GQHC and Commissioner of Taxation

[2024] AATA 409

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• The impact of this case on ATO policy is discussed in Decision Impact Statement: GQHC and Commissioner of Taxation (2020/0826).

(Decision by: Senior Member Dominique K Grigg)

GQHC and Commissioner of Taxation

Tribunal:

Member:
Senior Member Dominique K Grigg

Legislative References: - 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)

Case References:
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) 285 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 63
Ultimate Vision Inventions Pty Ltd v Innovation and Science Australia - [2022] FCA 606; (2022) 176 ALD 1

Other References:
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)

Hearing date: 1, 2, 5, 6, 7, 8 and 9 December 2022, 21 September 2023
Decision date: 16 February 2024

Brisbane

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Decision by:
Senior Member Dominique K Grigg

GLOSSARY

INTRODUCTION

1. The Applicant, GQHC, is a company within the Group (Group), an 80-year-old family-owned poultry operation headquartered in Site E, Queensland.^[1]

2. 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]

3. The Group produces over 28 million broiler chickens annually.

4. The Group also produces breeder chickens.

5. 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]

6. GQHC conducts the poultry farming operation specialising in the production of the broiler chickens and the broiler breeder laying farms.^[5]

7. Another entity in the Group, YZQC, operates the hatching operations.^[6]

8. 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.

9. 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).

10. YZQC was originally a party to this proceeding and was represented by the same representatives as GQHC.^[9]

11. 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).

12. GQHC provided the following original application summary of the proceedings:^[10]

13. 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.

14. 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).

15. 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]

16. 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.

17. 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.

18. The R&D scheme is managed by Innovation and Science Australia (Board) which was established by the IR & D Act.

19. 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.

20. 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.

21. 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.

22. 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]

23. 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

24. 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.

25. The Tribunal is very grateful to both parties for their detailed submissions and assistance throughout this matter.

Orders Sought

26. 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.

27. 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]

Witnesses

28. GQHC relied on the following witnesses:

29. 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

30. 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.

31. 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.

32. 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.

33. The Commissioner opposed the leave application.

34. The Tribunal decided not to grant leave for the following reasons based on considerations of procedural fairness, delay, and costs.

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. The entirety of GQHC's case did not turn solely on findings regarding this one activity.

41. 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

42. The issues for determination by the Tribunal are set out below.

43. 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]

Jurisdiction

44. 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

45. 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.

46. 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

47. 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.

48. 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)?

49. This involves consideration of the issues below.

Poultry Feed

50. 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.

51. Whether expenditure incurred on poultry feed fed to chickens is expenditure to which section 355-465(2) of the ITAA 1997 applies.

52. 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.

53. 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

54. 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.

55. Whether expenditure incurred acquiring the chickens is expenditure to which section 355-465(2) of the ITAA 1997 applies.

Scope of Subdivision 355-H

56. 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

57. 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.

58. 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.

59. 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.

60. 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).

61. 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

62. 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.

63. 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).

64. Section 28E of the IR & D Act is concerned with findings about whether technology is "core technology".

65. 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.

66. 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)

67. The Board may request further information from an R&D entity applicant (section 27E).

68. 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).

69. An applicant can apply for the Board to make section 27J findings (section 27G).

70. The Board's section 27J findings are then communicated to the R&D entity (section 27K).

When is the Commissioner Bound?

71. Section 27J findings are binding on the Commissioner of Taxation (see section 355-705, ITAA 1997) for the purposes of the ITAA 1997.

72. 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)

73. 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.

74. 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:

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

75. The Commissioner may apply for an internal review of a "reviewable decision": sections 30C and 30D, IR & D Act.

76. 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).

77. 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

78. Provisions concerning R&D are set out in Division 355 of the ITAA 1997.

79. 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)

80. Section 355-1 provides that an "R&D entity" may be entitled to a tax offset for "R&D activities".

81. An "R&D entity" includes a body corporate incorporated under Australian law (section 355-35).

82. "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"?

83. "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.

84. 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"?

85. 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"?

86. 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).

87. This issue is discussed further at paragraphs 257-285 below.

Outcome Cannot be Known or Determined in Advance

88. 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)

89. This issue is discussed further at paragraphs 291-294 below.

R&D Expenditure

Notional Deductions

90. 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.

91. 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)

92. 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%.

93. The deductions in this subdivision are notional only: section 355-100, ITAA 1997.

94. 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)

95. 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.

96. 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.

97. 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

98. 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

99. 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.

100. "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)

101. 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.

102. Amended assessments are taken to be "assessments" for the purposes of the ITAA 1936: section 173, ITAA 1936.

Deemed Assessments

103. 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

104. 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

105. 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".

106. 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

107. 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]

108. 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).

109. 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:

110. 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]

111. 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]

Registration Process

112. 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).

113. Following requests for further information and the exchange of information between the Group and Board,^[39] the claimed R&D activities were registered.

114. 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]

115. 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]

116. 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

117. 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]

118. On 23 April 2013, the Group also lodged its Scheduled Research and Development Form for the 2012 year with the Board.^[45]

119. On 28 April 2014, the Group lodged its ITR for the 2013 financial year accompanied by the R&D Tax Incentive Schedule.^[46]

Expenditure on Feedstock Inputs Attributable to Feedstock Output

120. 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]

121. 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]

Notices of Assessment

122. 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]

123. 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

124. 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]

125. 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]

126. 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)

127. 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]

128. 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]

129. 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.

130. 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.

131. On 5 February 2020, the Commissioner disallowed the Group's objections in relation to the 2013 and 2014 years.^[57]

132. 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]

133. 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.

134. 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

135. 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.

136. GQHC submitted:^[62]

(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.

137. 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.

138. 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.

139. 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

Commissioner's Contentions

140. The Commissioner contends that the Tribunal has jurisdiction to determine whether the Registered Activities constitute "R&D activities" within the meaning of section 355-20 of the ITAA 1997.

141. The Commissioner submitted:^[66]

(a)

where, as in the present matter, the Board has not made any findings and not given the Commissioner any certificate (with any finding) under sections 27B, 27J (or 28E), there are no findings that bind the Commissioner for the purposes of assessments of the relevant R&D entity for any income year;

(b)

the giving of a certificate is a pre-condition for the consequence provided for in section 355-705(1); and,

(c)

without that pre-condition being satisfied, the Commissioner is not bound and can exercise his ordinary duties.

142. The Commissioner outlined the role and duties of the Commissioner in the taxation regime:^[67]

(a)

section 8 of the ITAA 1936 provides that the "Commissioner shall have the general administration of this Act", which includes the ITAA 1997 and Schedule 1 to the TAA;^[68]

(b)

the Commissioner's duty includes a "duty"^[69] to make an assessment^[70] of the taxable income, tax payable and tax offset refunds of any taxpayer;^[71] and,

(c)

the making of an assessment is a reference to the "process by which the liability provisions in the assessment acts are applied to the facts at hand, leading ultimately to a conclusion about the specified amount of tax payable for the relevant income year".^[72]

143. The Commissioner referred to the decision in Macquarie Bank Limited v Commissioner of Taxation [2013] FCAFC 119, where the Full Federal Court explained the power given to the Commissioner as follows (at [11]):

The power of the general administration of tax legislation given the Commissioner, by provisions like s 8 of the 1936 Act^[73] ...does not permit the Commissioner to dispense with the operation of the law. The power of general administration in such provisions is not a discretion to modify, or which modifies, the liability to tax imposed by the statute: the power in such provision for general administration (coupled with whatever discretion they may contain) affects the administration of the Acts and not the Commissioner's duty to act according to law and to assess taxpayers to the correct amount of liability imposed by the legislation.

(emphasis added)

144. In the absence of a certificate of finding(s) by the Board, the Commissioner contends it is up to him to determine whether a notional deduction arises under section 355-210 in respect of certain expenditure by reference to the expenditure said to be incurred on R&D activities. In those circumstances, where the pre-condition has not been met, the Commissioner must determine for himself whether he is satisfied that the relevant activities meet the definition of "R&D activities" in determining whether an entity is entitled to a notional deduction.

145. The Commissioner refutes GQHC's contention that an inconsistency arises because of overlapping or concurrent jurisdiction, or that there is any risk of an absurd result. This is because:

(a)

There is no statutory basis for the Commissioner's general powers to be limited in the way contended for by GQHC.

(b)

Co-regulation does not of itself, speak of any inconsistency. The Commissioner referred to the Explanatory Memorandum as contemplating the complementary roles of both the Commissioner and the Board:^[74]

A key function of the Board will be to enhance the integrity of the program by managing a process of registration for activities. Registration allows the Board to undertake risk assessment and compliance work, complementing integrity measures undertaken by the Commissioner of Taxation (Commissioner). In conducting this risk assessment and compliance work, the Board will confirm or reject an R&D entity's self assessment of certain activities as 'core' or 'supporting' R&D activities as defined under new Division 355 of the ITAA 1997.

(emphasis added)

(c)

The Board and Commissioner operate within different contextual domains. It is only if there have been no findings made by the Board, that the role of assessment of eligibility moves to the Commissioner as part of the carrying out of his duties.

Conclusion on Jurisdiction

146. Pursuant to section 355-705, the Commissioner is bound by certain findings of the Board.

147. Primarily, GQHC's contention is that the scheme does not confer any power on the Commissioner to make findings or decisions as to the eligibility of R&D activities as defined in Division 355 of the ITAA 1997. If the Commissioner has an issue regarding the eligibility of an activity, GQHC states it has the ability, pursuant to section 30C(4) of the IR & D Act to apply to the Board for internal review of a reviewable decision. The difficulty with this submission is that it that assumes a "reviewable decision" has been made.

148. Here, no findings were made by the Board and there is no section 30A "reviewable decision". Section 27B of the IR & D Act contemplates that the Board "may not" make findings. Section 355-705 contemplates the Commissioner being bound only "if" there is a certificate with relevant findings.

149. The Full Federal Court decision of Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; (2021) 284 FCR 294 (Auctus) is relevant to this issue.^[75] In Auctus, the taxpayer registered certain activities with the Board under section 27A of the IR & D Act. The taxpayer "self-assessed" its activities as ones capable of being registered as R&D activities. The activities were registered under section 27A without the Board making any findings. The taxpayer self-assessed a tax offset refund of $2,269,336.05 in its ITR for the 2013 year.

150. Following the self-assessment, the Board made findings that the registered activities were not eligible R&D activities. The Commissioner issued the taxpayer with reasons for issuing a notice under section 8AAZN of the TAA requiring the taxpayer to repay the tax refund for the 2013 year. The Court noted that in 2013 (contrary to prior years), the Tax and Superannuation Laws Amendment (2013 Measures No 1) Act 2013 (Cth) introduced a new section (section 166) which required an assessment of taxable income, tax payable and the total of the taxpayer's offset refunds. Previously, tax offset refunds were not required to be assessed.

151. The Full Court noted that the Board will not always issue a certificate and will not always make findings. The R&D tax incentive operates on a self-assessment basis.^[76]

152. Although Auctus did not concern whether the activities were R&D activities, Thawley J noted (in discussing the overall regime) that either the Commissioner or the Board might conclude whether activities are eligible R&D activities. He said (at [32]):

The Board might do so by making findings under ss 27B or 27J. If the Board has not made findings (which is often the case), the Commissioner might form his own views about whether a taxpayer's activities are R&D activities. As the legislation currently stands (tax offset refunds being part of the process of assessment), if the Commissioner took the view that particular activities were not R&D activities and there was no binding finding about that, then the Commissioner would have to act on his view in performing his assessment obligation under s 166 of the ITAA 1936. In fulfilling his duty, the Commissioner is bound by a finding made by the Board if one happens to exist (s 355-705) but is otherwise responsible for administering the tax laws according to their terms. The Commissioner is not bound by the taxpayer's self-assessed view that their activities are "R&D activities". If it were otherwise, the taxpayer's opinion about their activities constituting R&D activities would, in the absence of a finding by the Board, be determinative of this aspect of the taxpayer's eligibility to the tax offset refund.

(emphasis added)

And, at [36]:

If the Commissioner formed the view today that a taxpayer was not entitled to the tax offset refund which the taxpayer had self-assessed in a return, he would ordinarily assess the taxpayer in accordance with his view: s 166 of the ITAA 1936.

153. McKerracher and Davies JJ agreed with Thawley J.

154. The Full Court held that the administration and management of the R&D tax incentive scheme is managed jointly by the Board and the Commissioner (at [34]).

155. If no findings have been made by the Board, the Commissioner can make his own assessment. Thawley J's obiter dicta in Auctus, and the agreement of his fellow judges, is highly persuasive to this Tribunal. It should not be departed from lightly.^[77] It is expected that, "in the ordinary course the Tribunal would be expected to defer to and follow a considered conclusion, even if strictly obiter, reached by a judge of the Federal Court of Australia": TCXG and Minister for Foreign Affairs [2013] AATA 377 at [21].

156. In closing submissions, GQHC conceded that Auctus was not in their favour.

157. The Tribunal finds, consist with Auctus, that:

(a)

"findings" made by the Board are clearly a pre-condition to the Commissioner being bound. There is no statutory impediment on the Commissioner's ordinary duties in these circumstances.

(b)

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, in circumstances where no such findings have been made by the Board. This is consistent with the Commissioner's general administrative power and duty to assess the taxpayers' liability according to law; and,

(c)

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.

158. The Tribunal therefore finds it has jurisdiction to review the objection decision dated 5 February 2020 pursuant to section 25 of the AAT Act and Part IVC of the TAA.^[78]

ISSUE 2: R&D ACTIVITIES

BACKGROUND – POULTRY FARMING

159. GQHC provided the following background information regarding the poultry farming industry and GQHC's operations which is relevant to understanding the issues to be determined.^[79]

Breeding Stock

160. The Group primarily uses a breed of chicken called the "Ross 308" to breed its broiler chickens. The Ross 308 stock is acquired from a company called Aviagen, a chicken genetics company.

161. Breeder chickens are reared, housed, and managed at breeder farms.^[80]

162. Breeder chickens start to produce eggs when they become sexually mature.^[81]

163. Breeder chickens are generally used to lay eggs for 40 to 44 weeks (Laying Period), after which they are exchanged for a new flock.^[82]

Breeding Sheds – Design and Operation

164. Breeder chickens are kept in sheds. The sheds have raised plastic slat flooring to encourage the birds to remain off the ground, which is usually soiled with manure.^[83]

165. The sheds are designed to encourage the birds to lay in raised nesting boxes, as this minimises bacteria and moisture on the eggs.^[84]

166. The slat design enables most of the manure to pass though, but there is still "a gradual build-up of faeces and other contaminates on the slats during each laying period".^[85]

167. After each Laying Period the entire shed and slat flooring needs to be thoroughly cleaned and sanitised to ensure the shed is contaminant and disease free before the arrival of the next flock of breeder hens.^[86]

Egg Incubation

168. Fertile eggs are transferred from the breeder farm to a hatchery for the incubation process.^[87]

169. Eggs are incubated for a period of 18 days before being placed into a hatcher for three days.^[88]

170. Once hatched, the broiler chicks are vaccinated and transported to a broiler farm.^[89]

Broiler Farming

171. The broiler chicks are zero days old when they arrive at the broiler farm.^[90]

172. The chicks are placed on the floor of the sheds.^[91] The chicks are allowed to run freely within the shed.^[92] The sheds contain "feeders", "drinkers" and "ventilation systems" of varying quality.^[93] Some sheds have "hot air brooders" which are big heaters that blast heated air into the shed.^[94]

173. The following photographs taken from a shed at a broiler farm shows drinkers and feeders used by GQHC:^[95]

174. Housing the chickens in sheds "protects them from outside predators such as snakes, rats and birds, and any diseases they might carry. [Keeping chickens in sheds] also ensure[s] that the chickens will not consume any undesirable items".^[96]

175. The sheds are maintained at a certain temperature, which is adjusted depending on the age of the chickens.^[97]

176. The optimal temperature for the growth of zero-day-old chickens is 32 degrees Celsius.^[98] Heaters in the sheds are turned on two days prior to the arrival of the zero-day-old chickens to preheat the floors and maintain the temperature.^[99]

177. The optimal temperature changes for each growth phase.^[100]

178. The aim of the temperature adjustments is to ensure the broilers consume as much feed as possible for growth.^[101]

179. Other variable conditions within the broiler sheds controlled by GQHC include:^[102]

(a)

air speed – water is sprayed in the air in the shed to create a wind chill factor;^[103]

(b)

lighting;

(c)

water consumption; and,

(d)

feed consumption.

180. Farmers oversee the broilers and are required to visit the sheds around two to three times a day to observe and monitor the broilers.^[104] Other than observation, there is limited physical interaction between the farmer and the chickens between their arrival and pick up (collection for sale).^[105]

181. The shed conditions are varied with the intention of providing optimal growing conditions for the bird throughout their growth cycle and to replicate optimal conditions that the chickens would experience if they were out in the wild.^[106]

182. The chicken growth cycle is as follows:

•

14 days: the chicken loses all of its down which it had when first hatched;

•

21 days: the chicken finishes growing feathers and can maintain its body heat;

•

28 days: the chicken is grown enough to permit identifying whether it is male or female;

•

5-7 weeks: the chickens are picked up and sold for processing;

•

if the chickens continued to live at 22-24 weeks: the chicken would be sexually mature.

183. The following photographs are of chickens at 18 and 28 days of age in GQHC's sheds:^[107]

184. Broiler chickens remain in the sheds for 5 to 7 weeks of age until they reach a certain weight.^[108]

185. When the chickens are ready to be collected, they are taken "off feed" so that the chickens have the chance to finish processing food through their crop and gizzard (see anatomy image at paragraph 715.^[109]

186. The broilers are picked up manually and placed in a truck to be delivered to the processing plant owned by a third party.^[110] GQHC cease to own the broilers as the truck passes over the weighbridge at the farm.^[111]

Broiler Chicken Feed

187. GQHC use four types of feed – known as the starter, the grower, the finisher and the withdrawal.^[112] The feeds contain different protein and fat levels appropriate for each stage.^[113] Feed recipes may differ depending on the availability of raw materials.^[114] GQHC said "nutrients must be provided in the correct balance and proportions to ensure optimal growth".^[115]

188. Chicken feed is made up of the following components:

(a)

carbohydrates;

(b)

protein and amino acids;

(c)

fats and oils collectively referred to as lipids; and

(d)

vitamins and minerals.

Chicken's Digestive System

189. The chicken's digestive system comprises: the oesophagus, the crop, the proventriculus, the gizzard, the small intestine, the ceca, the colon, and the cloaca. These elements are illustrated in the diagram at paragraph 718 below.

