Consideration
140 There is a substantial overlap between questions of law 1 to 9. Similarly, the grounds of appeal substantially overlap. In these circumstances, it will be convenient to deal with the questions of law (and grounds) together rather than separately. In summary, the issue is whether the Tribunal erred in its construction of the definition of "core R&D activities" in s 355-25(1) of the ITAA 1997 or in the application of that construction to the activities constituting the pilot project.
141 Moreton's submissions (based on its written submissions) can be summarised as follows:
(a) In relation to s 355-25(1)(a), the Tribunal erred in finding that the requirement that the "outcome" of the experimental activities "cannot be known or determined in advance" will not be satisfied by experimental activities whose outcome, whilst unknown, relates to the application of an existing technology to a specific site: Reasons, [258]-[259], [262]. There is nothing in the statutory text to suggest that activities should be excluded if the unknown outcome relates to the application of an existing technology to a specific site. Nor is there anything in the context, including the legislative history and extrinsic materials, to suggest that such a limitation should be read into s 355-25: Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at [39]; see also [2.13] of the Explanatory Memorandum.
(b) Further and in any event, the Tribunal erred by mischaracterising the "outcome" at which Moreton's activities were directed for the purposes of s 355-25(1)(a). It did so in two significant ways. First, as the Tribunal found elsewhere, the pilot project was undertaken in order to determine whether the syngas produced by the application of the UCG process to the site could be treated and used to drive a gas turbine so as to produce electricity: Reasons, [27], [258]. That was something that had never been done before in the world: Reasons, [261]. The activities included work in designing and developing a syngas clean up plant to determine whether the gas could be cleaned to a point where its chemical composition could be used for gas turbines to generate electricity. By focussing only on the application of the UCG technology to the particular site, the Tribunal took an unduly narrow (and incorrect) view of the "outcome" at which the experimental activities were directed for the purposes of s 355-25(1)(a). The reference in s 355-25 to "core R&D activities" in the plural form, in contrast to the reference in s 27J of the IR&D Act to "all or part of a registered activity", permits a set of related experimental activities considered in combination to be evaluated against the statutory criteria. Applying the criteria to individual activities or components of the overall activities in isolation is apt to lead to error. A consequence of viewing a related set of activities as a whole is that, if the carrying out of those activities is cut short (as they were in the present case) it should not deny eligibility under the legislation in respect of the activities actually carried out.
(c) Secondly, in expressing an understanding that the project was not undertaken to, in part, demonstrate that UCG as a process could be undertaken in an environmentally friendly manner (Reasons, [257]), the Tribunal foreclosed any consideration of that demonstration (or failure to demonstrate) as an outcome of the activities. The expressed understanding was directly at odds with the FEED document, which stated that one of the outcomes sought was to "demonstrate … that the process [can] be operated in a safe and environmentally responsible manner", and that there would be a series of trials with extensive monitoring carried out on all aspects of the technology associated with the process, "particularly the environmental aspects". Indeed, as is evident from the facts as set out in the Reasons, the environmental aspects dominated the pilot project (particularly in the years in question) and the outcome was that the UCG process could not be undertaken in an environmentally friendly manner. It was for that reason that the Queensland government ultimately banned the technology.
(d) On a proper construction and application of s 355-25(1)(a), the "outcome" at which the experimental activities were directed was determining whether syngas produced from the application of the UCG process could, after processing, drive a gas turbine and that the process could be operated in an environmentally responsible manner. These matters were unknown and could not be determined in advance on the basis of current knowledge, information or experience, but could only be determined by applying a systematic progression of work of the kind described in subparagraphs (i) and (ii) of s 355-25(1)(a). There is no basis for reading down the provision, or characterising the outcome, in such a way as to deny eligibility on the basis that the outcome was "site specific".
(e) In relation to s 355-25(1)(b), there is nothing in the text of this provision that suggests that what constitutes "new knowledge" should be narrowly defined. To the contrary, the words in parenthesis support an expansive interpretation of those words. So too does the text of the objects clause in s 355-5. Reading down the type of new knowledge that can satisfy s 355-25(1)(b) by reference to the extrinsic materials is contrary to established principles of statutory construction. As a result, the Tribunal misconstrued the type of knowledge that is capable of satisfying the purpose requirement in s 355-25(1)(b).
