Federal Court of Australia judgment – Moreton Resources Ltd

On 25 July 2019, the Court handed down its judgment on Moreton’s appeal. The Court considered whether the AAT had erred in its construction of the definition of “core R&D activities” in s.355-25(1) of the ITAA 1997 in relation to the pilot project activities which had been registered in the 2010 year. The Court found that the AAT had erred in its interpretation of part of the definition of “core R&D activities” and ordered the matter be remitted to the AAT for determination according to law.

In particular, the Court found that:

• The AAT erred by considering that the words “experimental activities” do something other than merely refer to activities which meet the requirements of s.355-25(1)(a) and s.355-25(1)(b).
• The AAT misconstrued the terms of s.355-25(1)(b) by considering that it excluded activities which have the purpose of generating new knowledge with respect to the application of an existing technology at a new site.

The Federal Court remitted the matter to the AAT for determination of whether Moreton’s activities in the 2012, 2013, and 2014 income years were eligible supporting R&D activities in accordance with the law. The AAT handed down its decision on 21 September 2022 and publicly released its decision on 11 November 2022.

The Court focused on two particular aspects of the AAT’s approach to the construction of the definition of “core R&D activities” in s 355-25(1). Those two aspects are whether the term “experimental activities” imposes requirements further to s.355-25(1)(a) and s.355-25(1)(b), and whether a purpose of generating new knowledge with respect to the application of an existing technology at a new site can meet the requirements of s.355-25(1)(b). It is noted that as the definition is cumulative, all aspects of the definition of “core R&D activities” in s.355-25(1) must be satisfied.

The decision of the Court to treat the words “experimental activities” as merely descriptive of the activities which meet s.355-25(1)(a) and s.355-25(1)(b) is consistent with ISA’s approach.

Following the Court’s judgment, ISA acknowledges that activities involving the application of existing technology at a new site may, depending on the particular facts and circumstances of each case, satisfy the legislative criteria set out in s.355-25(1)(a) and s.355-25(1)(b). However, not all such applications of existing technology will satisfy those criteria.

Activities will be assessed on a case-by-case basis against all aspects of the definition of core R&D activities in s355-25(1).