190. Within the intestine are microbiota (bacteria), which aid in the digestion of feed.

191. The digested food is a source of energy and "is extracted primarily from carbohydrates, lipids and proteins through metabolic reactions".^[116] The chemical energy is broken down into simple molecules which "are transformed into new products such as cell regeneration (maintenance) or meat accretion (production). In the process, further energy is consumed in heat." GQHC stated, "only part of the chicken feed's energy is ultimately used for meat production".^[117]

R&D CONTENTIONS – SUMMARY

GQHC's Contentions

192. GQHC contends the Registered Activities are eligible core and supporting R&D activities.^[118]

Commissioner's Contentions

193. The Commissioner contends that none of the Registered Activities constitute R&D activities within the meaning of section 355-20 because:^[119]

(a)

in respect of many or all of the activities, GQHC's evidence does not sufficiently establish that the activity took place at all, or took place in accordance with the registrations in the R&D Applications;

(b)

assuming the Registered Activities were carried out:

(i)

they were not experimental activities whose outcome could not be known and determined in advance on the basis of current knowledge without the need to apply any systematic progression of work that:

(1)

was based on principles of established science; and

(2)

proceeded from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and

(ii)

they were not conducted for the purpose of generating new knowledge, including new knowledge in the form of new or improved materials, products, devices, processes, or services;

(c)

none of the Registered Activities involved applying a systematic progression of work that was based on principles of established science and proceeded from hypothesis to experiment, observation and evaluation, and led to logical conclusions; and,

(d)

none of the Registered Activities claimed to be supporting R&D activities satisfy the definition in section 355-30 of the ITAA 1997 in being activities directly related to one or more of the core Registered Activities (if any).

GQHC'S EVIDENCE – OVERVIEW

Mr A

194. Mr A is the Development Manager of the Group.

195. Mr A has a Certificate of Animal Production attained in 1984 and has been employed by the Group since May 1992. Mr A stated that as part of his role as Development Manager for the Group, he is responsible for overseeing all R&D activities, including:^[120]

(a)

regularly attending industry conferences and conducting research on topical issues for broader application in the poultry industry;

(b)

keeping up to date with the latest research and developments, including by maintaining links with other leading experts in the poultry industry;

(c)

identifying the need for research and development;

(d)

carrying out research with the aim of Improving broiler chicken farming operations;

(e)

working with [the Group]'s former Group Manager for Veterinary Services, Dr E (now an external consultant of [the Group] and [the Group]'s Consultant in Poultry Nutrition, Ms Ms D, among others, to discuss and design R&D trials;

(f)

preparing proposals for R&D trials, including identifying the technical and commercial objectives for R&D trials and determining the resources required;

(g)

liaising with and presenting proposals for R&D trials to the Senior Leadership Team for approval;

(h)

managing and overseeing key aspects of R&D trials;

(i)

reviewing and analysing data collected from R&D trials; and

(j)

preparing and presenting observations and conclusions from R&D trials to the Senior Leadership Team

196. Mr A reports to the Group's CEO, Mr B.^[121]

197. Mr A explained the approval process within the Group for all R&D activities. The Senior Leadership Team (SLT) approves all activities with the CEO giving the final approval. In order for the Group to approve any activities they must be "commercially justified".^[122] Proposals to engage in activities are put to the SLT outlining:

(a)

the objectives of the proposed project;

(b)

The resources required for the project (including personnel, external contractors, feed, feed additives, medicines and birds required); and,

(c)

the timing of the project.

198. Mr A prepared the R&D Applications for registration of the claimed projects with the Board.^[123]

Mr B

199. Mr B has been the Group's CEO since 2010. Prior to that he, amongst other things, was the CFO of the Group. Mr B' background is in accounting.^[124]

200. In assessing R&D activities, Mr B stated that the Group must balance the costs, benefits and risks associated with such activities given the limited resources of the business. Any proposed R&D activities must be approved by the SLT before any expenditure is incurred.^[125]

Accounts and Financial Records

201. Mr B explained that:^[126]

31. At the end of each month it is also necessary to process a number of transfer Journal entries. This occurs after cost calculations are prepared to ensure that all Income and expenses attributable to any given company (based on the assets that they own and the functions that they serve) are properly accounted for in each company. This is relevant to expenses such as administration expenses and other overheads.

32. The largest elimination journal entries relevant to [GQHC] are to transfer the cost of eggs delivered from the [the Group]'s breeder farms to the hatchery and the costs of feed delivered from our feed mill.

202. Mr B exhibited copies of the trial balances and statement of taxable income of the Group.^[127] Mr B also provided copies of the ITRs, financial statements, R&D tax incentive schedules and R&D expenditure summaries of GQHC for the Relevant Year.^[128]

R&D Activities

203. For each of the Registered Activities Mr B confirmed that:^[129]

(a)

he made the final decision on behalf of GQHC to approve the undertaking of the R&D activities;

(b)

his decision to proceed with each of the R&D activities was for the purpose of acquiring new knowledge as described in the R&D Application;

(c)

the R&D activities were conducted wholly within Australia; and

(d)

in the case of R&D activities, he approved the R&D activities on the basis that they would be for the benefit of and assist the Group.

204. Mr B explained the R&D expenditure calculations process involved calculating the following:^[130]

(a)

the number of hours spent by technical staff involved in the conduct and management of the activities registered under the R&D Application;

(b)

the duration and scope of the trials conducted by and attributable to the entities within [the Group] that undertook R&D activities for the relevant year, to determine labour, contract, operating costs and applicable feedstock costs attributable to each of the registered activities;

(c)

identification of any other direct or contractor costs incurred in relation to the registered activities; and

(d)

apportionment of relevant administration overheads to each of the registered activities where a sufficient nexus to support the R&D activities was identified.

Dr E

205. Dr E has been a self-employed veterinary consultant since 2018. Prior to 2018, between March 1991 and December 2017, Dr E was employed as Group Manager, Veterinary Services for the Group.^[131]

206. Dr E has a Bachelor of Veterinary Science (Honours) from the University of Queensland. Dr E has been a member of several poultry industry committees and groups including the World Poultry Science Association and the Poultry CRC (End-user Advisory Committee). He has been an adjunct lecturer at the Queensland University School of Veterinary Science since 2013 and adjunct lecturer at the James Cook University School of Veterinary Science since 2015.^[132]

207. Dr E has approximately 35 years of experience as a qualified veterinarian in the poultry industry.^[133]

208. Dr E provided an expert report on the topics of:^[134]

(a)

the anatomy of a chicken – in particular the key similarities and differences between the anatomy of a day-old chick and a chicken at the age of being taken for harvesting;

(b)

the digestive process of a chicken; and

(c)

(some of) the claimed R&D activities.

Role with the Group

209. During the Relevant Year, Dr E was employed by the Group. During his employment, Dr E stated he:^[135]

(d)

was responsible for the health and welfare of GQHC's livestock and the wholesomeness of the products offered;

(e)

advised on research trials and methodology, and how to interpret results;

(f)

provided technical advice on veterinary matters and writing reports; and

(g)

conducted postmortem examinations of chickens.

210. As Group Manager of Veterinary Services for the Group, Dr E had the following key responsibilities:^[136]

(a)

managing the diagnostic and quality assurance laboratory;

(b)

managing the health and welfare of the livestock for the business;

(c)

building and developing relationships with all levels of management within the group on matters of livestock health, biosecurity, welfare, food safety and flock performance; and

(d)

representing the company on matters of technical importance and regulatory impact to customers, government, and the wider community.

Key Performance Indicators in the Poultry Industry

211. Dr E explained there are three key performance indicators in the growing of broiler chickens:^[137]

(a)

the FCR;

(b)

growth rate; and

(c)

mortality rate.

212. Dr E explained the concept of FCR as follows.

213. FCR is a measure of the amount of feed it takes to grow a broiler chicken. He gives the following example: an FCR of 1.5 means that 1.5kg of feed is required to grow a live broiler chicken to 1kg body weight.^[138]

214. FCR is measured on a farm-by-farm basis and by reference to each "batch". A "batch" refers to all of the broiler chickens that are growing on a particular farm at the one time. A batch of chickens is fully depopulated from a farm before it is restocked with a new batch of day-old chickens.^[139]

Feedstock

215. Dr E also provided his expert opinion as a veterinarian in relation to the feedstock adjustment issue.

R&D Activities

216. Dr E explained the process for R&D activities at the Group was overseen by the SLT. Once the SLT had approved an R&D activity, Dr E was often involved in the designing of trials, monitoring trial processes, and analysing results.^[140]

217. Dr E was involved in the following relevant activities:^[141]

(a)

Activity 1.1: Development and testing of single-stage incubation techniques;

(b)

Activity 4.1: Experimentation to trial and optimise slat washer prototype operation;

(c)

Activity 4.2: Experimentation to trial and optimise effectiveness, bird health; and

(d)

Activity 5.1: Experimentation with wholegrain sorghum feed formulations.

Ms D

218. Ms D's area of expertise is poultry nutrition. Ms D has a Bachelor of Agricultural Science (Animal Nutrition and Production) and, amongst other things, over 25 years in poultry feed production and onsite feed mill experience. She also has over 29 years of experience in the design, implementation, and assessment of research trials.^[142]

219. At the time of providing her report, one of the Group's members had been her client for 23 years.^[143]

Associate Professor Peter Groves

220. Associate Professor Groves is a veterinarian with substantial experience in the poultry industry. Associate Professor Groves' PhD thesis concerned an epidemiologically based project on a poultry disease through the University of Sydney.^[144]

221. He has been a member of the Australian and New Zealand College of Veterinary Scientists (Epidemiology Chapter) since 1992, "learning and being accredited in epidemiological techniques which are heavily focussed on statistical analyses of population health and performance clinical studies and field studies".^[145]

222. Associate Professor Groves stated he has had experience since the late seventies with "high quality experimental work...requiring rigorous attention to scientific method".^[146]

223. Associate Professor Groves is the Director of the Poultry Research Foundation and stated that he has been an author of 67 scientific publications. Associate Professor Groves also stated he has first-hand knowledge and close experience in designing, conducting, and analysing basic and applied research studies over 40 years in the poultry field.^[147]

Associate Professor Dragana Stanley

224. Associate Professor Stanley is the Head of Poultry Health Research Cluster Institute for Future Farming Systems at Central Queensland University. She has a PhD in Microbiology/Molecular Biology from Victoria University, Melbourne. According to her curriculum vitae, Associate Professor Stanley has 62 published manuscripts; 52 as journal manuscripts, 10 as pear reviewed conference proceedings, and 2800 citations. Her publications are in the area of intestinal microbiota, gut health and digestion, nutrition microbiology and gene expression.^[148]

225. Associate Professor Stanley stated that she is a National Health and Medical Research Council panel member, an Australian Research Council Discovery Early Career Researcher Award fellow, and a visiting professor at the Faculty of Technology at the University of Novi Sad, Serbia.

226. Associate Professor Stanley provided her expert opinion on:

(a)

the chicken digestion process from a biochemical perspective; and

(b)

the role of microbiota, enzymes and any other reagent, catalyst, or intervening process in the chicken digestion process.

COMMISSIONER'S WITNESSES – OVERVIEW

Professor Colin Scanes

227. Professor Scanes has a Bachelor of Science (Honours first class) 1969 (University of Hull, UK); Doctor of Philosophy (Ph.D.) 1972 (University of Wales, UK) and a Doctor of Science (D.Sc.), 1985 University of Hull, UK. Professor Scanes has been an academic in the field of animal science since the early seventies and has held many academic positions including Professor of Poultry Science, Mississippi State University, USA, Professor of Biological Science, University of Wisconsin, Milwaukee and Vice Chancellor of Research and Economic Development/Dean of the Graduate School and University of Wisconsin, Milwaukee.^[149]

228. Professor Scanes is currently Professor of Animal Physiology and Nutrition at the University of Wisconsin, Affiliate Professor at the University of Arkansas, and President of Scanes Technology and Research Inc.^[150]

229. Professor Scanes has written numerous textbooks on poultry science and was the Editor in Chief for the journal Poultry Science. In 2002 Professor Scanes became an Elected Fellow of the Poultry Science Association.^[151]

Dr Isabelle Ruhnke

230. Dr Ruhnke graduated in Veterinary Medicine from the Freie Universität Berlin, Germany in 2008. Her PhD focussed on evaluating the impact of feed technologies and feed particle size on broiler chickens and laying hens at the Institute of Animal Nutrition, Freie Universität Berlin.^[152]

231. Dr Ruhnke received a postdoctoral research fellowship at the University of New England in May 2014. Dr Ruhnke is currently a senior lecturer at the University of New England.^[153]

232. According to her curriculum vitae Dr Ruhnke has been involved in 13 comprehensive poultry research projects, supervised 12 Higher Degree Research (PhD and Master) students, published 56 international peer-reviewed scientific publications and made 56 conference contributions.^[154]

233. Dr Ruhnke was asked for her opinion in relation to the feedstock adjustment issue, namely:

(a)

whether the poultry feed is "transformed or processed" when fed to the chickens and in the process of producing the broilers; and,

(b)

whether the poultry feed is "transformed or processed" when fed to the broiler breeders and layers and/or in the process of producing the egg, or fertilised egg (as the case may be).

CONSIDERATION

234. The criteria (set out above) that must be satisfied in the Relevant Year for GQHC's activities to be registered as "R&D activities" are:

(a)

GQHC must be an "R&D entity": (ITAA 1997, s 355-35(1); IR & D Act, s 27A(1)); and

(b)

in the Relevant Year the claimed activities must be core or supporting R&D activities as described in section 355-25.

Is GQHC an "R&D Entity"?

235. It is not in dispute that during the Relevant Year:^[155]

(a)

GQHC was an R&D entity within the meaning provided by section 355-35 of the ITAA 1997;

(b)

GQHC was an Australian resident for tax purposes;

(c)

GQHC was an entity within a non-consolidated vertically integrated chicken growing business; and,

(d)

GQHC ran broiler rearing and broiler breeder laying farms.

Were GQHC's Activities "Core" or "Supporting" Activities?

"Principles of Established Science" (s 355-25(1)(a)(i))

236. The emphasis on the centrality of concepts of science in the legislation means experts like Professor Scanes and Associate Professor Groves are qualified to comment upon what is known in respective fields of scientific expertise as a hypothesis and what is required to conduct a scientific experiment or investigation in accordance with the principles of established science (as required by section 355-25, ITAA 1997).

Basic Research vs Applied Research

237. GQHC's expert, Associate Professor Groves, referred in his report to a manual prepared by the Organisation for Economic Co-operation and Development, the "Frascati Manual", which provides definitions for scientific research.^[156] The Frascati Manual (2015) categorises three types of R&D activities (at paragraph 1.35, page 29):

Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view.

Applied research is original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific, practical aim or objective.

Experimental development is systematic work, drawing on knowledge gained from research and practical experience and producing additional knowledge, which is directed to producing new products or processes or to improving existing products or processes.

238. Associate Professor Groves reported that in the "commercial world, [the] level of experimental work [as found in basic research methods] is not fully appropriate [and impractical] and a more empirical approach is often taken".^[157] Associate Professor Groves considered it unrealistic to expect commercial operations to engage in university level research. And, more importantly, that this does not negate the value of the research as a result. Associate Professor Groves stated that, to expect a higher standard of research would have industry repercussions in that commercial operations could not conduct self-evaluation of products and would have to rely on generalised highly controlled basic research results offered by manufacturers and marketing people.

239. Associate Professor Groves stated most poultry companies "would look cautiously on any new technology being introduced without first trialling it under their own conditions" and that "to not do so would be irresponsible to the company and to the wellbeing of the livestock. It would be very unwise to simply adopt a technology with evaluation based just on published studies".^[158]

240. Associate Professor Groves' opinion regarding trialling new technology and commercial operations is no doubt correct, but whether an entity trials new equipment before broadscale introduction does not necessarily equate that trial to an eligible core R&D activity as defined in the ITAA 1997. The statute requires that there a be a demonstrated progression of work based on principles of established science. The statute does not distinguish between basic and applied research, commercial industries or academia. It is broad enough to encompass all methods of research provided they are conducted based on the principles of established science.

241. Despite referring and relying on the Frascati Manual, during cross-examination Associate Professor Groves acknowledged that he may not have read the following paragraphs in the Frascati Manual:^[159]

Research and experimental development (R&D) comprise creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge.^[160]

For an activity to be an R&D activity, it must satisfy five core criteria.

2.7 The activity must be:

•

novel

•

creative

•

uncertain

•

systematic

•

transferable and/or reproducible.^[161]

242. Associate Professor Groves also acknowledged he had not taken into account each of those five OECD criteria when assessing whether each of the activities under review in this matter satisfied each of those criteria, other than generally. Having acknowledged this, he then sought to discount the Manual by saying the criteria were "a little subjective".^[162] A surprising and somewhat defensive response. Having informed the Tribunal that his opinion was based on, and adhered to, the Frascati Manual, it was discovered that he only "adopted" or read limited parts of the Manual.

243. For example, in relation to troubleshooting activities the Manual specifically provides that:^[163]

Trouble-shooting occasionally shows the need for further R&D, but more frequently it involves the detection of faults in equipment or processes and results in minor modifications of standard equipment and processes. It should not, therefore, be included in R&D.

244. No reference was made to this by Associate Progressor Groves which is relevant given his acceptance of evidence that the Group was trialling and calibrating equipment and feed to ascertain its commercial viability (see paragraphs 348, 517 and 717 below). Nor did Associate Professor Groves explain how mere trialling and calibration of equipment and feed fell within the Manual's guidelines and concepts.

245. The Commissioner submitted that Manual was an inappropriate aid to interpreting the language used in section 355-25 because the version considered by Associate Professor Groves post-dated Division 355 and the Relevant Year under examination.^[164]

246. The ITAA 1997 does not define R&D by reference to the Frascati Manual as has been done in other statutory instruments, such as the Other Grants Guidelines (Research) 2017 (Cth). Parliament could have defined the R&D activities to mean those falling within the categories set out in the Frascati Manual (or any other specific reference work), but it chose not to do so in the ITAA 1997.

The Scientific Method

247. Professor Scanes provided an opinion on what constitutes the principles of established science. Professor Scanes stated the following elements are required before an activity can be said to fall within widely recognised principles of established science:

(a)

a hypothesis; and,

(b)

experimentation.

Hypothesis

248. According to Professor Scanes, a hypothesis must have the following criteria:

(a)

specificity;

(b)

validity;

(c)

clarity;

(d)

testability;

(e)

it must seek new knowledge;

(f)

it must have end points to be measured;

(g)

it must have context – i.e. it must be based on sound science and fit within the framework of the scientific literature.

249. Professor Scanes stated that, without these elements, a hypothesis is invalid and the work flawed.

Experimentation

250. According to Professor Scanes, experimentation has the following overarching aspects:

(a)

experimental design; and,

(b)

research analysis and reporting.

251. Experimental design encompasses:

(a)

sufficient detail of how the hypothesis is to be tested – inputs and methods to be used; and,

(b)

adequate replication – i.e. it is a statistically sound experiment.

252. Research analysis and reporting concerns how the data collected needs to be analysed and reported.

253. GQHC submitted that the words of section 355-25 do not require "the design or progression of activities to conform to any academic or industry standard, i.e., the section does not incorporate standards employed by peer reviewed journals or universities that govern the acceptance or credibility of studies. All that is required is a hypothesis, an experiment, observation and evaluation, that lead to logical conclusions".^[165] As a result, GQHC stated that there is no requirement for:^[166]

(a)

a plan or documents; or

(b)

If there is a plan, for it to be free from scientific or academic criticism.