(f) Although a purpose of generating new knowledge that may be site-specific is sufficient to satisfy s 355-25(1)(b), the Tribunal in any event mischaracterised Moreton's purpose by limiting it to "testing the application of existing technology at a particular site and nothing more": Reasons, [262]. To the extent this was an inference drawn from facts found, Moreton contends it was not reasonably open: see Minister for Immigration & Multicultural Affairs v Al-Miahi (2001) 65 ALD 141; [2001] FCA 744 at [34]. Moreover, it fails to take into account that knowledge of whether the UCG process could be carried out in an environmentally responsible manner is "new knowledge" for the purposes of s 355-25(1)(b).
142 In oral submissions, senior counsel for Moreton challenged the Tribunal's construction of the words "experimental activities" in the opening line of s 355-25. It was submitted that there was nothing in the text of the legislation to exclude activities directed at site specific knowledge (assuming this is the correct characterisation of the activities), that the words "experimental activities" bear their ordinary meaning, and that the Tribunal erred in law in departing from that ordinary meaning. It was further submitted that, by focussing on the acquisition of site specific knowledge, the Tribunal had mischaracterised the purpose of the activities (namely, to demonstrate the technical and environmental viability of the UCG technology, including integrating the technology with a gas turbine).
143 The Board's submissions in response can be summarised as follows:
(a) The Tribunal was correct to conclude at [196] of the Reasons that activities will not be experimental activities merely because "they are a test or trial undertaken for the purpose of discovering something unknown or for testing a principle". As the Tribunal reasoned, such a construction would, in effect, omit the adjective "experimental" from the definition in s 355-25(1). As the text of s 355-25(1)(a)(ii) confirms, there is an important difference between observation - observing or measuring the results of some established process, procedure or phenomenon - and conducting an experiment. An experiment involves the testing of a hypothesis, not merely observing some process or phenomenon. In light of the context provided by s 355-25(1), "experimental activities" excludes the measurement or observation of some unknown quantity by known methods and techniques.
(b) In the present case, the Tribunal found that the pilot project involved the application of known and "old" technology to a particular geological site: Reasons, [256]-[257]. Because the UCG process is site specific, how the process would proceed would depend on the characteristics of the site: Reasons, [258]. The Tribunal reasoned that the pilot plant could be described as "experimental" only to the extent that the application of the known technology at the specific site could be predicted but not known until implemented: Reasons, [261]. However, consistently with the distinction drawn between observation and experiment, such activities cannot be regarded as "experimental activities". As the Tribunal found at [262], Moreton was not carrying out the project "to solve a problem, develop a new product or improve a process". It was testing or observing the results of applying an existing technology at a particular site and nothing more.
(c) The question for the Tribunal (and this Court) is whether "all or part of a registered activity" was a core R&D activity or supporting R&D activity conducted during the year of registration: see IR&D Act, s 27J. The fact that "core R&D activities" is defined in the plural is irrelevant. As s 27J makes plain, it is not enough that the registration describes an activity that is an R&D activity; it is essential for Moreton to demonstrate that what was actually done in a relevant year corresponds with the relevant registration, and further that the activities carried out satisfy the relevant definitions of R&D activities.
(d) The Tribunal applied the definition of "core R&D activities" both to the activities registered during the relevant years as well as to the pilot project as a whole. Whether particular activities can legitimately be categorised as part of a broader "project level" activity is a question of fact. In some circumstances, it may be appropriate for the definition of "core R&D activities" to be applied to a number of aggregated registered activities which, on proper characterisation, are components of a single experimental activity.
(e) Contrary to Moreton's submissions, the text of s 355-25 is not focused merely on the "outcome" of experimental activities. The opening words of s 355-25(1) make clear that the hinge about which the section turns is the "experimental activities" themselves. This is confirmed by the exclusions in s 355-25(2).
