would be subsequently added as confidence grows in the process.This FEED document is for the Pilot Facility only.Purpose of the Pilot FacilityThe purpose of the pilot facility is to demonstrate:•that the coal deposit selected produces a UCG gas that can be used to power a commercially available gas turbine•that the UCG gas can be cleaned up to the requirements of the gas turbine•that the process con [sic] be operated in a safe and environmentally responsible manner As part of the operation of the pilot facility a series of trials with extensive monitoring will be carried out on all aspects of the technology associated with the process, particularly the environmental aspects.Once the pilot facility objectives have been achieved and confidence in the UCG process has been gained, a larger scale plant can be built.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

On 21 August 2015, the Board decided that Moreton’s registered activities for the 2012 to 2014 years were neither “core R&D activities” nor “supporting R&D activities”. Following a process of internal review, that decision was confirmed by the Board on 21 December 2015 (the internal review decision). Moreton applied to the Administrative Appeals Tribunal (the Tribunal) for review of the internal review decision. On 10 September 2018, the Tribunal affirmed the internal review decision. The Tribunal found that many of Moreton’s registered activities in relation to the pilot project in the 2012 to 2014 years were excluded from the definition of “core R&D activities” on the basis that they were “activities associated with complying with statutory requirements or standards” (the relevant statutory provisions are set out below). Moreton’s alternative submission before the Tribunal was that if any part of the registered “core R&D activities” for the 2012 to 2014 years were, in fact, not “core R&D activities”, they were nonetheless “supporting R&D activities” because, among other things, they directly related to “core R&D activities” registered for the year ended 30 June 2010 (the 2010 year). The registered activities for the 2010 year included activities that constituted or formed part of the pilot project. The Tribunal concluded that the pilot project did not meet the definition of “core R&D activities” because, in summary, it “was testing the application of existing technology at a particular site and nothing more”: Tribunal’s reasons for decision (the Reasons) at [262]. Thus, a critical element of Moreton’s alternative submission was rejected by the Tribunal, and the Tribunal may be taken to have implicitly rejected Moreton’s alternative submission. Pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act), Moreton ‘appeals’ to this Court, on a question of law, from the decision of the Tribunal. Moreton does not challenge the Tribunal’s conclusion that the registered “core R&D activities” for the 2012 to 2014 years were excluded from the definition of “core R&D activities” on the basis that they were activities associated with complying with statutory requirements or standards. Moreton’s appeal focusses on the Tribunal’s rejection of its alternative submission. At the forefront of Moreton’s submissions on appeal is the contention that the Tribunal erred in its construction of the definition of “core R&D activities” and thus in concluding that the pilot project did not satisfy that definition. Moreton contends that the Tribunal construed the definition such that it cannot be satisfied by experimental activities whose outcome, while unknown, relates to the application of an existing technology to a specific site and that, in so construing the definition, the Tribunal erred. For the reasons that follow, in our view, the Tribunal erred in its construction of the definition of “core R&D activities”. It follows that the Tribunal’s decision must be set aside.

Ratio Decidendi

Legal Principle Established

The key provision of the IR&D Act for present purposes is s 27J:Findings about a registration(1)The Board may make one or more findings to the following effect about an R&D entity’s registration under section 27A for an income year (the registration year):(a)that all or part of a registered activity was a core R&D activity conducted during the registration year;(b)that all or part of a registered activity was not an activity of a kind covered by paragraph (a);(c)that all or part of a registered activity was a supporting R&D activity conducted during the registration year and in relation to:(i)one or more specified registered core R&D activities; or(ii)one or more specified core R&D activities for which the entity has been registered in an earlier income year; or(iii)one or more specified core R&D activities yet to be conducted for which the entity could be registered in the registration year if those activities were conducted during the registration year; or(iv)several specified core R&D activities, each covered by subparagraph (i), (ii) or (iii);(d)that all or part of a registered activity 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).(2)If the Board makes a finding under subsection (1) in relation to the R&D entity’s registration, 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 registration year that a registered activity was a core R&D activity.(3)This section has effect subject to section 32B (findings cannot be inconsistent with any earlier findings).The effect of this provision is that the Board may make findings as described in paragraph (a), (b), (c) or (d) of subsection (1) in respect of registered activities. For example, if an activity is registered for a particular income year, the Board may make a finding pursuant to paragraph (a) that the activity was a “core R&D activity” and that it was conducted during the income year. By way of further example, and relevant for the purposes of Moreton’s alternative submission before the Tribunal (see [7] above), if an activity is registered for a particular income year, the Board may make a finding pursuant to sub-paragraph (c)(ii) that the activity was a “supporting R&D activity” conducted in the income year, in relation to one or more specified “core R&D activities” for which the entity was registered in an earlier income year. There did not appear to be any dispute between the parties on the appeal that if activities were registered as “core R&D activities”, the Board could nevertheless find that they were “supporting R&D activities” pursuant to paragraph (c).