254. GQHC submitted that the objects of the R&D tax incentive "contemplate research being undertaken by private industry not institutions such as universities or other research organisations".^[167]

255. This submission is not unreasonable. Afterall, one of the objects of the IR & D Act is to encourage industry to engage in R&D. Only entities actively engaged in R&D can take advantage of the tax offset regime. Even so, the research activity has to be scientifically conducted. Section 355-25(1)(a) requires as a baseline threshold for quality; that the work must be "based on principles of established science". The scientific method "establishes a threshold".^[168] If there were no minimum threshold standards, what would be excluded from the definition of a core R&D activity? The definition would be meaningless.

256. The interpretation proposed by GQHC would devalue the regime and not only does not accord with the plain reading of the section, it does not accord with Parliament's intention as set out in the Explanatory Memorandum.

"Hypothesis" (section 355-25(1)(a)(ii))

257. As referred to earlier, the meaning of "hypothesis" is not defined in the ITAA 1997 and therefore takes its ordinary meaning in context.

258. The ordinary meaning of a word must be taken to mean its ordinary meaning within the context of the legislative scheme in which it is found. This is set out in section 15AB of the Acts Interpretation Act 1901 (Cth) (AIA) which provides relevantly that:

(1) ... in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:

(a)

to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act ; ...

(emphasis added)

259. In Stevens v Kabushiki Kaisha Sony Computer Entertainment [2005] HCA 58; (2005) 224 CLR 193 (Stevens), McHugh J said at 230 [124]:

In determining issues of statutory construction, the text of the relevant statutory provision must be evaluated not only by reference to its literal meaning but also by reference to the purpose and context of the provision. ... For purposes of statutory construction, context includes the state of the law when the statute was enacted, its known or supposed defects at that time and the history of the relevant branch of the law, including the legislative history of the statute itself. It also includes in appropriate cases "extrinsic materials" such as reports of statutory bodies or commissions and parliamentary speeches – indeed any material that may throw light on the meaning that the enacting legislature intended to give to the provision. That is the process required by the modern approach of the common law to statutory construction. In many jurisdictions, the common law principles have been incorporated, extended or modified by statute. Section 15AA of the Acts Interpretation Act 1901 (Cth) requires a court construing federal legislation to have regard to its purpose. Section 15AB of that Act authorises the use of various forms of extrinsic material to determine the meaning of that legislation.

(emphasis added)

260. See also the High Court decision in Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503, at 519 where the Court noted:

[39] This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.

(emphasis added; citations removed)

261. In SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362 at [14] Kiefel CJ, Nettle and Gordon JJ explained the starting point as follows:

The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute, whilst at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, the meaning must be rejected.

262. This is reflected in section 15AA of the AIA, which provides:

In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.

263. More recently, in Auctus at 310 [68], Thawley J, with whom McKerracher and Davies JJ agreed, said:

... The end object of the process of statutory construction is to give the words of the particular statute the meaning which the legislature is taken to have intended them to have : Lacey v Attorney-General (Qld) (2011) 242 CLR 573 at [43]; Certain Lloyd's Underwriters v Cross (2012) 248 CLR 378 at [25]-[26]. The preferred construction is reached through common law and statutory rules of construction, the application of which involves the identification of a statutory purpose from any express statement in the statute, or by inference from the text and structure of the statute and by appropriate reference to extrinsic materials : Lacey at [44].

(emphasis added)

264. The Explanatory Memorandum provides numerous examples, referring to the hypothesis having a "scientific basis" (for example, para [2.40]). It is appropriate to have regard to the Explanatory Memorandum in light of section 15AB of the AIA and the modern approach to statutory construction that has been explained in cases like Stevens.

265. The language in the Explanatory Memorandum is consistent with the statutory language of Division 355 of the ITAA 1997.^[169]

266. The Explanatory Memorandum provides the approach set out in section 355-25 is "generally known as the scientific method". The Explanatory Memorandum also sets out what will not be considered sufficient to qualify as follows:

[2.15] Less rigorous knowledge discovery and problem solving techniques, such as 'trial and error' alone, will not be sufficient to qualify as eligible experimentation. ...

...

[2.18] The need to employ the scientific method also reflects the degree of novelty in the ideas being tested. That is, the knowledge being sought must go beyond validating a simple progression from what is already known and beyond merely implementing existing knowledge in a different context or location. Rather, the gap between existing knowledge and the hypothesis being investigated will be significant enough to require application of the scientific method.

[2.19] Core R&D activities are part of the eligible experiment, rather than being merely related to it. These are the activities whose outcome is being determined in the context of applying the scientific method. However, not all of the steps in the scientific method will constitute experimental activities. Nor will an activity fall within the scope of the experiment merely because the experiment cannot take place without it.

(emphasis added)

267. Section 355-25 specifically provides experimental activities must not only proceed from hypothesis to experiment, but they must also be based on principles of established science.

268. Those provisions are enforced by section 355-5(2) which provides the object of the Division is to be achieved in a "scientific way".^[170]

269. As was noted by this Tribunal in Lakes Oil NL and Innovation and Science Australia (Taxation) [2023] AATA 811:^[171]

The emphasis on the centrality of concepts of science in the legislation means experts ... are well-qualified to comment upon what is known in his world as an hypothesis and what is required to conduct a scientific experiment or investigation....

It is clear that an hypothesis must have a scientific basis. (If there is any doubt about that having regard to the text of the legislation, that doubt is resolved having regard to the Explanatory Memorandum, which includes an example at p 26.)

(emphasis added)

270. "Scientific" is defined:

(a) in the online Macquarie Dictionary:^[172]

adjective 1. of or relating to science or the sciences: scientific studies.

2. occupied or concerned with science: scientific researchers.

3. regulated by or conforming to the principles of exact science: a scientific method.

4. systematic or accurate.

(emphasis added)

(b) in the Oxford English Dictionary relevantly as:^[173]

Of a process, method, practice, etc.: based on or regulated by science, as opposed to traditional practices or natural skill; valid according to the principles of science. Hence (of a person or other agent): guided by a knowledge of science; acting in accordance with the principles or methods of science.

(emphasis added)

271. Professor Scanes provided a clear and straight forward overview of the scientific method which he explained was best practice for all research. Professor Scanes explained this at the hearing as follows:^[174]

First of all, ... under the principles of established science, one has the situation where a hypothesis in a scientific study must be testable. So, the definition of a research scientific hypothesis is different to the definition of a hypothesis in everyday language

...

If a hypothesis is invalid, then the work that follows it is invalid.

... with an invalid hypothesis, a non-testable hypothesis, we're not following the principles - the established principles of science.

...

... an invalid hypothesis, and an invalid experimental protocol, may give you an indication of something, but it doesn't give you results.

...

If you're not following the principles of established science, any conclusion is based on sinking sand, it could be true, it could not, it's really simply a guess at that point.

(emphasis added)

272. Professor Scanes was asked if he accepted that a private company may be willing to accept a lower level of confidence in results. He said, "It depends on if they're looking for a commercial decision, or a scientific research conclusion".^[175]

273. The expert witness who explained the principles of methods of science in the conduct of research was Professor Scanes.

274. GQHC sought to exclude Professor Scanes' opinions on numerous grounds.

275. First, GQHC submitted that his explanation of the scientific method is not relevant to the statutory scheme in the present circumstances on the grounds that it was too academic.

276. The Tribunal does not accept the assertion that Professor Scanes' outline of the scientific method demands a higher standard to the "systematic progression of work".

277. GQHC submitted there is no need to satisfy qualitative criteria. If a set of activities results in useless or meaningless data because of the design of the experiments, how can it be said to have been conducted based on principles of science. The word "science" found in section 355-25(1)(a)(i) is significant, has meaning and needs to be followed. It surely goes without saying that the underlying point of the scientific method is that it provides a minimal degree of "quality" or rigour to the outcome.

278. Second, during closing submissions GQHC submitted that the field of science applicable to this case was animal husbandry whereas Professor Scanes reports are based on poultry science.^[176] This was not put to Professor Scanes or Associate Professor Groves for that matter. It appears to be an afterthought. There was no evidence before the Tribunal regarding why research in animal husbandry is conducted differently from "poultry science".

279. The Tribunal notes that Ms D, called by GQHC as an expert witness, thought it appropriate when identifying her suitable expertise to list the poultry science conferences and symposiums she attended. GQHC's other expert witness, Associate Professor Groves, specialises in poultry diseases and syndromes;^[177] not animal husbandry. There was no submission that Associate Professor Groves' opinion was unqualified. It was not put to Professor Scanes that he was unqualified to give expert evidence. Further, there was no evidence before the Tribunal that the principles of established science research activity had some peculiarities when to comes to animal husbandry. In any event, whichever industry is applicable, the activities must fall within the definition of core R&D activities or they will not be eligible.

280. Third, GQHC submitted in closing submissions that a hypothesis need not be testable.^[178] If a hypothesis does not need to be testable, it is not a hypothesis. There was no evidentiary basis (or indeed scientific basis) for this submission. If untestable it is not scientific. The Frascati Manual which GQHC wants the Tribunal to follow sets out that one of the core criteria for R&D is that it contains a hypothesis that would "lead to results that could be possibly reproduced" and is transferable and reproducible.^[179]

281. Four, GQHC submitted Professor Scanes had not considered all the evidence and therefore his opinion is irrelevant.^[180] The Tribunal disagrees. This was not to put to Professor Scanes in cross-examination in order to give him an opportunity to confirm whether it would have altered his opinion.

282. Even without supplementary witness statements, it did not detract from Professor Scanes' opinion about experimental activities performed in accordance with principles of science.

283. The Tribunal preferred the explanation of Professor Scanes to the evidence of Associate Professor Groves. Associate Professor Groves' opinion was affected by virtue of his reliance upon the Frascati Manual (and, more importantly only parts of the Manual) and because he had been instructed that the "quality" of the research/data generated was not relevant. A distinction perhaps should have been made between "absolute quality", or perfection, and quality relating to an accepted method of practice.

284. For the reasons outlined above, the Tribunal gives less weight to Associate Professor Groves' opinion.

285. The Tribunal's findings have taken all of the experts' views into account but have been primarily influenced by Professor Scanes' opinion.

"New Knowledge" (section 355-25(1)(b))

286. What is meant by "new knowledge"? The term "new knowledge" is not defined in the ITAA 1997 and therefore takes its ordinary meaning in context. The phrase "new knowledge" is found within the section concerned with experiments being conducted where the outcome could not be known in advance by a competent professional in the field (as outlined in the Explanatory Memorandum (see above)).

287. In Coal of Queensland Pty Ltd v Innovation and Science Australia [2021] FCAFC 54; (2021) 285 FCR 186 (Coal of Queensland) at [121]^[181] the Full Federal Court said it was:

"[A]rtificial to discard the nature of an activity and what it achieves when assessing its purpose" and that "the nature of the activity conducted and the novelty and predictability of the results of that activity may elucidate whether a substantial purpose of an activity is the generation of new knowledge."

(emphasis added)

288. GQHC contends that this requirement includes new knowledge in the form of new or improved materials, products, devices, or processes, and contemplates a low statutory threshold.^[182] GQHC also submits that the generation of new knowledge need not be the sole purpose of the activities and relies on PKWK and Innovation and Science Australia (Taxation) [2021] AATA 706 at [35], [347]-[348].

289. The Explanatory Memorandum explains that:

Core R&D activities

2.11 The existence of core R&D depends on establishing that an experiment (or set of related experiments) is taking place. An experiment entails investigating causal relationships among relevant variables to test a hypothesis or determine the efficacy of something previously untried. Experiments may take place in a range of settings, from a separate laboratory to an otherwise normal production run. [Schedule 1, item 1, subsection 355-25(1)]

2.12 To qualify as core R&D activities, experiments will not merely confirm what is already known, or have an outcome that can be known or determined in advance. Rather, they will be activities whose outcome can only be determined by employing a systematic progression of work based on scientific principles and using an approach that proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions. This approach is generally known as the scientific method. [Schedule 1, item 1, paragraph 355-25(1)(a)]

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.

2.14 Further, the nature of the eligible experiment is such that there will be a clear risk that the outcome of the experiment will not be the desired one. The potential for this risk to deter firms from undertaking knowledge-generating R&D underpins the rationale for the R&D tax incentive.

2.15 Less rigorous knowledge discovery and problem solving techniques, such as 'trial and error' alone will not be sufficient to qualify as eligible experimentation. However, trial and error may form part of an eligible experiment where the conditions for core R&D are met. Trial and error can also qualify as a supporting activity where it forms part of a decision to proceed to activities that qualify as core R&D.

2.16 Experimental activities that qualify as core R&D must be for the purpose of acquiring new knowledge or information. This requirement reflects the R&D tax incentive's object of generating the knowledge benefits that arise from conducting R&D — rather than merely subsidising the application of the knowledge produced by R&D. This is particularly relevant where trials are repeated or prolonged, especially if carried out in a production context. The distinction between conducting R&D and applying the results of it (other than in further R&D) is a question of fact. 'New knowledge' in this context means knowledge not already available in the public arena at the time the activities are conducted, in the relevant technology, on a reasonably accessible world wide basis. [Schedule 1, item 1, paragraph 355-25(1)(b)]

2.17 The requirement can be met by the purpose of acquiring or generating knowledge in the practical form of knowledge or information about the creation of new or improved materials, products, devices, processes or services. Where experimental activities occur in the context of normal production activities, the experiments may entail the direct production or use of an actual material, product, device, process or service.

2.18 The need to employ the scientific method also reflects the degree of novelty in the ideas being tested. That is, the knowledge being sought must go beyond validating a simple progression from what is already known and beyond merely implementing existing knowledge in a different context or location. Rather, the gap between existing knowledge and the hypothesis being investigated will be significant enough to require application of the scientific method.

(emphasis added)

290. It is uncontroversial that whether an outcome can only be determined through the application of systematic progression of work based on scientific principles involves an objective determination from the perspective of a competent professional in the field.^[183]

Outcome of the Claimed Activity Cannot be Known or Determined Other Than by a Systematic Progression of Work (section 355-25(1))

291. What is required to determine whether an outcome cannot be known or determined other than by a systematic progression of work was considered in Coal of Queensland. Coal of Queensland concerned activities to investigate the nature and economic viability of mining coal in the Bowen Basin area of Queensland. The characteristics of the area being mined meant it was costly and difficult to extract the coal using traditional extraction methods. As a result, Coal of Queensland investigated whether certain other activities would improve the commercial viability of the area. Those activities were registered with the Board as R&D activities. On review the Tribunal found none of the registered activities were core R&D activities within the meaning of section 355-25(1) of the ITAA 1997.^[184]

292. On appeal, the Full Federal Court considered whether the Tribunal had applied a wrong legal standard in considering whether Coal of Queensland's activities were of a kind "whose outcome cannot be known or determined in advance" within the meaning of section 355-25(1)(a). The Court drew a distinction between knowing the precise data of work undertaken as opposed to the outcome of an activity (at [101] and [104]). The Court found an analogy provided by senior counsel for the Board of a person having a routine blood test for their cholesterol level was useful:

...In that analogy, merely because the precise data or results cannot be known in advance does not mean that the test constitutes an experimental activity whose outcome cannot be known or determined in advance as referred to in the section. That analogy is useful in exposing the difficulty with GQHC's approach. In the present case, while the precise data produced by the work undertaken by A&B Mylec could not have been known in advance, it does not necessarily follow that the work constituted an activity whose outcome could not have been known or determined in advance on the basis of current knowledge, information and experience.

293. In Ultimate Vision Inventions Pty Ltd v Innovation and Science Australia [2022] FCA 606; 176 ALD 1, Wheelahan J said, "the phrase 'cannot be' in s 355-25(1)(a) is absolute". There is only one option.

294. With the above concepts in mind the Tribunal turns to the Registered Activities in question.

INCUBATION/HATCHERY PROJECT

Overall Objective

295. The Incubation/Hatchery Project progresses across 2012 and 2013.

296. In its Application for the 2012 financial year GQHC described the objective of the Incubation/Hatchery Project as follows:^[185]

The overall technical objective of this R&D project is to develop novel incubation and hatchery processes and techniques capable of improving key performance measures such as overall hatchability, bird quality and rates of production.

In order to achieve the overall technical objective of this project, numerous technical sub-objectives will also need to be met. These sub-objectives include:

•

Increase average hatchability of eggs from 82% to 85%

•

Decrease chick cull rate from 0.9% to 0.5%

•

Decrease 7 day mortalities in broilers from 1% to 0.5%

•

Mitigate contamination during incubation and hatching

•

Improve the ease of control of incubation and hatchery processes

•

Maintain an egg shell temperature of 99.6 degrees Fahrenheit throughout egg development

•

Maintain energy efficiency in the incubation process

•

Ensuring that processes work effectively with [the Group's] current egg tray configuration.

In order to achieve the overall technical objective, [the Group] is seeking to design and develop novel techniques to detect illness, weakness or mortalities in embryos. Specifically, [the Group] will design and develop novel incubation and control techniques to determine how these affect incubation time and hatchability. Further, [the Group] will experiment with an improved incubation process arid an egg shell monitoring technique. [The Group] will also experiment with techniques to gain finer control over incubation and hatchery environments, to achieve improvements across all performance measures.

(emphasis added)

297. The overall objective was the same in the Application for the 2013 Year.^[186]

"Hypothesis"

298. The claimed hypothesis was that:^[187]

... the development of optimal techniques and methods would result in an overall improvement in hatchability and chick quality and a reduction in cross contamination. This will include changes to the hatchery facility control equipment in order to achieve finer precision of control over such variables as temperature, humidity, 02 and CO2 levels, etc. Due to the large number of variables, a lack of knowledge exists in the public arena as to how these variables interact, and which variables can materially affect the outcome of the process. As such, [the Group] is uncertain as to whether altering the processes and techniques during the incubation and development phase will increase hatchability, bird quality and rates of production.

[The Group] is continuously investigating and challenging industry best practices. In this regard, [the Group] is currently seeking to develop new and novel incubation and hatchery techniques in order to improve overall hatchability, bird quality and rates of production. While various processes have been trialled throughout the industry, any results, knowledge or data gained through these trials is largely protected as trade secrets. In addition, numerous variables exist and factors such as facility throughput, ambient and egg shell temperature and egg tray configuration also mean that any previously trialled process may not be able to be successfully implemented at [the Group]'s Site E facility.

New Knowledge

299. GQHC stated the new knowledge that would be generated was:^[188]

There are two main methods of incubation: multiple-stage (as currently used by [the Group]) and single-stage, and there are known to be advantages and disadvantages associated with both. While the industry standard is generally considered to be the single-stage incubation process , numerous site specific factors such as broiler breed, production throughput, ambient temperature and egg tray configuration prevent [the Group] from directly applying or determining the success of existing techniques in relation to its hatchery operations. Further, while various processes have been trialled throughout the industry, any results, knowledge or data gained through these trials is largely protected as trade secrets. [The Group] is therefore seeking to develop new single-stage incubation processes and develop new knowledge in the key areas of incubation (egg/incubator hygiene, egg shell temperature, relative humidity and airflow, and egg care). Factors such as facility throughput, ambient and egg shell temperature and egg tray configuration also mean that any previously trialled process may not be able to be successfully implemented at [the Group]'s Site E facility.