(f) The Tribunal did not accept that the UCG project was undertaken for the purpose of demonstrating that UCG as a process could be undertaken in an environmentally friendly manner. Rather, the Tribunal found, the project was undertaken to demonstrate that UCG could occur at the particular site: Reasons, [257]. Those are findings of primary fact that are not open to challenge.
(g) Further, whether the registered activities were carried out for the purpose of generating new knowledge was a question of fact for the Tribunal. The Tribunal's findings of fact were reasonably open. Merely because a process may incidentally generate new knowledge does not mean that the process is undertaken for the purpose of generating new knowledge: see Re DBTL and Innovation Australia (2013) 137 ALD 88 at [184].
(h) Further, contrary to Moreton's submissions, the text, context (including relevant extrinsic materials) and purpose of the ITAA 1997 deny that knowledge obtained by applying known technology to a new location constitutes "new knowledge". First, s 355-25(1)(b) refers to "new knowledge". The adjective "new" is capable of more than one construction. It could refer broadly to knowledge that is "new" in the sense of covering anything not previously known. It could also be narrower and only refer to knowledge that is "new" in the sense that the knowledge was not previously capable of being known or determined. The former would include facts that, although not known, are capable of being discovered using established techniques; e.g. the determination of the concentration of oxygen in a particular sample of gas. The latter narrower interpretation would exclude such facts from the concept of "new knowledge".
(i) Secondly, the latter construction is supported by the immediate context. The reference in s 355-25(1)(a) to an activity whose "outcome cannot be known or determined in advance" suggests that knowledge about a specific location that can be ascertained by applying pre-existing technology is not new knowledge.
(j) Thirdly, the object in s 355-5(1) informs the construction of "new knowledge". The object of Div 355 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". That object tends against permitting a tax incentive for knowledge that is highly specific to a particular context or location and is unlikely to provide any broader public benefit.
(k) Fourthly, the Explanatory Memorandum indicates that "new knowledge" must go beyond "validating a simple progression from what is already known and beyond merely implementing existing knowledge in a different context or location": at [2.18]. While an explanatory memorandum cannot alter the meaning of unambiguous statutory language, it may assist in resolving a constructional choice presented by the statutory text.
144 In our view, for the reasons that follow, the Tribunal erred in its construction of the definition of "core R&D activities" in s 355-25(1) of the ITAA 1997 (in particular, the words "experimental activities" in the opening line of the subsection).
145 The Tribunal's approach to the words "experimental activities" in the opening line of s 355-25(1) was as follows. Having noted (at [177]) that both parties agreed that the words "experimental activities" should be given their ordinary meaning, the Tribunal set out various dictionary definitions of "experimental" and "experiment" at [184] and [185]. The Tribunal did not, however, adopt a construction of "experimental activities" that reflected the dictionary definitions. At [196] of the Reasons (set out above) the Tribunal stated that it did "not accept the proposition that activities will be experimental activities provided they are a test or trial undertaken for the purpose of discovering something unknown or for testing a principle". This indicates a departure from at least some of the dictionary definitions set out earlier in the Reasons. (One of the dictionary definitions of "experiment" was "a test or trial; … an act or operation for the purpose of discovering something unknown or testing a principle".) Further, and significantly, the Tribunal stated at [258] that, on the ordinary meaning of an "experimental activity", the pilot project "can be regarded as such an activity". (Read in context, this would appear to be a reference to the ordinary meaning of the words according to the dictionary definitions set out earlier in the Reasons.) Nevertheless, the Tribunal concluded at [262] that the pilot project as a whole was not an "experimental activity". The conclusion at [262] demonstrates that the Tribunal adopted a construction of the words "experimental activities" that departed from the dictionary definitions.
146 It is convenient to refer at this point to cases that discuss the role of dictionary definitions in the process of statutory construction. In Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 68, Hill J observed that "the process of statutory construction does not consist merely of ascertaining the meaning of words used aided, if necessary, by a dictionary". See also Thiess v Collector of Customs (2014) 250 CLR 664 at [23]. While the Tribunal was mindful of these principles (see the Reasons at [183]), the initial resort to dictionary meanings (albeit subsequently departed from) was perhaps the wrong starting point.
