High Court refuses taxpayer special leave to appeal R&D case

Articles Written by Kathryn Bertram (Partner)

On 2 September 2021, the High Court of Australia[1] refused Coal of Queensland Pty Ltd (COQ) leave to appeal the decision of the Full Federal Court in Coal of Queensland Pty Ltd v Innovation and Science Australia[2] which denied COQ’s 2012 research and development (R&D) tax incentive claim on the basis that the application did not raise any question of general principle sufficient to warrant the grant of special leave.

At no stage of the judicial process was COQ successful in arguing the activities that it sought to have registered in the 2012 income year were “core R&D activities” or “supporting R&D activities” for the purposes of Division 355 of the Income Tax Assessment Act 1997 (Cth) (ITAA97).

This case demonstrates to taxpayers:

  • the importance of having independent expert evidence to support a claim that R&D activities created new knowledge (one of the statutory requirements in s 355-25(1)(b) of the ITAA97 which defines what activities are core R&D activities). Lay evidence tendered by COQ supporting the alleged new knowledge was insufficient to discharge the taxpayer’s burden of proof in this respect;
  • that it is important to remember that an appeal from the Administrative Appeals Tribunal (AAT) to the Federal Court must be in respect of a question of law. Various issues raised by COQ were found by the Full Court to raise a question of fact and were therefore not appealable points;
  • that to succeed in an appeal to the Federal Court, they must be able to support allegations of error by the AAT with relevant evidence. The Full Court found the absence of R&D plans or documentation was one factor taken into account by the AAT in concluding s 355-25(1) was not satisfied and it did not erroneously substitute an alternative inquiry for the statutory language in s 355-25(1)(a) as COQ had alleged. The Full Court also held that the AAT did not ignore COQ’s evidence, but referred to it as relevant issues arose for consideration; and
  • that there is no mutual exclusivity between sub-sections (1) and (2) of s 355-25. An activity could be conducted for the purpose of generating new knowledge, but if the activity also falls within s 355-25(2) then the exclusion may apply.


COQ held an exploration permit in an area of central Queensland known to contain unexploited coal deposits. The area was known to have coal with a high ash content due to the presence of other minerals and the highly banded nature of the deposits, which made extraction and processing expensive and difficult using established methods. COQ wanted to develop a new mining and beneficiation process that could transform the economics of coal mining and make the deposits within its permit commercially viable. Accordingly, it undertook various activities to investigate the nature and economic viability of mining this deposit in respect of which it sought to claim the R&D tax incentive.

COQ registered four core R&D activities and one supporting R&D activity with Innovation and Science Australia (ISA) for the 2012 income year. In May 2015, ISA determined that none of COQ’s registered activities were eligible to be registered as core R&D activities or supporting R&D activities. COQ sought internal review of this decision. ISA confirmed its original decision on review holding that none of the activities were core R&D activities or supporting R&D activities.

AAT decision

COQ appealed the decision to the AAT. It relied on evidence from five lay witnesses and one expert witness (Dr Jeffrey Euston). ISA relied on evidence from one expert witness (Dr Andrew Vince).

The AAT[3] found the activities were not core R&D activities because they were not carried out applying a systematic progression of work based on principles of established science, nor did they proceed from hypothesis to experiment, observation and evaluation, leading to logical conclusions. The AAT accepted the evidence of both experts that the outcome of the work was predictable based on experience and current knowledge available about this area, and as such, the activities did not generate any new knowledge.  The AAT agreed with ISA who had argued that the activities were part of the ordinary exploration activities a company with a mining tenement undertakes in order to ascertain the location, quality and size of the coal resources so it could progress to the point of mining coal. Accordingly, the AAT held that all the activities fell within the exception in s 355-25(2)(b). This section provides that prospecting, exploring or drilling for minerals or petroleum for the purposes of discovering deposits, determining more precisely the location of deposits or determining the size or quality of deposits are not core R&D activities. The AAT also rejected COQ’s alternative argument that if certain activities were not core R&D activities then they were supporting R&D activities.

Full Federal Court decision

COQ appealed the AAT’s decision to the Full Federal Court. It argued the AAT made findings that were not open on the evidence and applied a wrong legal standard in concluding that both the experts agreed the outcome of the work undertaken by A&B Mylec and Sedgman (experts in coal preparation in Australia) “could have been determined in advance and did not generate any new knowledge”. However, contrary to COQ’s assertion, the Full Court concluded that there was evidence to support the AAT’s finding, and the evidence did reasonably admit this inference.  

COQ also argued that the AAT did not apply the text of the statute but made an assumption that whether the statutory criteria was satisfied depended upon the existence of “R&D plans or documentation”. However, the Full Court noted the AAT did not state that the existence of R&D plans or documentation was essential to satisfy the requirements of s 355-25(1). Rather the Court found “it is apparent that the reference to the absence of R&D plans or documentation merely reflected the facts of the present case rather than an assumption that such plans or documentation were required to satisfy the provision”. It found the absence of R&D plans or documentation was one factor taken into account by the AAT in concluding s 355-25(1) was not satisfied.

The Full Court also found several submissions made by COQ did not raise a question of law and therefore were not matters to be determined by the Court.

The Full Court concluded that COQ did not establish that the AAT misapplied s 355-25(1) by limiting its consideration to activities predominantly to those undertaken in 2012 as opposed to taking into account COQ’s overall project. Rather the Full Court found the AAT was aware the project was a multi-year project and concluded there was no error in the AAT’s approach of focusing on the actual core and supporting activities undertaken in the 2012 income year and that the AAT did in fact consider evidence about the activities in later years (in so far as those activities shed light on the characteristics of the activities in the 2012 income year).  

The Full Court noted that some of COQ’s submissions appeared to proceed on the basis that if an activity was undertaken for the purpose of generating new knowledge, it cannot have been exploration or drilling for the purposes of determining more precisely the location, size or quality of deposits (for the purposes of s 355-25(2)(b)). However, the Full Court held there was no mutual exclusivity between sub-sections (1) and (2) of s 355-25. It found that an activity could be conducted for the purpose of generating new knowledge, but if the activity fell within s 355-25(2)(b), then the exclusion may apply.

COQ also submitted that the AAT had ignored relevant evidence, failed to give adequate reasons to the extent it did not accept its evidence and failed to make findings on material questions of fact. The Full Court found that the AAT did not ignore the evidence of Mr Vorias and Mr O’Malley but referred to it as relevant issues arose for consideration. In relation to the contention that the AAT failed to make findings on material questions of fact, the Full Court held that the matters raised by COQ did not arise for consideration on the AAT’s findings.

In relation to the alternative argument that certain activities were directly related to a core R&D activity to be conducted in a later year, the Full Court determined that the proposition that activities conducted during 2012 were “directly related” to, and were for the dominant purpose of supporting that work was not supported by, and was contrary to, the AAT’s findings. For these reasons, the Full Court dismissed COQ’s appeal.

[1] Coal of Queensland Pty Ltd  v Innovation and Science Australia [2021] HCASL 163 per Gordon J

[2] [2021] FCAFC 54 per Logan, Griffiths and Moshinsky JJ

[3] Coal of Queensland Pty Ltd  and Innovation and Science Australia (Taxation) [2020] AATA 126  per Deputy President Bernard J McCabe and Senior Member A Poljak

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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