Key examples of the specific knowledge gaps associated with the proposed novel incubation and hatchery processes that prevent [the Group] from determining the suitability of these processes in advance (and therefore areas in which [the Group] is aiming to generate new knowledge) are outlined in detail below.

•

Any process needs to include precisely controlled environments where conditioned cool and fresh air is applied to the oldest eggs (which are exothermic) and warm air applied to developing embryos (which are endothermic). This process also needs to ensure that each stage of embryo development receives the proper balance of heat, moisture and carbon dioxide , all of which are vital elements in incubation. Due to this need to precisely control humidity, any error or malfunction in a developed process could detrimentally effect the development of embryos.

•

Cleaning and air recirculation are also important due to the potential for older eggs to be a source of micro-organisms (such as bacteria or fungi) which can contaminate the younger eggs. Contamination in early life may have lasting implications, leading to contaminated broilers with decreased performance and higher mortality.

(emphasis added)

300. The same "new knowledge" claims were made for the 2012 and 2013 years.^[189]

Claimed Activities

301. GQHC registered the following core and supporting activities for the Incubation/Hatchery Project:^[190]

2012 Year

302. For the 2012 year, GQHC stated its "core R&D activity" involved the development and testing of single-stage incubation techniques to achieve an "optimal incubation method".

303. The claimed "core activities" in the 2012 financial year were described by GQHC as follows:

Core Activity 1.1 - Development and testing of single-stage incubation techniques^[191]

This core R&D activity involves the development and testing of single-stage incubation techniques in order to achieve an optimal incubation method for birds produced throughout the [the Group] poultry facility. The hypothesis to be tested is that higher carbon dioxide levels achieved using a single-stage incubation process will stimulate growth, improve feed conversion rates, increase weight for age ratios and improve yield in chicks compared to that achievable using [the Group] 's traditional multiple-stage incubation process.

To test this hypothesis [the Group] undertook a structured trial over a 10 week broiler cycle, setting aside both control and trial sheds at the same farm as well as at its dedicated test pens. These concurrent trials tested the performance of birds 'sourced' from a single-stage incubator machine against those from an existing multiple-stage incubator machine. Eggs were sourced from the same prime flock in order to ensure uniformity in egg quality and this maximising the scientific validity of the data.

(emphasis added)

Core Activity 1.2 - Development and testing of temperature and monitoring mechanism ^[192]

This core R&D activity involves the development and testing of an improved temperature monitoring process in order to effectively manage egg temperature and incubator air flow. [The Group] has hypothesised that by directly measuring egg shell temperature rather than inferring it by measuring air temperature within the incubator, [the Group] will be able to more accurately manage temperature and air flow requirements of the egg, resulting in increased hatchability, bird quality and rates of production.

To test this hypothesis [the Group] placed the developed egg shell temperature monitoring system on a series of egg racks. Throughout the trialling period [the Group] continually monitored and calibrated the settings of the incubator control system to ensure appropriate temperature and airflow throughout the incubator according to embryo development, based on the shell monitoring data. During calibration of the incubator control system, [the Group] continued to compare ambient temperature readings against egg shell, temperature readings from the incubator in order to identify potential anomalies.

When the eggs hatched, [the Group] assessed cull rates, hatchability, weight for age and yield of the chicks according to those monitored using the egg shell readings and those monitored against traditional ambient readings. Only after the initial 21 days of chick growth could [the Group] appropriately assess the success of the new shell temperature monitoring technique.

(emphasis added)

304. The claimed "supporting activities" in the 2012 financial year were described by GQHC as follows:

Supporting Activity 1.1.1 - Preliminary investigations and research^[193]

[The Group]'s technical personnel performed general and industry specific investigations and research (including literature reviews, industry research and discussions with industry experts etc.) in relation to various incubation techniques and temperature and airflow monitoring approaches. This research confirmed that [the Group] would be unable to transfer or apply existing knowledge to determine the efficacy of its proposed incubation process improvements.

Supporting Activity 1.2.1 - Preliminary investigations and research ^[194]

[The Group]'s technical personnel performed general and industry specific investigations and research (including literature reviews, industry research and discussions with industry experts etc.) in relation to various incubation techniques and temperature and airflow monitoring approaches. This research confirmed that [the Group] would be unable to transfer or apply existing knowledge to determine the efficacy of its proposed incubation process improvements.

2013 Year

305. The claimed "core activities" in the 2013 Year were described by GQHC as follows:

Core Activity 1.1 - Development and testing of single-stage incubation techniques ^[195]

This core R&D activity involved experimenting with alternative single stage incubation temperature profiles in order to achieve optimal incubation processes for birds produced throughout the [the Group] poultry facility. The hypothesis to be tested was that finer control of temperature during single stage incubation processes would result in improvements in overall chick quality, in particular improvements in moisture loss. Moisture loss is in important indicator of correct hatching. Moisture is the difference between the original egg weight and the chick weight. It is expected that a 12% moisture loss is achieved during incubation processes, however [the Group] was not achieving these moisture loss levels using standard Chickmaster single stage incubation processes.

Core Activity 1.2 - Development and testing of temperature and monitoring mechanism ^[196]

This core R&D activity involved the development and testing of an improved temperature monitoring process in order to effectively manage egg temperature and incubator air flow. [The Group] hypothesised that by directly measuring egg shell temperature rather than inferring it by measuring air temperature within the incubator, [the Group] will be able to more accurately manage temperature and air flow requirements of the egg, resulting in increased hatchability, bird quality and rates of production.

Core Activity 1.1

306. For the 2013 Year, GQHC stated the Core Activity 1.1 involved "experimenting with alternative single stage incubation temperature profiles in order to achieve optimal incubation processes". It is not clear what it meant by "optimal incubation processes".

307. GQHC stated their hypothesis for Activity 1.1 in the 2013 Year was that:^[197]

finer control of temperature during single stage incubation processes would result in improvements in overall chick quality, in particular improvements in moisture loss.

308. GQHC stated that:^[198]

While [the Group] had previously experimented with varying temperature profiles on other incubation systems designed to be controlled in Fahrenheit (eg Jamesway systems), there was no existing knowledge on how a system designed to be controlled in degrees Celsius (eg Chickmaster) could be recalibrated to operate in Fahrenheit. Experimentation was therefore required to first recalibrate the machines to Fahrenheit, before experimenting with the finer temperature controls to evaluate the impact on hatching and overall chick quality. There was a high degree of technical uncertainty as to whether the proposed changes to the temperature profiles would deliver the desired technical results.

To test the above hypothesis, [the Group] experimented with changes in the temperature profiles of the Chickmaster single stage incubation machines by recalibrating the temperature settings from degrees Celsius to Fahrenheit in order to obtain the finer temperature control required. Changes in egg moisture loss and 7 day mortality rates were then monitored to assess the impact of the new temperature profiles against the standard manufacturer set temperature profiles.

Core Activity 1.2

309. In relation to the Relevant Year, Activity 1.2 involved the development and testing of "an improved temperature monitoring process in order to effectively manage egg temperature and incubator air flow", with the hypothesis said to be that by "directly measuring egg shell temperature ... [the Group] will be able to more accurately manage temperature and air flow requirements of the egg, resulting in increased hatchability, bird quality and rates of production".^[199]

310. In relation to Core Activity 1.2, GQHC stated:^[200]

This core R&D activity involved the development and testing of an improved temperature monitoring process in order to effectively manage egg temperature and incubator air flow.

311. GQHC stated that:^[201]

... by directly measuring egg shell temperature rather than inferring it by measuring air temperature within the incubator, [the Group] will be able to more accurately manage temperature and air flow requirements of the egg, resulting in increased hatchability, bird quality and rates of production.

312. To test the hypothesis for Core Activity 1.2, GQHC stated it did the following:^[202]

In order to accurately test the hypothesis, [the Group] installed the egg sensor on different egg racks, by which it was able to collect a significant amount of egg shell temperatures.

According to [the Group's] research, embryos, from different aged donor flock and at different stages of development, require different heating and airflow requirements. Due to genetic improvements and technological advancements, eggs which enter a chamber will develop at different rates due to the age of the donor, and therefore require different temperature and airflow throughout the life of the donor flock. As such, the eggs are generating different levels of heat as they enter different embryo development stages.

Once the egg sensor was installed, [the Group] was required to monitor and calibrate the settings of the incubator control system to ensure appropriate temperature and airflow throughout the incubator according to embryo development. During calibration of the incubator control system, [the Group] continued to compare ambient temperature readings against egg shell temperature readings from the incubator.

When the eggs hatched, [the Group] assessed cull rates, hatchability, weight for age and yield of the chicks according to those monitored using the egg shell readings and those monitored against traditional ambient readings. Only after the initial 21 days of chick growth could [the Group] appropriately assess the abovementioned variables.

Evidence – Incubation/Hatchery Project

Mr A

313. Mr A stated the main commercial objective of Incubator/Hatchery Project was to:^[203]

... improve hatchability, production times and reductions in seven day mortality rates and to improve overall performance. The resulting increase in the production of hatching eggs will increase the number of broilers produced and an increase in broiler quality. An increase in the quantity of good quality broilers has a direct impact on the number of breeder hens required, therefore improving the overaII economics of the whole supply chain for the [the Group].

314. Mr A prepared a report dated 3 January 2012 for the SLT called "Scoping of the Research and Development Project for Single- 3 January 2012 Stage verses Multi-Stage Incubators".^[204]

315. Mr A stated the Incubator/Hatchery Project involved:^[205]

...undertaking a series of experimental activities to design and develop novel incubation and hatchery processes and techniques in order to generate new industry "best practice" as demonstrated through subsequent improved hatchability, bird quality and rates of production. Specifically in the 2011/12 income year, this project aimed to determine whether there was a measurable performance improvement between single-stage and multi-stage incubation.

316. An example of a multi-stage setter is:^[206]

317. An example of a single-stage setter is:^[207]

318. Dr E described the differences between a multi-stage system and single-stage system as follows:^[208]

A multi-stage system uses a setter room (this is the temperature and humidity-controlled room where eggs are incubated) in which trolleys of eggs are continuously rotated in and out i.e. fresh eggs are placed into one end of the setter in trolleys and the completed eggs are removed from the other end 18 days after they were placed in the setter. During this time, as eggs are removed from the far end, trolleys already in the setter are pushed along tracks towards the far end of the setter to allow room for trolleys of new eggs to be placed into the near end.

There are generally six to ten pairs of trolleys in the setter room. Therefore, at any one time there are eggs inside the setter between 0 days and 18 days of incubation. A multi-stage setter is therefore never empty.

By contrast a single stage setter contains only one age of eggs. These eggs are placed in the setter on day 0 and held in there until 18 days of incubation. Then all of the eggs in the setter are removed before the setter is washed, sanitised and restocked with new eggs.

Single stage incubation is generally regarded as a more successful form of incubation because eggs can be given more specific environmental control than in a multistage system. The temperature, humidity and CO2 requirements of incubating eggs change over the 18-day incubation period. This means that any suboptimal environmental conditions will have a detrimental impact on hatchability and chick quality, health and viability.

(emphasis added)

319. Associate Professor Groves explained the differences between a single and multi-stage system in terms of heating:^[209]

14...multistage machines make use of the air heated by the older eggs to warm the younger ones, which absorb heat from the air.

15. This is a very energy efficient system and needs less artificially provided heat to function. Hence multistage machines require less energy than single stage machines , which have to heat all the eggs when they are in the early incubation stages and then provide cooling when the eggs get older.

16. But as pointed out, well run single stage machines provide a more precise temperature and humidity condition to the eggs at all stages but require more artificial energy to do so. Therefore, a hatchery manager has to decide which system gives him best hatchability and chick quality but as a trade off against running costs.

(emphasis added)

Core Activity 1.1 - Development and testing of single-stage incubation techniques

Outcome of the activity could not be known in advance

320. Mr A's written evidence was that the outcome of this activity could not be known in advance because although single-stage incubation machines were readily available on the market, the standard within the Australian poultry industry is to use a multiple-stage incubation process. That is, he stated there was limited information about the effectiveness of the single-stage incubation process for Australian poultry conditions. Mr A stated it was not known whether effective installation and calibration could improve bird quality and bird performance (i.e., hatchability) when compared to multiple-stage incubation processes.^[210]

Systematic progression of work

321. Mr A's said GQHC engaged in a systematic progression of work as follows:^[211]

20. Activity 1.1 proceeded from hypothesis to experiment, observation and evaluation, leading to logical conclusions. The hypothesis to be tested was that increased carbon dioxide levels using a single-stage process will Increase growth, improve feed conversion ratios, weight for age and yield of chicks compared to the traditional multiple-stage Incubation process.

21. The systematic progression of work first involved a test pen trial at the testing facilities of the [the Group] in Site E. The trial facilities were made up of 24 test pens, each of which could house up to 100 birds.

22. To test the hypothesis:

(a)

1,200 birds that were hatched through single-stage incubation were placed into 12 test pens;

(b)

1,200 birds that were hatched through multiple stage incubation were placed into the other 12 test pens; and

(c)

all of the conditions of the 24 test pens were kept consistent, including feed programme and formulation such that the only variable was the method in which all of the chicks were hatched.

23. Each test pen housed 50 male chicks and 50 female chicks.

24. Certain data points were collected for each pen on a daily basis, including:

(a)

number of mortalities per day,

(b)

weight of those mortalities;

(c)

cumulative mortality weights over the life of the trial; and

(d)

number of chicks that remained within each pen.

(e)

The total and average weight of the chicks in each pen would also be measured weekly for further analysis.

25. The raw data from trials was collected by the "farm hand" on site, recorded by hand and provided to Dr E for Input into a Trial Workbook. ... This Trial Workbook contains raw data that was collected from one of the trials undertaken as part of Activity 1.1.

26. The farm hand picked up any dead chicks throughout the trial period and assessed the cause of death. Most often chicks would die of infection or injury. If the farm hand could not determine the cause of death, they placed the chick in a freezer and requested Dr E attend and examine any dead chicks through post mortem examination.

27. Raw data collected in Trial Workbooks ... are annotated and produced into a summarised form of results. ... This workbook was populated with data as the trial progressed and the consolidated data generated immediately upon completion of the trial.

28. The results from the summary workbook identified in paragraph 27 above were further summarised into a table setting out the weight differences, mortality rates and feed conversion rates of chicks hatched in a single stage setter in comparison to the multi-stage setter...

29. As part of Activity 1.1, certain data points were also extracted from a number of single-stage setters and compared to the same data points extracted from multi-stage setters. By way of example, now produced and shown to me at the time of affirming this witness statement and marked "MR A-19" is a true copy of data obtained from the hatchery in relation to single-stage setter numbers 18 to 23. This hatchery report shows various data points in relation to each "batch" of chicks that have hatched in the same incubator:

(a)

unique identifier for the particular "batch";

(b)

number of eggs in the "batch" that were placed into each setter;

(c)

number of eggs that were "fertile" being those that survive having been vaccinated as a live embryo;

(d)

breeder shed number from where eggs were sourced;

(e)

whether the egg was considered "A" grade (being a clean nest egg) or "B" grade (being one that was misshaped and will not hatch as well);

(f)

sometimes separated into male and female and weighed accordingly;

(g)

number that are "culled", being those that are not viable after incubation period; and

(h)

number that are "bombs", being those that explode due to infection.

30. The data collected above was also collected from multi-stage setters and further compared and analysed against data collected from single-stage setters.

31. Dr E was responsible for considering the numerical results, performing any statistical analysis of data collected from the test pen trials. He discussed his findings and what he observed during the trials and reported those findings and observations to me at the conclusion of each trial.

32. The outcome of the trials at the test pen facilities proved that single-stage incubators had a significant advantage over the traditional multi-stage incubators. In particular, the trials confined a higher overall hatch rate, a lower number of culls and a lower number of early mortalities.

33. Following the success of the test pen trials, a farm trial with a total 60,000 chicks was conducted. The chicks in the trial were separated into two batches, being those hatched from the single-stage incubation machine and those hatched within the multi stage incubation machine. The chicks were kept separate and placed into separate sheds at [the Group's] Site C Complex. During the growing period, the weight of the chickens were taken every seven days, mortalities monitored and recorded. All feed was kept separate to ensure that any differences in performance were accurately measured. Each shed was run under commercial conditions with birds harvested and results analysed to show any differences in growth, weight for age, mortality, morbidity and feed conversion ratio.

34. Activity 1.1 continued into the 2012/13 income year. Further analysis of the single-stage setters included analysis of data points such as temperature, humidity and in particular carbon dioxide levels. In particular, [the Group] utilised the Hatchcom software to compare data points between two brands of single-stage setters. Now produced and shown to me at the time of affirming this witness statement and marked "MR A-20" are examples of data points collected in relation to the single-stage setter numbers 18, 19 and 20.

35. Now produced and shown to me at the time of affirming this witness statement and marked "D-21" are notes prepared by Mr F, Consultant, and former Livestock Manager for [the Group], containing observations and data considered in relation to single-stage setters 21, 22, and 23 during his visit to the Site E Hatchery in July 2012. The notes also contain observations from the testing between the two brands of single-stage setters considered by [the Group].

322. As part of the trials two different single stage setter machines were used. One machine is manufactured by Jamesway, the other by Chickmaster.^[212] In a subsequent statement Mr A clarified that "three Jamesway single stage setter machines and three Chick Master single stage setter machines were used".^[213] Mr A provided the following additional detail:^[214]

(a)...Each single stage machine had an individual capacity of about 60,000 eggs;

(b)

while multi-stage machines were not sealed in comparison to the single-stage machines, an assumption underlying Project 2009-07 was that the CO2 level in the multi-stage incubation machine would be equal to the average atmospheric percentage. That is, the CO2 would not be replaced by fresh air and diluted outside the incubator. This would be marginally augmented by CO2 emitted by the eggs; and

(c)

the decision to adopt single stage incubators was made after the experiment, and was informed by the observation of a large difference in the hatch percentage from a range of ages (having tested both prime, young and old donors).

323. Following the trials, the "conclusion" reached was recorded in a report to the SLT:^[215]

Initially there was a big difference in the two brands of incubators with the Jamesway performing better in all areas of measurement. As our knowledge improved with the trials that were conducted the [management team] were able to use this knowledge to improve the overall performance of both brands of incubators.

The construction of a special purpose building for the Jamesway allowed for the extensive trials within a real world operation. The invaluable experience and data that has been gathered ensures that the design and construction of a full scale hatchery incorporates the knowledge that has been learnt.

The selection of which brand that the [management team] finally decides on now a much easier decision. The knowledge and experience has allowed for detailed analysis of all aspects of a fully functioning hatchery with areas of knowledge covering energy inputs, system design, long term maintenance and, of course, performance benefits of a Site D site.