147 The effect of the Tribunal's construction was that the word "experimental" in the opening line of s 355-25(1) narrowed the types of activities that could qualify as "core R&D activities" beyond the requirements of paragraphs (a) and (b). In other words, on the Tribunal's approach, to determine whether activities are "core R&D activities" one first considers whether the relevant activities are "experimental" activities. If they are not, they cannot qualify as "core R&D activities". If they are, then it is necessary to consider whether they also satisfy the descriptions in paragraphs (a) and (b). That the Tribunal took this approach is evident from, in particular, [196], [197] and [257]-[262]. Thus, on the Tribunal's approach, the words "experimental activities" in the opening line of the provision have real work to do; they do not merely refer to activities of the type described in paragraphs (a) and (b).
148 In our respectful opinion, the words "experimental activities" in the opening line of s 355-25(1) have very little, if any, work to do beyond reflecting the type of activities described in paragraphs (a) and (b) of the subsection. Paragraphs (a) and (b) contain a detailed description of activities. Activities must meet the descriptions in both paragraphs to satisfy the defined expression "core R&D activities". The word "experiment" is used in paragraph (a): this paragraph refers to an outcome that can only be determined by applying a systematic progression of work that, among other things, "proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions". Given the detail and content of the description in paragraphs (a) and (b), it is difficult to envisage activities that would meet the description in paragraphs (a) and (b) but would not be considered "experimental activities". This is not to say that the word "experimental" in the opening line of the subsection is wholly superfluous. It is, at least, descriptive of the types of activities that are described in paragraphs (a) and (b).
149 Notwithstanding the matters discussed in the preceding paragraphs, it seems that the Tribunal's construction of the words "experimental activities" in s 355-25(1) was influenced by the terms of paragraph (b), which states that the activities 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)". The Tribunal referred to paragraph (b) in the course of its discussion of the meaning of "experimental activities" (at [188]). The Tribunal then quoted a paragraph from the Explanatory Memorandum ([1.15]) that stated that the new definition recognised that the taxpayer needed "new information" and needed "to do an experiment to discover that knowledge" (at [189]). Further, the Tribunal's reasoning at [259] (in the context of whether the pilot project was an "experimental activity") reflected the language of paragraph (b).
150 In essence, the Tribunal construed the words "experimental activities" as not covering activities having the purpose of generating new knowledge with respect to the application of an existing technology at a new site. In the core section of the Tribunal's reasoning on the pilot project, after acknowledging that, on the ordinary meaning of "experimental activity", the pilot project could be regarded as such an activity (at [258]), the Tribunal stated that, beyond the site specific knowledge that would be generated, it did not accept that the pilot project was undertaken "for the purpose of generating new knowledge" (at [259]). The Tribunal concluded, at [262], that the pilot project was not an "experimental activity". In reaching this conclusion, the Tribunal was significantly influenced by its view that, beyond the site specific information that would be generated, the pilot project was not undertaken for the purpose of generating new knowledge. In explaining its conclusion, at [262], the Tribunal stated that the pilot project involved "testing the application of existing technology at a particular site and nothing more".
151 In our respectful opinion, the Tribunal misconstrued the words "experimental activities" in the opening line of s 355-25(1) by treating these words as not covering activities having the purpose of generating new knowledge with respect to the application of an existing technology at a new site (at least in circumstances such as those of the present case). The Tribunal's construction is not supported by the text, context or purpose of the provision: see Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at [39] per French CJ, Hayne, Crennan, Bell and Gageler JJ; Thiess v Collector of Customs (2014) 250 CLR 664 at [22]-[23] per French CJ, Hayne, Kiefel, Gageler and Keane JJ; and Regional Express Holdings Ltd v Australian Federation of Air Pilots (2017) 262 CLR 456 at [19] per Kiefel CJ, Keane, Nettle, Gordon and Edelman JJ. The text of the provision, whether one looks at the words "experimental activities" or the text of paragraph (b), does not impose any such limitation. Paragraph (b) refers to experimental activities "that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services)". These words are capable of applying, depending on the circumstances, to activities that are conducted for the purpose of generating new knowledge with respect to the application of an existing technology at a new site. Further, the exceptions to the definition of "core R&D activities" set out in subsection (2) of s 355-25 do not support the Tribunal's construction.
152 The context of the provision, including the extrinsic materials, also does not support the Tribunal's construction. The Explanatory Memorandum is of limited, if any, assistance. It stated at [1.15] that the new definition of "core R&D activities" used "clearer language" than the earlier provision. It also stated that the new definition "recognises that the taxpayer needs new information (to solve a problem, develop a new product or improve a process) and needs to do an experiment to discover that knowledge". These words cannot be treated as substitutes for the statutory language. In any event, they are capable of applying to activities that have the purpose of generating new knowledge with respect to the application of an existing technology at a new site (at least in circumstances such as those of the present case). We note for completeness that in [2.18] of the Explanatory Memorandum it is stated that the knowledge being sought must go beyond "merely implementing existing knowledge in a different context or location". To the extent that regard may be had to this statement, it is not inconsistent with the proposition that, depending on the circumstances, activities that have the purpose of generating new knowledge with respect to the application of an existing technology at a new site may fall within the statutory definition.
153 Further, the purpose of the research and development provisions does not support the Tribunal's construction. The object of Div 355 of the ITAA 1997 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 (s 355-5(1), set out above). The 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)" (s 355-5(2)). At least in circumstances such as those of the present case, this object is capable of being served by activities that have the purpose of generating new knowledge with respect to the application of an existing technology at a new site.
154 Although the Tribunal's reasoning in relation to the pilot project focussed on the words "experimental activities" in the opening line of s 355-25(1), it might be said that the Tribunal implicitly also relied on paragraph (b) of that subsection. If and to the extent that the Tribunal relied on paragraph (b), the same reasoning as set out above applies. In summary, depending on the circumstances, paragraph (b) is capable of applying to activities having the purpose of generating new knowledge with respect to the application of an existing technology at a new site.
155 While not dispositive of the appeal, we also consider the Tribunal's statement at [196] of the Reasons - that it did "not accept the proposition that activities will be experimental activities provided they are a test or trial undertaken for the purpose of discovering something unknown or for testing a principle" - to be open to doubt. In our view, activities of this nature may, depending on the circumstances, constitute experimental activities. Such activities may fall within the description in paragraphs (a) and (b) of s 355-25(1).
156 In light of the conclusions expressed above, it is not necessary to deal separately with each of the questions of law and each of the grounds of appeal. For the reasons set out above, we consider that the Tribunal erred in its construction of the definition of "core R&D activities".
157 It follows that the decision of the Tribunal must be set aside.
158 Although it is not necessary for our decision, we also consider that the Tribunal appears to have mischaracterised the activities constituting the pilot project. The Tribunal stated, at [257], that it did "not understand the project as described to have been undertaken to, in part, demonstrate that UCG as a process could be undertaken in an environmentally friendly manner". It is difficult to reconcile this statement with the FEED document, which stated that the purpose of the pilot facility was to demonstrate (among other things) "that the process [can] be operated in a safe and environmentally responsible manner". The Reasons do not explain why the Tribunal expressed the view that it did at [257] notwithstanding the statement of purpose in the FEED document.
159 Further, while it is true that, as the Tribunal noted at [259], some of Moreton's documents described the pilot project as using known technology, the Tribunal in the core section of its reasoning did not acknowledge that the pilot facility would be the first UCG facility in the world to utilise a gas turbine to make electricity from syngas (as stated in the FEED document) or that the pilot project was taking place under the auspices and strict control of the Queensland government and its agencies to test the environmental impact of the process. (Ultimately, as set out above, the Queensland government decided to ban UCG because of its environmental impact.) In light of these matters, the Tribunal's characterisation of the pilot project at [262] of the Reasons (e.g. "testing the application of existing technology at a particular site and nothing more") is open to question.