324. Mr A stated the analysis contained in the Group's "Pan Trial February 2012 - Single Stage v Multi Stage Setters Results"^[216] "demonstrated a commercially significant difference".^[217]

Purpose of generating new knowledge

325. Mr A stated the activities were engaged in for the purpose of generating new knowledge. That new knowledge was "a new process in the hatchery based upon a single-stage incubation process rather than the traditional multi-stage incubation process".^[218]

326. Mr A stated success was measured by "key areas of incubation (egg incubator hygiene, egg shell temperature, relative humidity and airflow, and egg care)".^[219]

327. Mr A stated although there was single-stage incubator information available, it was not tailored to the breed of broiler used by the Group.^[220]

Supporting Activity 1.1.1 - Preliminary investigation and research

328. Mr A stated the supporting activity was:^[221]

(a)

"directly related to Activity 1.1 and involved general and industry specific Investigations and research (including literature reviews, industry research and discussions with Industry experts) which was required to be undertaken In order to design, plan and implement the experiments in the core activity";

(b)

ongoing throughout the 2012 year and completed in subsequent income years.

Supporting documents

329. Mr A provided the Tribunal with the following documents relevant to the Incubator/Hatchery Project:

(a)

Trial Workbooks called "Trial 0112 Setter Comparison Trial" and "Trial February 2012 – Single Stage vs Multi Stage Setter" within which trial data was entered;^[222]

(b)

"[The Group] Pan Trial February 2012 - Single Stage v Multi Stage Setters Results";^[223]

(c)

"Single-stage hatchery report for setter numbers 18 to 23";^[224]

(d)

"Data collected in relation to single-stage setter numbers 18, 19 and 20";^[225]

(e)

Observation "Notes prepared by Mr F [consultant] relating to visit to the Site E Hatchery" in July 2012;^[226]

(f)

a report given to the SLT called "Jamesway v Chickmaster Single Stage Setter Trials" dated 31 October 2013 noting the outcomes of the above trials undertaken in the 2011/12 income year and other subsequent activities undertaken as part of the broader project;^[227]

(g)

A letter regarding the comparison of the Jamesway and Chickmaster single stage setter trials dated 31 October 2013 (file name "Single Stage Comparison - FY2013");^[228]

(h)

a "bundle of true copies of contemporaneous records of the activities";^[229]

(i)

a "bundle of true copies of academic and industry articles on poultry incubation" that were considered prior to undertaking the experiments;^[230] and,

(j)

a bundle of articles, extracted from Group's systems, referring to the importance of temperature and carbon dioxide concentration during the hatching phase.^[231]

330. Mr A also provided a document titled "Literature Review of Multistage and Single-stage incubation" dated 5 April 2016 by Diana Paez, an intern working in the R&D team who reported directly to Mr A.^[232] This document was prepared several years after the Relevant Year. The literature review was clearly not conducted prior to the activities taking place.

Dr E

331. Dr E stated that the descriptions contained in the R&D project description is consistent with his understanding and recollection of Activity 1.1.^[233]

332. Dr E stated the single stage incubation trial was conducted at the trial facilities of the Group. The hypothesis being tested was that higher carbon dioxide levels achieved using a single-stage incubation process would stimulate growth, improve feed conversion rates, increase weight for age ratios and improve yield in chicks compared to that achievable using a traditional multiple-stage incubation process.^[234]

333. In his statement Dr E stated he could not recall specific details of the activity.^[235]

334. Despite not being able to recall, consistent with Mr A's evidence, Dr E set out in his statement that the trial facilities had 24 test pens contained in a shed which could house up to 100 birds.^[236] This is clearly not an entirely independent recollection given his admission that he could not recall the details. This is not to be critical of Dr E. It is just a fact that ten years have passed since these purported activities were engaged in by GQHC. It means little probative weight can be given to his evidence of what actually occurred.

335. Twelve hundred birds that were hatched through single-stage incubation were placed into 12 test pens. The 1,200 birds that were hatched through multiple stage incubation were placed into the other 12 test pens.^[237]

336. Dr E stated that conditions across the pens were consistent with the only variable being whether they were hatched through multi or single-stage incubation.

337. Each day the following data was collected by a farm hand:

(a)

number of mortalities per day;

(b)

weight of those mortalities;

(c)

cumulative mortality weights over the life of the trial; and

(d)

number of chicks that remained within each pen.

338. Each week the total and average weight of remaining chicks was also measured.

339. The farm hand would also assess the cause of death of the chicks. If the cause was unable to be established, the dead chicks would be placed in a freezer for assessment through post mortem examination.

340. The data recorded each week was then given to Dr E to record in a Trial Workbook. Dr E provided a copy of the same Trial Workbook as Mr A.^[238] Dr E said the Trial Workbook contains raw pen trial data that he collected from one of the trials undertaken. Dr E stated that the data was password-protected, and he was the only person with knowledge of the password at the relevant time.

341. The data was then analysed and summarised. Dr E provided a copy of:

(a)

a document called "Trial February 2012 - Single Stage vs Multi Stage Setter" containing a summary of findings from a test pen trial involving the testing of performance of chicks hatched through a single-stage incubation machine compared to those hatched through a multi stage incubation machine;^[239] and

(b)

a document called "[The Group] Pen Trial February 2012 – Single Stage v Multi Stage Setters Results" (also provided by Mr A) setting out the weight differences, mortality rates and FCR of chicks hatched in a single-stage setter in comparison to the multi-stage setter.^[240]

342. Dr E said it was his responsibility to consider the numerical results and perform any statistical analysis of the trial data.

Outcome of Trial

343. Dr E stated the "outcome of the trials at the test pen facilities proved that single stage incubators had a significant advantage over the traditional multi stage incubators. In particular, the trials confirmed a higher overall hatch rate, a lower number of culls and a lower number of early mortalities". The trial outcomes were corded in a report, "Jamesway v Chickmaster Single Stage Setter Trials" dated 31 October 2013 (a copy was also provided by Mr A).^[241]

344. Dr E provided (as did Mr A) a copy of data obtained from the hatchery in relation to setter numbers 18 to 23.^[242] Dr E stated this report showed the various data points in relation to each "batch" of chicks that had hatched in the single-stage incubator including:

(a)

unique identifier for the particular "batch";

(b)

number of eggs in the "batch" that were placed into each setter;

(c)

number of eggs that were "fertile" (being those that survive having been vaccinated as a live embryo);

(d)

breeder shed number from where eggs were sourced;

(e)

whether the egg was considered "A" grade (being a clean nest egg) or "B" grade (being one that was misshaped and will not hatch as well);

(f)

sometimes separated into male and female and weighed accordingly;

(g)

number that are "culled" (being those that are not viable after incubation period); and,

(h)

number that are "bombs" (being those that explode due to infection).

345. Dr E stated similar data was collected in relation to the multi-stage setters for comparison purposes.

346. In addition to being directly involved in the project, Dr E was put forward as an expert witness in relation to the projects under examination. In relation to this project, Dr E assumed that there were site specific conditions that meant that the activities conducted were "experimental" and could not be known. Yet, at no time did Dr E identify what those variables were. Dr E reached conclusions but he provided little detail and no explanation.

347. This evidence was insufficient to enable the Tribunal to come to the correct or preferable decision. Dr E was not an independent witness and was not given the same instructions regarding the requirements of section 355-25 as the independent experts. Dr E did not comment on the other experts' reports. In these circumstances, the Tribunal does not give Dr E's expert opinion as much weight.

Expert Evidence

Was the Progression of Work Based on Principles of Established Science?

348. The expert evidence set out in the expert reports on this issue is summarised in the following table (emphasis added).

CONSIDERATION - INCUBATION/HATCHERY PROJECT

Did the Claimed Activities Occur?

349. There is a distinct lack of documentation in relation to this project. This was acknowledged by GQHC.^[273] Despite the lack of documentation, witnesses involved in the activities gave evidence, confirming the claimed activities took place.

350. The Tribunal is satisfied some activities took place.

Contentions - Are the Claimed Activities "Experimental Activities"?

351. The Commissioner contends that in the 2012 year:^[274]

(a)

in Professor Scanes' opinion, there was "strong, consistent and convincing evidence both for the utility of single stage incubators and their superiority over multi-stage incubators";^[275]

(b)

there was no valid hypothesis because it was unclear and was more a statement of the commercial benefit of single stage incubators;

(c)

there was no relevant systematic progression of work. The Commissioner points to the "scant documentation of data, experimental and research protocols, research reports and statistical analysis" identified by Professor Scanes;^[276]

(d)

the "experiment's" design was problematic as there was no attempt at replication;^[277]

(e)

the activity merely involved GQHC learning "how to use a new piece of equipment";^[278] and,

(f)

at its highest, the activity "was calibration, customisation and trial and error troubleshooting".

352. In relation to the 2013 Year the Commissioner repeated its contentions made for the 2012 year. In addition to the Commissioner contends that in the 2013 Year:^[279]

...site specific issues were "extremely unlikely" due to single stage incubators being controlled environments and the fact that Ross 308 chickens were used globally.^[280]

Were the Claimed Activities "Core Activities"?

Was There a Valid "Hypothesis"?

353. The comments and findings on the meaning of "hypothesis" in paragraphs 257-285 are repeated here.

354. The Commissioner contends there is no scientific basis to the "hypothesis" identified by GQHC, such as it is. The Commissioner submits the hypothesis is really a commercial aim or objective which does not satisfy the legislative requirements.^[281]

355. Both experts opined that the purported hypothesis was "clumsy" or "unclear". As already outlined, sections 355-5(2) and 355-25 provide experimental activities must proceed from hypothesis to experiment, "based on principles of established science" in a "scientific way". There is no real divergence of opinion between the experts that this activity did not proceed in a scientific way.

356. Associate Professor Groves noted that the documents that were available indicated a focus on the bottom line. There is no evidence of any scientific basis behind the purported "hypotheses".

357. Professor Scanes admitted he was not aware that a key difference between the Jamesway single-setter and the Chickmaster single-setter trial by the Group was the use of the CO2 in the Jamesway machine.^[282] GQHC submitted that as a result his opinion as to the hypothesis is not based on his specialised knowledge and therefore should be given a little weight.^[283] The Tribunal finds this approach incorrect. The hypothesis under consideration is that stated in the R&D Application. It is apparent from a reading of the transcript that this evidence was interrupted. It was not put to the Professor whether the "difference" (which was not particularised) would alter his opinion.

358. The Tribunal finds there was no valid hypothesis in relation to the Incubation/Hatchery Project. This finding would effectively dispose of the entire claim in relation to the Incubation/Hatchery Project. However, for completeness the Tribunal will make findings in relation to all of the issues which were before the Tribunal.

Was the Outcome Known in Advance?

359. Mr A's written evidence was that the outcome of this activity could not be known in advance because although single-stage incubation machines were readily available on the market, the standard within the Australian poultry industry is to use a multiple-stage incubation process. That is, he stated there was limited information about the effectiveness of the single-stage incubation process for Australian poultry conditions. Mr A stated it was not known whether effective installation and calibration could improve bird quality and bird performance (i.e. hatchability) when compared to multiple-stage incubation processes.^[284]

360. The flaw in Mr A's evidence is that in the R&D Application Mr A wrote "the industry standard is generally considered to be the single-stage incubation process". During cross-examination Mr A tried to explain that the industry was moving towards single-stage, but it was not the standard. This evidence was confusing and inconsistent, and therefore, unreliable.^[285]

361. Mr A stated the experiment was undertaken having regard to:^[286]

11. ... the claim of hatchery manufacturers that by increasing the level of CO2 to 10,000ppm the developing embryo will increase the size of the cardio vascular system, which in turn will increase the performance of the chick. The trial was design to show that we could see a commercial difference in chicks hatched in the Jamesway setters compared to multi-stage setters.

(emphasis added)

362. This indicates that the activity undertaken was not to engage in research, it was seeking information on which machine provided a more cost-effective outcome.

363. The evidence indicates that it was known in advance, or able to be determined, that there were advantages of using a single-stage machine and that they were more costly.^[287] Mr A acknowledged that an article from 2009, prior to GQHC engaging in the Registered Activities, that was exhibited to one of Mr A's statements, set out these advantages and disadvantages.^[288] Another article, also from 2009, exhibited to Dr E's report notes the result of research out of the University of Georgia on the "benefits of single-stage incubation".^[289] The author reporting on the 2009 University study concluded that "it appears that SS incubation is appropriate for large-scale incubation. The improvements in biosecurity and sanitation in SS compared to MS are well known. This study confirms this and also suggests that moderate improvements can be seen in hatchability performance with large-scale single stage incubation". The single-stage machines in the University study were the same brand as those used by GQHC and the research was done at a commercial broiler hatchery.^[290]

364. Mr A agreed that both articles identified the ability to better control heat, humidity, and carbon dioxide as an advantage of single-stage incubation, as well as improved sanitation.^[291] Mr A also agreed that the University study:^[292]

(g)

suggested single-stage hatched chicks were less susceptible to dehydration;

(h)

there was a view in the industry that higher carbon dioxide levels which can be controlled in the single-stage machine led to better quality chicks; and

(i)

single-stage incubation as giving superior results to multi-stage.

365. Mr A referred to a presentation titled "Multi Stage vs Single Stage Incubation Trial" by Richard Dixon, Group Incubation Manager of Hy-Line dated 20 May 2010. Hy-Line is a leading producer of egg laying chicken genetics. Mr A stated this presentation was considered by the Group to inform itself of the potential of single-stage incubation machines.^[293] It is clear from this presentation that three years prior to the activities in question, Hy-Line had already undertaken a comparison between single and multi-stage incubators.

366. Although Mr A undoubtedly has years of experience in poultry farming, he is not a scientist and is not appropriately qualified to critique this research.

367. Mr A stated "it" still needed to be trialled at GQHC farm. This kind of trial or troubleshooting activity is contrary to the explanation in the Explanatory Memorandum, and the Frascati Manual relied on by GQHC's expert witness. See also the Full Federal Court decision in Coal of Queensland discussed earlier.

368. Precise data/results not known specifically by the Group does not mean the activity was an "experimental activity" whose outcome could not be known or determined in advance.

369. It became apparent through cross-examination that GQHC's own documents revealed that it had tried the Chickmaster machine, and then the Jamesway single-stage machine in 2007, "in order to determine its ease of use and assess its impact on hatchability and broiler quality. The results of the trial would then be compared to the traditional multiple-stage incubation process in order to assess which processes produce better results". This was five to six years prior to the 2013 Year being considered here.^[294] GQHC's records went on to note that during the 2010 year, "technical personnel continued operating both the multiple-stage (Jamesway) and single stage (Chickmaster) incubation processes that it had operated throughout 2009".^[295]

370. Mr A agreed that during the Relevant Year, Jamesway was available for troubleshooting and advice in relation to its machines and that they were available to give expert advice in relation to hatchery.^[296] Mr A acknowledged that he had in fact obtained advice from Jamesway at the time.^[297]

371. Mr A accepted during cross-examination that what GQHC was doing in this project was:^[298]

(a)

trying to get to know these fundamentally different new machines; and

(b)

using the machines for the purpose for which they had been designed.

372. In relation to the scoping study Mr A prepared for the SLT called "Scoping of the Research and Development Project for Single- 3 January 2012 Stage verses Multi-Stage Incubators" dated 3 January 2012,^[299] Mr A agreed that at that time GQHC had a good idea single-stage was superior but said, "[w]hen you're going to invest that sort of money, yes, we needed confidence".^[300] Mr A explained it was a multimillion dollar investment in the new incubators.

373. In relation to the issues of whether an outcome could be known in advance and generate new knowledge, GQHC submitted that in relation to Incubation/Hatchery Project, Professor Scanes' opinions were not based on his specialised knowledge.^[301] This submission was based on the fact that Professor Scanes conducted a Google search using words from the R&D Application for which GQHC submitted did not require specialised knowledge. However, there is no evidence that the results of this search was the only basis for Professor Scanes' opinion. It was not put to Professor Scanes that there was no apparent specialised knowledge in selecting the articles that he relied on. What Professor Scanes did, by conducting a search that anyone could do (i.e., did not require the research skills and training of a specialist academic), was demonstrate that the knowledge was common and very much publicly available, and should have been known the Group.

374. Professor Scanes explained his methodology and process as follows. It was not limited to a Google search:^[302]

13. Activities seeking new information could meet the criteria in the question if there were gaps in the scientific literature and/or an absence of published scientific papers. I consider that there were neither an absence of scientific reports nor gaps in the scientific literature. We can readily assess whether there was either an absence of scientific reports or gaps in the scientific literature by searching the scientific literature together with technical papers (e.g. by Google or Google Scholar; these being widely accepted in the animal science field). Normally, scientists would conduct a search of the scientific literature prior to initiating a research project. An example of the approach I used is described in appendix III. Based on my experience as a poultry researcher and as an administrator/manager, I consider that searching the scientific and commercial literature is important to making a prudent business decision to acquire major capital equipment. A corollary is that the scientific literature should have been considered when the project was proposed and initiated. It is not clear whether this had been done.

14. I cross-referenced the materials from [the Group] with my analysis of the scientific literature and commentary that was available at the end of 2010 (detailed in appendix III). Based on my knowledge of the field and my reading of the pertinent literature (as summarized in appendix III), I concluded that there is strong, consistent and convincing evidence both for the utility of single stage incubators and their superiority over multi-stage incubators. The conclusion based on my experience and the consensus of the papers (from prominent poultry scientists) was that single stage incubators were superior to multi-stage incubators.

(emphasis added)

375. Professor Scanes selected two articles and said he considered one of the authors to be a very reliable individual. GQHC argued that this assessment was based on Professor Scanes' personal knowledge, not on his specialised knowledge in poultry science. The Tribunal does not understand this submission. It is obvious to the Tribunal that Professor Scanes' specialist knowledge enabled him to assess whether a study conducted by this individual was reliable.

376. The outcome of the evidence given during the hearing was that both Mr A and Associate Professor Groves acknowledged the outcome was known.

New Knowledge

377. In terms of whether they were seeking new knowledge, GQHC submitted the Incubation/Hatchery Project involved purchasing and using single-stage incubators and observing their effects in South East Queensland's climatic conditions. GQHC contend that the guides provided by the breeding companies did not provide specific information on these site-specific factors.^[303]

378. The Commissioner contends that to the extent that the projects involved applying existing technology to a new environment, they do not constitute "experimental activities" or activities having the purpose of "generating new knowledge" within the meaning of Moreton Resources.

379. The Commissioner stated the activities engaged in here are distinguishable from the circumstances in Moreton Resources because:^[304]

(a)

the activity in Moreton Resources was a pilot project using technology that had had extremely limited worldwide use. By contrast GQHC is engaged in commercial poultry farming; and

(b)

in Moreton Resources the Court held that what was being tested would have been a "first" worldwide, whereas here "nothing on the facts of the present matter suggests that the Purported R&D Activities involve a similarly large departure from how chickens have been commercially produced around the world up to the relevant date".

380. The Tribunal agrees with the Commissioner's submission.

381. No details of the relevance of Queensland's climatic conditions were provided. The eggs were being controlled in terms of temperature, airflow and otherwise by the "developed egg shell temperature monitoring system" calibrated by GQHC.

382. In terms of temperature control Mr A acknowledged at the hearing that by the time of the 2013 activities the industry ought to have known that:^[305]

(c)

being able to more finely control the temperature of the incubator ought to lead to better chick outcomes;

(d)

single stage machines ought to allow for better control over temperature than multi stage machines;

(e)

single stage machines allowed for better control with temperature than multi stage machines;

(f)

the relationship between having finer control over temperature in the early stages of incubation, ought to lead to better outcomes in terms of overall hatchability, chick quality and mortality rates.

383. Associate Professor Groves reported that:^[306]

The outcome of this experimental process could not ...be foreseen under [the Group]'s environment and conditions of operation.

384. During cross-examination, Associate Professor Groves explained his reference to the outcome of this activity was a reference to whether or not the "cost" of using a single-stage machine was going to be worthwhile commercially to the Group.^[307] That is, the outcome sought was not regarding the advantages of single-stage incubators, because this was already known.

385. In relation to whether the outcome (whatever that was) could only be known or determined by a systematic process of work, Associate Professor Groves accepted during cross-examination that:

(a)

the knowledge that existed at that time was that control over carbon dioxide at different stages of incubation can enhance embryo growth and improve hatchability;^[308] and,

(b)

at the time the literature showed a tendency towards single-stage incubators producing superior hatchability outcomes.^[309]

386. Despite reporting that the scientific literature provided equivocal results as to whether single-stage machines would give better hatchability results than multi-stage, during cross-examination Associate Professor Groves accepted "that [i.e. single stage machines] is where the literature [sic] was heading" and that the tendency was to show a superiority of single-stage in terms of hatchability outcomes.^[310]

387. In light of the above the Tribunal finds the Incubation/Hatchery Project was not undertaken for the purpose of generating new knowledge.

Evidence of Observation and Evaluation?

388. In terms of needing to test equipment in situ, Mr A acknowledged there are no records of the way that in which the so-called Brisbane conditions differ from any other relevant conditions. Mr A simply said, "[t]hat's called the weather".^[311]

389. There was limited documentation, but Mr A provided copies of documents which indicated there was some observation and data being recorded.

390. There is insufficient evidence that GQHC has been engaged in a systematic process. In Rix's Creek Pty Limited; Bloomfield Collieries Pty Limited and Innovation Australia [2017] AATA 645 (Rix Creek), the Tribunal explained:

[20]... Evidence must be available to satisfy this requirement and that a vague, generalised description of the claimed activities is not sufficient to establish that a hypothesis was formulated and that the activities claimed were carried out.

[21] ...Documentary evidence is an expected feature of an activity that is systematic, investigative and experimental.

391. GQHC noted that the activities in question occurred eight to ten years ago, so more reliance on oral evidence was required. GQHC referred to Mount Owen Pty Limited and Innovation Australia [2013] AATA 573; 137 ALD 88 where the Tribunal confirmed that:

[155] The purpose of a research and development activity may be established, for example, by oral testimony or contemporaneous documentation which shows that the activity was carried out pursuant to a plan or formulated program...

392. There is no statutory requirement for documentation but there must be sufficient evidence to support a finding. In a few other matters the Tribunal has found a lack of proper/relevant contemporaneous documents has been fatal to the application.^[312]

393. In Royal Wins Pty Ltd and Innovation and Science Australia [2020] AATA 4320 (Royal Wins), Deputy President Molloy said (at [37]):

...it is an essential aspect of the systematic progression of research and development applications that there be adequate documentary evidence.

394. The Full Court in Coal of Queensland confirmed documentation is not a statutory requirement (referring to Rix Creek at [21]) but noted that in Rix Creek the point made by the Tribunal was "documentary evidence is an expected feature of an activity that is systematic, investigative and experimental". In those circumstances, it was appropriate for the Tribunal to take into account a lack of documentation "in reaching the conclusion the relevant parts of s 355-25(1) were not satisfied".^[313]

395. Here, despite there being few internal records, there was evidence provided by way of witness statements and orally from GQHC by way of Mr A and Dr E.

396. However, Dr E acknowledged in his written statement that he could not recollect the specific details of the activities.^[314] As a result his evidence is of limited probative value.

397. In terms of observation and evaluation, Associate Professor Groves accepted that one cannot know the cause of the results recorded (that there was no significant difference in relation to the weight of the chickens between the single and multi-stage incubation system).^[315] He said "all you can say is they came out of the machines differently" because there are a number of differences between the Jamesway single and multi-stage incubators.^[316]

398. In his report Associate Professor Groves referred to "Evidence of records kept for this experiment is shown in document 'MR A-16'. This workbook copy shows many tables, many of which are not titled, but this is a matter of quality, not activity. 'MR A-16' is a raw copy of a workbook only". During cross-examination he acknowledged that he could not understand (i.e. interpret or evaluate) the results recorded in the workbook (MR A-16).^[317]

399. In relation to the records kept, in particular the workbook, Associate Professor Groves acknowledged that a person, without other information, reading that document couldn't necessarily understand the results.^[318]

400. In light of the above the Tribunal finds there was insufficient evidence of observation and evaluation.

Was the Progression of Work Based on Principles of Established Science?

401. During cross-examination Mr A agreed that as of 3 January 2012, two types of incubators were being investigated to allow the Group "to critically assess the performance of the incubators before having to make the final decision of what brand of system we will implement for the overall project".^[319]

402. In February 2012, the Group conducted a pen trial comparing a Jamesway single-stage against a Jamesway multi-stage to assess the bird performance of eggs hatched from different type of setters.^[320] The results of this trial were that there was no significant difference in relation to the weight of the chickens between the single and multi-stage incubation systems.^[321] Mr A stated they were unable to prove or disprove the hypothesis that carbon dioxide would "work better" in a single-stage machine. Mr A acknowledged that there many differences between single and multi-stage machines though, not just carbon dioxide. The machines also differ in temperature profiles, how they are cleaned and emptied, how the air circulates within the machine. It was put to Mr A that as a result of all of these differences it is not possible to say whether the results could be solely attributable to carbon dioxide levels. Mr A did not seem to understand the question and replied, "you would think if there was more than that, we would see a bigger result" and "we would know if we were not running these machines correctly". The point is one cannot be certain. This has a negative impact on the reliability and efficacy of the results and the trial methodology.

403. Mr A agreed that in addition to the differences in the machines themselves, things change on a regular basis and the operator is another variable in terms of their skill and knowledge of how to operate the machines.^[322]

404. In relation to the 2013 Year the Group was testing whether finer temperature control during the single-stage incubation process would result in improvements in overall chick quality, in particular improvements in moisture loss and also that by directly measuring egg shell temperature instead of air temperature, it would more accurately manage temperature and air flow requirements.^[323] In 2010 Jamesway was advertising and promoting an egg shell temperature measuring device which was supposed to automatically read and report egg shell temperature which can then be used to adjust the ambient incubator temperature.^[324]

405. Mr A said they could not get this Jamesway accessory to work satisfactorily.

406. Mr A agreed that as the Group started using these machines and getting used to them, the different accessories and the different settings, the Group was able to use them more effectively. He said they had to run the trials to get that information. Mr A accepted the trials included the calibration of different available settings and accessories (see the description in the 2013 R&D Application).^[325]

407. Mr A said the Group was not satisfied with the results they were getting out of the Jamesway single stage because of the "advanced percentage of day olds causing too many dead culls at hatch take off".^[326] Mr A agreed during cross-examination that to overcome this problem the Group was going to embark on a fact-finding mission to determine what was going wrong. Mr A agreed the methodology was about calibrating the machine by making adjustments to see whether the results improved. Mr A acknowledged he "didn't know" what the adjustments were going to be at the outset.^[327]

408. As referred to earlier, Mr A said they asked for advice from Jamesway on several occasions and made some adjustments accordingly.^[328] There are no records of particular trials comparing one adjustment against another.^[329] There is some evidence of data being collected from some setters though.^[330]

409. Associate Professor Grove's opinion was based on not needing to assess the "quality" of the research. This led to error. Even still, Associate Professor Groves acknowledged the shortcomings in the activities. Associate Professor Groves assessed the project as far as he could determine from the information provided, "without undue consideration of the quality of the work performed".^[331] He acknowledged that he was instructed that section 355-25 of the legislation was not concerned with the quality of work done at any stage, but just with the process.^[332]

410. As opined by Professor Scanes, "installing new equipment and observing the effects within the production system does not comply with there being either a systematic progression of work or generation of new knowledge".^[333]

411. There was no single-stage versus multi-stage test conducted with only a CO2 variable in place.^[334] That is there was no control group. During cross-examination Associate Professor Groves accepted that having a control group is usually something that is part of the scientific method or experiment and that the control should usually be the same as the trial group, except for the variable being trialled.^[335]

412. A systematic approach based on principles of science was not followed.

Findings

413. Based on the available material, the Tribunal finds that in relation to the Incubation/Hatchery Project:

(a)

GQHC did not approach the research in a scientific and systematic manner;

(b)

the activities were not "experimental" as that word is used in section 355-25; and therefore,

(c)

the activities are not "core R & D activities" under section 355-25 of the ITAA 1997.

414. The Tribunal is not satisfied the activities undertaken by GQHC in the Incubation/Hatchery Project were based on principles of science as required by section 355-25(1)(a) of the ITAA 1997.

415. Given this finding it follows that the claimed supporting activities for this Project are not "supporting R&D activities" as required under section 355-30 of the ITAA 1997.

WATER QUALITY PROJECT

416. The Group's broiler farms use dam water or a mix of town and bore water to supply drinking water to the chickens.^[336] The bore water contains a large amount of iron hydroxide, which needs to be reduced through aeration of the water into a dam.^[337] The dam is exposed to the natural elements and is, as a result, susceptible to contamination, necessitating treatment before being supplied to birds as drinking water.^[338]

417. GQHC had been treating water with chlorine, but this is a complex, labour intensive process requiring constant maintenance and monitoring to ensure the appropriate chlorine concentration is maintained and was not consistently achievable.^[339]

418. GQHC stated they wanted to find an alternative, low maintenance, water treatment process that increased the consistency of water quality in the measures of chlorine concentration and bacterial count, while maintaining health data and reducing labour costs of managing water quality.^[340]

Overall Objective

419. In its application for the 2012/2013 financial years GQHC described the overall objective of the Water Quality Project was to:^[341]

develop a low-maintenance water treatment process that increases the consistency of bird drinking water quality, comprising both bacterial counts and acceptability to birds.

420. The Group also listed the following as "key technical objectives" it was seeking to achieve:^[342]

Key technical objectives that [the Group] is seeking to achieve through this R&D project include ensuring that the developed processes are able to:

•

achieve a consistent chlorine concentration of 3ppm free chlorine in bird drinking water

•

successfully treat up to 60,000L of dam water per shed per day

•

consistently maintain E.coli counts at zero

•

consistently maintain Coliform counts at zero

•

consistently maintain total plate count (TPC) below 1000 cfu/ml

•

consistently maintain chlorine and contaminant levels over transfer distances up to 100m

•

Ensure broilers maintain average feed conversion of 1.8:1

•

Ensure that the average broiler mortality level remains below 8%.

421. In summary, the key technical objectives were to achieve a consistent chlorine concentration of 3ppm free chlorine in bird drinking water, consistently maintaining E. Coli and Coliform counts at zero, and ensuring that the average broiler mortality level remained below 8%.^[343]

New Knowledge

422. GQHC stated the new knowledge that would be generated was:^[344]

...with respect to a low maintenance dam water treatment process that is able to increase the consistency of bird drinking water quality, and thus ensure optimal bird health and performance. In order to achieve this objective, [the Group] has experimented with a number of potential processes surrounding treatment, transport and monitoring of drinking water in an effort to develop an effective overarching solution.

...

[The Group] has also sought to develop new knowledge with respect to methods for treating this water at extraction, and maintain its purity throughout transfer to and holding in shed tanks prior to being imbibed by poultry.

Claimed Activities

2012 Year

423. GQHC registered the following core and supporting activities in 2012 for the Water Quality Project:^[345]

424. For the 2012 year GQHC claimed its "core R&D activity" involved the development of improved water treatment techniques for application to broiler growing farms supplied by untreated dam water.^[346]

425. GQHC stated its hypothesis was:^[347]

...utilisation of a novel, alternative chemical dosing system (e.g. twin-oxide) in place of traditional chlorine-based treatments would reduce bacterial counts in bird drinking water and increase the acceptability of the water to birds, thus improving water consumption and bird performance. An additional objective of this experimentation at Site G was to assess whether the system was able to treat large volumes of water (up to 60,000 litres of water per day).

426. The hypothesis was said to be tested by undertaking an experimental process:^[348]

...experimenting with various dosage rates, while monitoring several water quality factors during growout at Site G, including total plate count, coliforms, E.coli, as well as bird performance indicators (to determine the acceptability of the treated water to birds) including water consumption rates, feed conversion rates and bird weights.

2013 Year

427. GHQC registered the following core and supporting activities in 2013 for the Water Quality Project:^[349]

428. In the 2013 Application, GQHC stated:^[350]

During 2013, [the Group] continued to conduct experimental water treatment activities at the company's Site C grow-out facility. As indicated above, [the Group]'s Site C farm is unique in that it uses an equal mixture of town and bore water to supply drinking water to birds. Bore water is mixed with town water to offset the high cost and limited supply of town water, however this mixture is not ideal due to the poor quality of bore water on the Site C site. The bore water must be aerated into a dam to facilitate the removal of high levels of iron oxide in the water. The aerated bore water is then stored in a dam to allow the iron oxide to fall out of suspension.

Given the high degree of uncertainty surrounding both the effectiveness and acceptability of the novel chemical dosing system (e.g. twin-oxide), and following the failures experienced in the initial phase of experimentation, [the Group] experimented with the use of straight chlorine against a treatment approach utilising a combination of chlorine and twin-oxide dosing during grow-out at Site C during the 2013 year. Through this trial the project team sought to experiment with various dosage rates while monitoring several water quality factors, including Iron Oxide, TPC, coliforms, E.coli, as well as bird performance indicators including water consumption rates, feed conversion rates, and bird weights. This experimentation included varying the dosage rates within an order of magnitude, including a 'shock dose' in response to poor initial results, and adjusting water pump capacities to ensure that required volumes of water could be treated.

It should be noted that through this trial period, [the Group] observed that the combined chlorine and twin-oxide dosage methodology for water treatment did not achieve the required water treatment effectiveness nor did it provide improved liveability and performance outcomes for the birds and as a result the company has proposed to investigate alternative water treatment methods.

429. For the 2013 Year GQHC claimed its "core R&D activity" involved a proposal to "investigate alternative water treatment methods" given that the "combined chlorine and twin-oxide dosage methodology for water treatment did not achieve the required water treatment effectiveness nor did it provide improved liveability and performance outcomes for the birds".

430. The Group "experimented with the use of straight chlorine against a treatment approach utilising a combination of chlorine and twin-oxide dosing during grow-out at Site C".^[351]

431. The claimed "supporting activities" for the 2012 and 2013 years were the installation of an enhanced chemical dosing system.^[352]

Evidence – Water Quality Project

Mr A

432. Mr A stated the Water Quality Project was carried out as described in the R&D Applications:^[353] The water at the Site C complex was bore water. It contained a large amount of iron hydroxide and as a result had to be pumped into a dam to convert it to iron hydroxide. Using the dam meant the water was open and susceptible to wild birds (ducks and water fowl) which was a significant risk to water quality.

433. Mr A stated the project was designed "as a response to a long history of unsatisfactory water quality at the Site C complex". Mr A was unable to locate the baseline water quality records.^[354]

434. Mr A said chlorine levels were tested at both ends of the sheds' water systems and bacteria extracts were sent back to the laboratories and analysed.

435. Mr A said twin oxide was selected to replace chlorine because "it was claimed to increase the level of sanitation for similar levels of product and it was also claimed to remove biofilm from the drinkers and water tanks thus improving performance of the birds".

Outcome could not be known in advance

436. Mr A stated the outcome could not be known in advance on the basis of current knowledge, information or experience.

Systematic progression of work

437. Mr A stated the core R&D activity was carried on by applying a systematic progression of work that was based on principles of established science, and proceeded from hypothesis to experiment, observation and evaluation, and led to a logical conclusion.

Purpose of generating new knowledge

438. Mr A stated the core R&D activity was undertaken for the purpose of generating the new knowledge described therein.

Supporting activity

439. Mr A stated the supporting activity was directly related to the core R&D activity and involved general and industry specific investigations and research (including literature reviews, industry research and discussions with industry experts) which were required to be undertaken in order to design, plan and implement the experiments in the core R&D activity.

Supporting documents

440. Mr A provided the Tribunal with the following supporting documents:

(a)

a document titled "Twin Oxide Trial Report v1.1";^[355]

(b)

a copy of academic and industry articles on water quality for poultry considered prior to undertaking the experiment;^[356]

(c)

a document titled "Scoping of the Research and Development Project for Chlorine Dioxide" dated 4 March 2013;^[357]

(d)

a document titled "Twin Oxide Report to the Management team" dated 29 May 2013;^[358] and,

(e)

a memorandum analysing the known properties, preparation methods, and uses of chlorine dioxide.^[359]

Expert Evidence

441. The expert evidence set out in the expert reports on this issue is summarised in the following table (emphasis added).

CONSIDERATION – WATER QUALITY PROJECT

442. The Commissioner contended:^[372]

(a)

"the documentation failed to include adequate information on composition (minerals, bacterial, pH and toxins) in their water sources, and whether the water was subject to treatment such as filtration and chlorination. In the absence of such documentation, GQHC did not demonstrate that they were addressing a problem or an unknown outcome";^[373]

(b)

there was no evidence that dam water is significantly more polluted and susceptible to contamination than other sources;^[374]

(c)

there was no testable hypothesis;

(d)

there was no documentation evidence about experimental design, protocols, or analysis of results;^[375]

(e)

in Professor Scanes' opinion the information available in the public domain meant that the outcome would have been known in advance;^[376]

(f)

the absence of documents indicates that GQHC did not follow principles of established science or proceed from hypothesis to experiment, observation and evaluation;^[377]

(g)

given the lack of documentation it cannot be determined whether the purpose of the activity was to generate new knowledge.^[378]

Were the Claimed Activities "Core Activities"?

Was There a Valid "Hypothesis"?

443. In relation to the Water Treatment Project, GQHC submitted Professor Scanes' opinion that he did not find a hypothesis in the documents was incorrect because the Group's R&D Application (for the 2012 year) reads:^[379]

The overall hypotheses tested by [the Group] was that the utilisation of a novel, alternative chemical dosing system, e.g. (twin-oxide) in place of traditional chlorine based treatments would reduce bacterial counts in bird drinking water and increase the acceptability of the water to birds, thus improving water consumption and bird performance.

444. In the Tribunal's opinion this submission was a misunderstanding of Professor Scanes' evidence. Just because GQHC described something as a "hypothesis" does not make it a hypothesis. Professor Scanes was provided with the R&D application and clearly considered this paragraph. Further, GQHC's submission regarding Professor Scanes is contrary to the evidence of their own expert witness who opined that there was no defined hypothesis.

445. The hypothesis lacked specificity and is irreplicable. What does "traditional chlorine-based treatments" mean? What constitutes a reduction of bacterial counts? What does "improved water consumption" mean? What are the various dosage rates? What water quality factors are being monitored? And so on.

446. With respect to the 2013 Application Mr A accepted there was no stated hypothesis.^[380] The experts were also in agreement that there was no hypothesis.

447. The Tribunal finds there was no valid hypothesis in relation to the Water Quality Project.

Was the Outcome Known in Advance? New knowledge

448. The experts agreed the reason the outcome was unknown was due to a lack of specificity about the activity.

449. Mr A prepared the scoping paper, "Scoping of the Research and Development Project for Chlorine Dioxide" (TwinOxide) on 4 March 2013.^[381]

Mr A accepted that by 2013 chlorine dioxide was a well-known water disinfectant "for commercial human consumption".^[382] In a memorandum called "analysing the known properties, preparation methods, and uses of Chlorine Dioxide" from the TwinOxide suppliers, it is noted that chlorine dioxide is a kind of bactericide widely used in water disinfection and the food industry, that it has bactericidal ability and is of no harm to the human body, animals and the environment and was used to disinfect poultry drinking water.^[383]

450. Mr A accepted the TwinOxide branded chlorine dioxide was a commercially available product, which GQHC used in accordance with its intended purpose for the purpose of improving performance.^[384]

451. As at 2012-2013 the manufacturer of TwinOxide was promoting TwinOxide as:

(a)

a superior water disinfectant alternative to chlorine;^[385]

(b)

having been "acknowledged by numerous governments, industries and academics worldwide as the best available replacement for chlorine or classical chlorine dioxide".

452. Mr A had to acknowledge that the Group was trialling the product because it was being promoted as a superior disinfectant to chlorine.^[386]

453. The TwinOxide Trial Report v1.1 reported that:^[387]

Due to the very high organic matter and heavily loaded levels of Coliform and E. coli the information gathered did not conclusively show any positive or negative results.

454. If the hypothesis was intended to be that TwinOxide was a superior water disinfectant alternative to chlorine, this was already known.

455. The Tribunal finds the outcome is unknown because it is unclear what was being tested i.e. there is no hypothesis.

Evidence of Observation and Evaluation?

456. There is insufficient evidence of observation and evaluation. Associate Professor Groves noted there were no statistics reported.

Was the Progression of Work Based on Principles of Established Science?

457. No, for the reasons already outlined. There is no hypothesis, there is a dearth of documentation and detail. There appears to be no new knowledge generated. There is a lack of evidence, lack of details, lack of testable hypothesis, and a lack of statistics (for evaluation and logical conclusion). The Tribunal cannot find the activities forming part of the Water Quality Project were experiments based on principles of established science.

Findings

458. Based on the available material, the Tribunal finds that in relation to the Water Quality Project:

(a)

GQHC did not approach the research in a scientific and systematic manner;

(b)

the activities were not "experimental" as that word is used in section 355-25; and therefore,

(c)

the activity was not a "core R&D activity" under section 355-25 of the ITAA 1997.

459. The Tribunal is not satisfied the activities undertaken by GQHC in the Water Quality Project were based on principles of science as required by section 355-25(1)(a) of the ITAA 1997.

460. Given this finding it follows that the claimed supporting activities for this Project are not "supporting R&D activities" as required under section 355-30 of the ITAA 1997.

SHED CLEANING PROJECT

Overall Objective

461. GQHC submits the Shed Cleaning Project involved modifying an existing commercially available equipment into a mobile automated slat washing system.^[388]

462. In its Applications for the 2012 and 2013 years, GQHC described the objective of the Project was as follows:^[389]

...to develop an automated and portable poultry slat washing system and associated cleaning techniques that will improve both the speed of poultry shed sanitation, and the biosecurity of its operations. In this regard, [the Group] hopes to reduce the length of the cleaning period so as to allow the speedier introduction of laying batches, reduce...labour requirements, and improve the health of its breeding stock by preventing the carry-over of disease from one batch to the next.

New Knowledge

463. In 2012 GQHC explained the "knowledge gaps" as follows:^[390]

To achieve this automated slat washing system, [the Group] was required to overcome a number of knowledge gaps. One of the key factors that drove [the Group] to develop automated slat washing techniques was the ineffectiveness of manual slat sanitisation (Incomplete removal of faecal and other contaminants from the previous laying period). Ineffective sanitisation risks the health of breeder stock being introduced into the shed in the next placement period. As [the Group]'s slat washing device is novel to the industry, [the Group] is unable to rely on existing research to determine the performance or optimal design of the device, and unable to determine in advance whether this project's objectives are achievable, particularly with respect to the Impact on bird health. Furthermore, [the Group] is unable to determine in advance whether consistent decontamination of the slats without rework is achievable. Rework would impact [the Group] 's ability to realise a reduction in labour usage, or an improved throughput rate. In addition, [the Group]'s concept of a device that is transportable between laying farms, removing the need to develop centralised infrastructure or multiple systems could also result in the transferal of contaminants between farms.

(emphasis added)

464. GQHC stated the new knowledge which would be generated in the 2013 Year as follows:^[391]

While a limited number of automated slat washing processes have been developed on a worldwide basis ([the Group] observed some primitive overseas systems in operation as part of this project's research phase), [the Group]'s proposed solution departs from these in several aspects. For example, all existing solutions require either fixed or large-scale centralised infrastructure, incompatible with [the Group]'s multi-site operations and biosecurity objectives. Accordingly, [the Group]'s hypothesised automated slat washing system, one that is portable and therefore can be transported and used on multiple farms, will mark a significant advancement on the current commercially available knowledge in the industry.

However, the attainment of a successful automated slat washing system, demands the project team overcome a number of knowledge gaps. One of the key factors that drove [the Group] to develop automated slat washing techniques was the ineffectiveness of manual slat sanitisation (incomplete removal of faecal and other contaminants from the previous laying period). Ineffective sanitisation risks the health of breeder stock being introduced into the shed in the next placement period.

As [the Group]'s slat washing device is novel to the industry, [the Group] is unable to rely on existing research to determine the performance or optimal design of the device, and unable to determine in advance whether this project's objectives are achievable, particularly with respect to the impact on bird health. Furthermore, [the Group] is unable to determine in advance whether consistent decontamination of the slats without rework is achievable. Rework would impact [the Group]'s ability to realise a reduction in labour usage, or an improved throughput rate. In addition, [the Group]'s concept of a device that is transportable between laying farms, removing the need to develop centralised infrastructure or multiple systems, could also result in the transferal of contaminants between farms.

Through this R&D project, [the Group] is therefore aiming to create new knowledge in the form of improved slat washing processes (ie more efficient, effective and consistent processes), including through a new automated and portable slat washing device. [The Group] is also looking to understand the effect of the automated slat washing techniques on breeder bird health (ie morbidity, mortality rates) in subsequent/consecutive laying periods.

Other examples of the new knowledge sought by [the Group] include:

•

The design of processes able to achieve the efficiency and degree of sanitisation required, and the quantitative effect of those processes on critical bird health measures.

•

The configuration of nozzle systems to ensure complete removal of faecal and other contaminants immediately following a laying period

•

The optimum design of the washing process required to effectively remove the cementitious layer formed by faecal matter on prolonged exposure to the sun

•

The design of washing processes capable of mitigating the risk of contaminant transferal between farms (ie given the portable nature of the device).

(emphasis added)

Claimed Activities

465. GQHC registered the following core and supporting activities for the Shed Cleaning Project.^[392]

2012/2013 Years

466. The claimed "core activities" for the 2012 and 2013 years involved testing and optimising the "operational effectiveness of the slat washer design".

467. GQHC stated its hypotheses were:

Core Activity 4.1 - Experimentation to trial and optimise slat washer prototype operation ^[393]

-

that automated slat washing techniques are able to effectively wash (solids removal) and sanitise (pathogen removal) at least 150 slats/hour, enabling the sanitisation of an entire shed in no greater than 7 hours

-

that automated slat washing techniques are able to reduce the length of time required to sanitise an entire farm (including the removal and reinstallation of slats) by 50%, to less than 2 weeks

-

that automated slat washing techniques are able to achieve improved sanitation consistency (improved throughput and effectiveness without the need for rework).

Core Activity 4.2 - Experimentation to trial and optimise effectiveness, bird health ^[394]

-

that automated slat washing techniques are able to mitigate disease transfer/carry-over between consecutive batches of birds, and thus are also able to reduce morbidity/mortality rates.

468. GQHC stated it would test the hypotheses by:^[395]

[The Group]'s method of experimentation was to operate the slat washer prototype onsite at [the Group]'s laying farms during the shed sanitation process. [The Group] engaged a specialist external consultant throughout the trials to assist in monitoring the system's efficiency (throughput, water consumption, rework rates) and sanitation effectiveness.

In response to several shortfalls observed during these trials, [the Group] developed several modifications to the original design of the slat washer. These included the addition of a water heating process to the device and the use of surfactants in an attempt to improve the prototype's ability to remove the cementitious substances that form on the slats during prolonged exposure to the sun.

...undertaking three specific trials on the slat washer prototype. The method of experimentation was "to operate the slat washer prototype onsite at [the Group]'s laying farms during the shed sanitation process.

2013 Year

469. GQHC stated its hypothesis was:^[396]

automated slat washing techniques are able to mitigate disease transfer/carry-over between consecutive batches of birds, and thus are also able to reduce morbidity/mortality rates.

470. GQHC stated it would test the hypothesis by:^[397]

determining the effect of iterative modifications to the slat washer prototype on critical breeder health measures, including morbidity and mortality rates and the prevalence of disease, during both control and test laying periods.

471. The claimed "supporting activities" for the 2013 Year were:

(a)

preliminary investigations and background research;^[398] and,

(b)

procurement and iterative modifications to slat washer prototype which included:^[399]

Manufacture and procurement of a prototype automated, portable slat washing system. The prototype's design was developed by [the Group] so as to be highly flexible, with the specific purpose of enabling the project team to perform iterative design modifications in response to adverse or unsatisfactory trial results. Examples of the design modifications made by [the Group] include:

•

modifications to the location of the nozzles and orientation of the slats on entering the automated washer

•

modifications to the water recycling system to achieve the required level of water consumption

•

modifications to the nozzles to a horizontal 'vee' to optimise the water dispersal pattern and improve effectiveness

•

modifications to the automated loading/unloading systems, including the incorporation of guards and a scissor lift device, to improve the operational health & safety of the system

•

incorporation of water heating coils capable of heating the water to between 35 degrees and 65 degrees. The addition of a heating process was theorised by [the Group] to improve the effectiveness of the device in sanitising slats that had been exposed to the sun for extended periods of time (ie between removal from the sheds and cleaning), thus forming a cementitious layer of manure on the slats. Initial observations from [the Group]'s trialling activities showed that the automated slat washing techniques were ineffective in this regard.

•

installation/mounting of the system on a transportable platform

Evidence - Shed Cleaning Project

Mr A

472. The purpose of the shed design is set out in paragraphs 461-462 above.^[400]

473. Mr A stated that the cleaning of the sheds between each batch was historically done manually, taking on average 70 hours to clean each shed.^[401]

474. This photograph is a typical slat flooring design used by GQHC:^[402]

475. This photograph demonstrates manual slat washing:^[403]

476. Before and after cleaning of the sheds:^[404]

477. Mr A stated the main commercial objective of Shed Cleaning Project was to:^[405]

...reduce the length of the cleaning period of the slats flooring used in the layer sheds so as to allow a speedier introduction of laying batches, reduce labour requirements, and improve the health of its breeding stock by preventing the carry-over of disease from one batch to the next.

478. Mr A said the overarching purpose of the project was "to streamline and optimise the process of cleaning and preparing farms slats in between hatching cycles".^[406]

479. The Shed Cleaning Project involved "experimental development of an automated and portable poultry slat washing system and associated cleaning techniques that will improve the speed of poultry shed sanitisation, the biosecurity of its operations, water consumption and bird health in subsequent laying periods".^[407]

480. Mr A provided a document titled "Research & Development (R&D) Project Description – Techniques to improve laying shed cleaning efficiency" which sets out the objectives of the Shed Cleaning Project.^[408]

481. Mr A said that by using the slat washer prototype, the Group reduced the cleaning time from 5 minutes for one person per slat "to needing 30 seconds for three persons to wash a slat".^[409]

482. Mr A provided a copy of a presentation titled "Clean out hours at 3 900We VSM 090217" which analysed the efficiency that was gained.^[410]

483. Mr A also provided a document headed "Project Workflow" which showed:^[411]

(a)

... a full cleaning and preparation workflow under the pre-existing method for a farm of 5 sheds (noting each shed has approximatively 800 slats). Washing the slats would typically take between 4 and 5 weeks; and

(b)

... a full cycle using the slat washer prototype, for the same farm. The total slat washing time is reduced to 8 days.

Prototype used

484. Mr A's evidence was that the prototype machine used was "designed and built by staff of [the Group]".^[412] Mr A's evidence was that:^[413]

25. Representatives of [the Group] visited the manufacturer of the slat washer machine in London, Canada to see its capabilities. From there, engineering work was undertaken to design a machine that may have been able to clean the slats. The parts came from similar systems but all had to be modified to suit the business' requirements.

26. Once the machine arrived in Australia, further modifications were implemented. This construction work was undertaken in parallel with frequent communications with KL system, the Canadian supplier of the slat washer machine from which the prototype was derived.

27. These modifications were aimed to:

(a)

increase the water pressure and quantity to adapt to the size of the sheds; and

(b)

allow for the shed washer prototype to be transported from farm to farm, as required.

28. A new platform was built to enable movements from farm to farm. All equipment that could be purchased in the market was not designed to be moved.

29. Now produced and shown, marked MR A-75 is a bundle of true copies of photos of the experiment. Referring more specifically to the sixth and sevenths of these photos:

(a)

the silver piece of equipment marked KL is the original slat washer provided by KL system;

(b)

all other pieces of equipment were designed and adapted by [the Group] staff members.

485. The slat washing machine being trialled looked like this:^[414]

486. Mr A was involved in the planning and management of the trials, analysis of trial results, and preparation of trial reports. Mr A said he was unable to locate the trial reports.^[415]

Supporting documentation

487. Mr A provided the following documents:

(a)

a capital expenditure proposal titled "Major Expenditure Authorisation Request" relating to the acquisition of an automatic washing system;^[416]

(b)

a document dated 5 November 2012 containing an actions items list for the "[the Group] Breeder Farm Catchout / Cleanout Process Improvement";^[417]

(c)

a document dated 12 December 2012 containing an actions items list for the "[the Group] Breeder Farm Catchout / Cleanout Process lmprovement";^[418] and,

(d)

a 12-week management plan.^[419]

488. Other than those documents referred to in the paragraph above, Mr A was unable to locate any other documents (other than photos) relating to the trials for the 2011/12 income year.^[420] Mr A must have meant to refer to the 2012/2013 years given the date on the documents themselves and the fact that the R&D application for the 2013 Year claimed the activities commenced in August 2011.^[421]

489. The following photographs show the slats following two soakings in truck wash solution and two runs through the slat washer:^[422]

Activity 5.1 – Experimentation to Trial and Optimise Slat Washer Prototype Operation

490. Mr A^[423] stated this core activity:^[424]

examined the optimisation of the actual mechanical operation of the washer. By way of example, [the Group] trailed hot water (by bringing in a portable boiler to supply hot water) and a number of chemicals to try to improve the efficiency of the washer ...

Outcome could not be known in advance

491. Mr A's evidence was that the outcome of Activity 5.1 could not be known in advance on the basis of the then current knowledge, information or experience because "the slat washing design and associated washing techniques were designed to be portable and used in multi breeder farm operations, as opposed to existing systems designed for single breeder operations".^[425]

492. Mr A stated the benefit of a portable machine is that it would remove "the need to develop centralised infrastructure or multiple systems" but the risk was that the use of a portable machine "could result in the transferal of contaminants between farms".^[426]

Systematic progression of work

493. To overcome the technical risks, Mr A stated a programme of systematic, investigative, and experimental activities was required.^[427]

494. Mr A's evidence was that three specific trials were conducted on the slat washer prototype in order to test the following hypotheses:^[428]

(a)

that automated slat washing techniques are able to effectively wash (solids removal) and sanitise (pathogen removal) at least 150 slats/hour, enabling the sanitisation of an entire shed in no greater than seven hours;

(b)

that automated slat washing techniques are able to reduce the length of time required to sanitise an entire farm (including the removal and reinstallation of slats) by 50%, to less than two weeks; and

(c)

that automated slat washing techniques are able to achieve improved sanitisation consistency (improved throughput and effectiveness without the need for rework).

495. The experimentation went as follows:^[429]

54. The method of experimentation was to operate the slat washer prototype on site at [the Group's] laying farms during the shed sanitisation process. A specialist external consultant was engaged throughout the trials to assist in monitoring the system's efficiency (throughput, water consumption, rework rates) and sanitisation effectiveness. In response to several shortfalls observed during these trials, several modifications to the original design of the slat washer were formulated and further tested through on-site experiments. These included the addition of a water heating process to the device and the use of surfactants in an attempt to improve the prototype's ability to remove the cementitious substances that form on the slats during prolonged exposure to the sun.

Purpose of generating new knowledge

496. Mr A stated the activities were engaged in for the purpose of generating new knowledge, namely a "new device (being an automated and portable slat washer), and the techniques that would enable effective operation of the design against the design criteria (portability, solids and pathogen removal etc.)".^[430]

497. Mr A stated this knowledge was new because GQHC considered large centralised automated slat washing systems that were available in the industry to be inefficient and unsuitable for a poultry operation that has multiple breeder farms like the Group. Mr A stated this was because slats taken from the various farms to a centralised location for cleaning had limitations in relation to cost, and time to transport the slats to and from the cleaning location.^[431]

498. Mr A stated there were no commercially available off-the-shelf portable solutions or publicly available knowledge of a design that were capable of being deployed at a multi-breeder facility.^[432]

Supporting Activity 5.1.1 – Preliminary investigations and research into state-of-the art

499. Mr A stated the supporting activity was directly related to Core Activity 5.1 and involved discussions with key stakeholders within the poultry industry in order to determine the existing state-of-the-art with respect to slat washing techniques. Mr A stated it was through these investigations that it was confirmed there were no commercially available off-the-shelf solutions that would be able to meet the company's technical objectives.^[433]

Supporting Activity 5.1.2 – Procurement and iterative modifications to slat washer prototype

500. Mr A stated this supporting activity was directly related to Core Activity 5.1 and that, due to the "novelty of the solution", several modifications to the design and washing techniques were required to be made in order to conduct the experiments that would allow the effectiveness of the design to be determined. These modifications were commissioned to an external manufacturer and overseen by Mr A.^[434]

Activity 5.2 – Experimentation to Trial and Optimise Effectiveness, Bird Health

501. The second core activity in relation to this project was focussed on bird health. The issue was the impact of a portable washer on bird health and disease transfer/carry-over between consecutive batches of birds.^[435]

502. Mr A stated this core activity:^[436]

...was conducted after [the Group] had improved the washing efficiency and looked at the effect of the improved washing on bird performance and mortality.

Outcome could not be known in advance

503. Mr A's evidence was that the outcome could not be known in advance for the same reason as Core Activity 5.1.^[437]

504. Mr A stated he conducted preliminary investigations and research, including liaising with leading suppliers, and was unable to determine in advance whether the developed techniques would be capable of achieving the required disease mitigation/bird morbidity objectives.

Systematic progression of work

505. Mr A stated a systematic progression of work from hypothesis to experiment, observation and evaluation, leading to logical conclusions was undertaken.^[438]

506. The hypothesis being tested was that the developed automated slat washing techniques can significantly reduce or mitigate the transfer of contaminants, including pathogens, between consecutive batches and thus materially improve bird health.

507. The hypothesis was tested by "determining the effect of iterative modifications to the slat washer prototype on critical breeder health measures, including morbidity and mortality rates and the prevalence of disease, during both control and test laying periods".^[439]

Purpose of generating new knowledge

508. Mr A stated the activities were engaged in for the purpose of generating new knowledge, namely:^[440]

an improved process for washing the layer slats using the new automated and portable slat washer developed in core Activity 5.1 and how to achieve mitigation of disease transfer/carry-over between consecutive batches of birds, and thus reduce morbidity/mortality rates.

509. Mr A said preliminary investigations and discussions with experts within the poultry industry determined that there were no commercially available off-the-shelf portable solutions or publicly available knowledge capable of being deployed at a multi-breeder facility like GQHC's facility.^[441]

Supporting documentation

510. Mr A stated he prepared a scoping document prior to the commencement of the trials but was unable to locate a copy of it.^[442]

Supporting Activity 5.2.1 – Preliminary investigations and research into the state-of-the-art

511. Mr A stated the supporting activity was directly related to Core Activity 5.2 and involved discussions with key stakeholders within the poultry industry in order to determine the existing state-of-the-art with respect to slat washing techniques.^[443]

Supporting Activity 5.2.2 – Procurement and iterative modifications to slat washer prototype

512. Mr A's evidence was that this supporting activity was directly related to and conducted for the dominant purpose of "supporting [sic] Activity 5.2". Mr A stated, "due to the novelty of the solution several modifications to the design end washing techniques were required to be made in order to conduct the experiments that would allow the effectiveness of the design to be determined".^[444]

513. These modifications were commissioned to an external manufacturer and overseen by Mr A.^[445]

Dr E

514. Dr E stated he was directly involved in various aspects of testing relating to Activities 5.1 and 5.2, including:^[446]

(a)

the microbiological aspects of this activity, which involved swabbing of the equipment and monitoring bird health; and,

(b)

testing of critical health measures, such as morbidity and mortality rates and the prevalence of disease during both control and test laying periods.

515. In addition to being directly involved in the project, Dr E was put forward as an expert witness in relation to the projects under examination. In relation to this project, Dr E provided no details or specifics and simply referred to what was stated in the R&D Application. In relation to Dr E's expert opinion, there was little detail and no explanation. For example, his evidence about a hypothesis was simply:^[447]

...a hypothesis was developed, a trial designed and undertaken, and an evaluation of the results conducted.

516. This evidence was insufficient to enable the Tribunal to come to the correct or preferable decision.

Expert Evidence

517. The expert evidence set out in the expert reports on this issue is summarised in the following table (emphasis added).

CONSIDERATION – SHED CLEANING PROJECT

518. GQHC said the purpose of this project was to develop a portable and automated shed cleaning system that decreased time and labour requirements and increased the efficiency of cleaning the layer sheds while improving the health of breeding stock by preventing the carry-over of disease from one batch to the next.

519. Professor Scanes concurred that:^[465]

...it is very important to assure sanitization of slats in broiler breeder sheds with consequent removal of pathogens that impair performance of progeny. For instance, pathogens such as Salmonella can contaminate eggs. Eggs laid on slats have much lower bacterial loads (by three orders of magnitudes) than those laid on litter.

520. The Commissioner contends, based on Professor Scanes' expert opinion, that in the 2013 Year:^[466]

(c)

there was no convincing case that "the outcome would not have been known in advance based on any technical documentation for the slat washer from the manufacturer";^[467]

(d)

there was a lack of evidence which demonstrated whether:^[468]

(i)

"the automated slat cleaner was a modification of existing commercially available equipment"; and,

(ii)

GQHC's "efforts went beyond calibration and customization".

(e)

the hypotheses were unclear and untestable and were merely "reasonable objectives";^[469]

(f)

there was a lack of documentation, and the project did not follow the principles of established science;^[470]

(g)

GQHC engaged in the project for commercial reasons, not in order to generate new knowledge;^[471] and,

(h)

the activities were merely trial and error.

Were the Claimed Activities "Core Activities"?

Was There a Valid "Hypothesis"?

521. The comments and findings on the meaning of "hypothesis" in paragraphs 257-285 are repeated here.

522. The hypotheses for the Shed Cleaning Project were:

(a)

that automated slat washing techniques are able to effectively wash (solids removal) and sanitise (pathogen removal) at least 150 slats/hour, enabling the sanitisation of an entire shed in no greater than 7 hours;

(b)

that automated slat washing techniques are able to reduce the length of time required to sanitise an entire farm (including the removal and reinstallation of slats) by 50% to less than 2 weeks; and,

(c)

that automated slat washing techniques are able to achieve improved sanitation consistency (improved throughput and effectiveness without the need for rework).

523. It was suggested to Mr A that what the Group called a "hypothesis" was more of an objective or an aspiration. In response, Mr A said, "We know what dirty looks like".^[472]

524. GQHC submitted Professor Scanes' criticism of the three hypotheses was "overly semantic" and that he did not explain why those hypotheses were untestable or how his opinion that they were untestable was based on his specialised knowledge. None of these issues were explained by Associate Professor Groves either.

525. The Tribunal accepts the first two hypotheses were testable in that once it was known what was meant by "automated slat washing techniques", an outcome could be measured.

526. In relation to the third proposed hypothesis, it is too vague and lacks specificity and replicability. It is an invalid hypothesis.

527. The hypotheses are too general and lacked specificity. GQHC's expert agreed he would need more information to form a judgement. In relation to the third hypothesis, it was, in addition to being vague, untestable.

528. The Tribunal finds there was no valid hypothesis in relation to the Shed Cleaning Project.

Evidence of Observation and Evaluation?

529. In terms of the results there were no records kept and no standards being measured. In response to this proposition, Mr A stated "they're all visual... We'd been cleaning slats for 40 years; we sort of know how to do it".^[473]

530. There are no records before the Tribunal whether the Group did indeed achieve at least 150 slats an hour from its work with this machine.^[474]

531. Associate Professor Groves acknowledged he was not provided with any documents that show the actual evaluation of the cleanliness. His understanding was that it was a visual assessment.^[475] Associate Professor Groves assumed GQHC had engaged a specialist consultant to oversee the project.^[476] He was not provided with any documents of work done by a specialist consultant overseeing the work.^[477] He reported:^[478]

Without this documentary information, I am unable to make any reasonable judgment on the systematic progression of this activity.

532. Associate Professor Groves acknowledged he was never given information about results or the measure of acceptability.^[479]

533. Associate Professor Groves was not provided with any documents of work done by the chemical company engaged.^[480] In fact he was not told what the chemicals were.^[481]

534. The Tribunal finds there is insufficient evidence of observation and evaluation.

Was the Claimed Activity Undertaken for the Purpose of Generating New Knowledge?

535. Mr A said the Group was looking to automate what was otherwise a laborious, costly process.

536. The prototype was purchased from an overseas manufacturer for $68,540.^[482] Mr A stated he was involved in the design of the prototype. However, Mr A provided no supporting documents or evidence in his witness statements about what particular design features he designed.^[483] Mr A explained there would have been emails and engineering files but this was 11 years ago. Mr A explained in re-examination that his IT manager upgraded the system and lost most of his files from 2011, 2012, and 2013.

537. In the "Major Expenditure Proposal Justification And Analysis" form,^[484] Mr A explained the need to purchase the equipment as being a cost reduction benefit:^[485]

The purchase of an automatic washing system that will wash and sanitise 150 slats per hour will reduce not only labour but the total time it takes to clean out the breeder farms. The current rate of cleaning is approximately one slat every eight minutes. This takes approximately 106 hours per shed.

The slat washer will not only wash but will soak, wash, rinse and sanitise at the same time.

It is envisaged that this washer will be placed on a trailer and moved from farm to farm.

With extra breeder sheds being planned to come online in 2012 the turnaround time for clean out must be shorter.

The slat washer will ensure not only clean and sanitise correctly but do it in a timely manner.

The cost savings alone in labour justifies this capital purchase, however having the slats cleaned and sanitized properly has greater implications.

538. This indicates that it was already known, or at least assumed, that an automated washing machine would save time, and money. This was not activity where the "outcome" as opposed to the data could not be known or determined in advance.

539. In that same expenditure form, the anticipated annual cost saving from such a machine was estimated to be $773,025. There is no mention of any R&D expenditure or R&D activities in this document.^[486] There is also no mention of any risk that the machine may fail.

540. Nozzles were changed to increase water pressure, which Mr A agreed is likely to lead to more effective cleaning.^[487]

541. Other than physical modifications the other activities involved trialling commercially available cleaning products.^[488] Mr A agreed "in theory" that using cleaning products should lead to a better cleaning outcome.^[489]

542. Hot water was then trialled by attaching a hot water broiler. The Group then engaged a specialised chemical company to assist, after which it was able to achieve satisfactory results.^[490]

543. Mr A accepted at the hearing that:

(a)

there were some forms of poultry slat washer machines available on the market with similar features to the prototype used by the Group in at least 2011;^[491]

(b)

some of the modifications made, such as to the main switchboard and plumbing, were standard solutions;^[492]

(c)

it was a predictable conclusion once you get the machine settings right, that automated slat washing would be quicker than manual slat washing;^[493]

(d)

if you get a slat washing machine working effectively then it should be able to sanitise slats so that disease is not transferred and carried over;^[494] and,

(e)

one would hope that having the nozzles sufficiently close to what is being cleaned is going to be important to cleaning effectiveness.^[495]

544. Associate Professor Groves accepted that using heated water in a cleaning process is a fairly standard response to trying to get a "better clean".^[496]

545. There is nothing inherently unpredictable about mounting a cleaning machine on a trailer in order to make it portable. It was accepted that it was known that adjusting the nozzle pressure, water temperature and adding chemicals, would achieve a cleaner outcome.

546. Associate Professor Groves accepted using a flat deck shipping container is a fairly standard response to move machinery from one place to another.^[497] He also accepted that enabling a switchboard and electricals was a standard response to wanting to have a portable machine that plugs into power at places.^[498] Similar responses from Associate Professor Groves were given in relation to the use of nozzles, tubs, and chemicals to clean.^[499]

547. There is no evidence of the purpose of the activity being to generate new knowledge. The purpose of the trial of the automated machine was to save time and costs.

548. The Tribunal is not satisfied that the activities were undertaken for the purpose of generating new knowledge.

Was The Progression of Work Based on Principles of Established Science?

549. GQHC submitted Professor Scanes' opinions were based on incorrect assumptions. GQHC stated one assumption made by Professor Scanes was that GQHC adopted or adapted a portable, automated slate washer machine, and that was contrary to the evidence. The evidence was that they procured one of their own design.^[500] There was no evidence, other than Mr A's oral evidence, that this was the case. The Tribunal finds this was a reasonable assumption for Professor Scanes to make in the circumstances.

550. Another purported incorrect assumption was that the manufacturer of the automated slat cleaner would have provided information on its effectiveness. There may not be evidence that this occurred, but Professor Scanes is entitled to assume, frankly, as a matter of common sense, that this information would have been provided. None of these propositions were put by junior counsel for GQHC to Professor Scanes.

551. Associate Professor Groves' initial opinion of this project was that there was no hypothesis. He reported that he could not assess whether there had been a systematic progression of work. He then stated what was done was "experimental".

552. Associate Professor Groves acknowledged that his opinion was based on instructions given and his assumption that GQHC was the originator and the source of the concept of the machine as opposed to the manufacturer.^[501] He was not provided with any design documentation. His subsequent opinion was based on an assumption of which there is no documentary evidence and which is lacking in all details.

Findings

553. Based on the available material, the Tribunal finds that in relation to the Shed Cleaning Project:

(a)

GQHC did not approach the research in a scientific and systematic manner;

(b)

the activities were not "experimental" as that word is used in section 355-25; and therefore,

(c)

the activities are not "core R&D activities" under section 355-25 of the ITAA 1997.

554. The Tribunal is not satisfied the activities undertaken by GQHC in the Shed Cleaning Project were based on principles of established science as required by section 355-25(1)(a) of the ITAA 1997.

555. Given this finding it follows that the claimed supporting activities for the Shed Cleaning Project are not "supporting R&D activities" as required under section 355-30 of the ITAA 1997.

BROILER IMPROVEMENT PROJECT

Overall Objective

556. GQHC submitted the Broiler Improvement Project involved using wholegrain (whether it be wholegrain sorghum or wholegrain wheat) in poultry feed and testing its performance in the Ross 308 in the Queensland environment.^[502]

557. In its R&D Application GQHC described the objective of the Broiler Improvement Project as follows:^[503]

...to design, develop and test novel methods and techniques to improve broiler performance (e.g. average weight gains, feed conversion rates), processing yield and the efficiency of feeding regimes. This will include research and development to optimise [the Group]'s various poultry feed formulations (including starter, pre-grower, grower, finisher and holding rations), as well as research into alternative breeding programs, feeding regimes, medication and vaccination regimes, and bio-security measures.

One of the key hypothesises developed and tested by [the Group] throughout this project is that it may be possible to improve poultry feed conversion rates and processing yield through the development of a new range of poultry ration mixes based on wholegrain sorghum. [The Group] has also investigated the potential to extend the company's novel low-energy holding ration to an earlier point in broiler growout whilst maintaining the feed conversion rates and other performance measures currently achieved using higher-energy (and more expensive) rations. Finally, [the Group] has also proposed to establish the feasibility and effectiveness of introducing novel supplements into the ration mix in an effort to improve bird performance outcomes attributable to poultry diet.

558. The specific objectives for the 2013 Year were stated to include:^[504]

•

Quantifying the impact on broiler bird performance, processing yield and quality of broiler (including evisceration yield, skin on/skin off yield, abdominal fat yield, drumstick yield, etc.) associated with a novel wholegrain sorghum based ration

•

Quantifying the impact on broiler bird performance, processing yield and quality of broiler (including evisceration yield, skin on/skin off yield, abdominal fat yield, drumstick yield, etc.) associated with bringing forward the novel low-energy holding ration to an earlier point in broiler growout

•

Quantifying the impact on broiler bird performance, processing yield and quality of broiler (including evisceration yield, skin on/skin off yield, abdominal fat yield, drumstick yield, skin and foot pad integrity etc.) associated with supplementing rations with alternative additives (including amino acids and organic minerals).

New Knowledge

559. GQHC stated the new knowledge that would be generated:^[505]

...[was] with respect to processes that are able to more effectively and/or efficiently deliver the required broiler performance.

... relates to the development of a new range of poultry rations based on the utilisation of a wholegrain sorghum.

Claimed Activities

560. GQHC registered the following core and supporting activities:^[506]

2012/2013 Years

Core Activity 5.1 – Experimentation with Wholegrain Sorghum Feed Formulations

561. The claimed "core activity" for the 2012 and 2013 years involved the design, development and testing of "wholegrain sorghum-based feed formulations with the objective of improving broiler performance (average weight gains, feed conversion rates) and processing yield".

562. GQHC stated its hypothesis was:^[507]

the utilisation of wholegrain sorghum as the basis for the various broiler feed rations will increase feed conversion rates across the broiler growout period.

563. The hypothesis was said to be tested in relation to the 2012 income year by undertaking:^[508]

"several experiments to determine whether a wholegrain sorghum substitute can be successfully implemented into ration mixes, while maintaining bird health and bird performance", and conducting trials based on the feeding of wholegrain sorghum.

564. The hypothesis was said to be tested in relation to the 2013 Year by undertaking further experimentation:^[509]

"focussed on incorporating synthetic amino acids (specifically L-Arginine) to supplement the sorghum based ration" to "overcome observed amino acid deficiencies in sorghum based ration formulations".

Core Activity 5.2 – Experimentation with Alternative Feed Formulations and Regimes

565. The hypothesis was said to be tested in relation to the 2013 income year by undertaking further experimentation of an "alternative feeding regime with the objective of improving the efficiency of the company's broiler operations, specifically by utilising rations with lower energy/protein density (ie that consist of less expensive ingredients) while seeking to maintain key performance measures such as feed conversion rates".^[510]

566. GQHC stated its hypothesis was:^[511]

substituting high-protein feed formulations with the company's unique low energy holding ration at a significantly earlier point during broiler growout will not have an adverse impact on bird performance while providing a more economical formulation.

567. The hypothesis was said to be tested by undertaking an experimental process:^[512]

to determine whether the earlier administering of the holding ration (and thus the removal of the withdrawal ration) had an adverse effect on broiler performance (average weight gains, feed conversion rates) and processing quality

2013 Year

Core Activity 5.3 – Experimentation with Organic Mineral Supplements

568. In addition to the wholegrain sorghum and low-energy holding ration feed, the Group also trialled "the feasibility and effectiveness of introducing novel supplements [organic minerals] into the ration mix in an effort to improve bird performance outcomes attributable to poultry diet".^[513]

569. GQHC stated its hypothesis was:^[514]

...the skin condition of poultry, and foot pad integrity in particular, is detrimentally impacted by inorganic minerals within feed and that the replacement of these inorganic minerals with an organic mineral blend will potentially contribute to improved skin integrity and reduce plant condemnations.

570. The hypothesis was said to be tested by undertaking an experimental process:^[515]

To determine "whether the inorganic mineral supplements could be feasibly incorporated into the feed formulation to achieve sustainable bird performance improvements and thereby contribute to improved returns (in terms of improved feed conversion outcomes and reduced condemnations)". The hypothesis was said to be tested by experimentation with "alternative feeding programs across three growout areas", which included two smaller trials

571. The claimed "supporting activities" for Relevant Year were preliminary investigations and background research.^[516]

Evidence - Broiler Improvement Project

Mr A

572. Mr A's evidence was that the main commercial objective of this project was to "improve broiler performance, quantified by average weight gains and feed conversion rates, processing yield and the efficiency of feeding regimes" which "would ultimately reduce the business' operating costs and improve profitability".^[517]

573. To achieve this objective the project focussed on its feed formulations, and research into alternative breeding programs, feeding regimes, medication and vaccination regimes, and biosecurity measures.^[518]

574. Mr A was involved in the planning and management of the trials as well as analysis of results and preparation of trial reports.^[519]

Core Activity 7.1 - Experimentation with wholegrain feed formulations

Outcome could not be known in advance

575. Mr A's evidence^[520] was that the outcome of Activity 7.1 could not be known in advance on the basis of current knowledge, information or experience because:^[521]

research of scientific articles in the public domain conducted by [the Group] found that although wholegrain wheat is a common additive with poultry ration mixes, it has been shown to have a potentially negative effect on bird health (when compared to non-wholegrain rations) due to the tendency for wholegrain to become lodged in the birds' gizzards.

Supporting documents

576. Mr A provided copies of articles considered by the Group during the course of conducting Activity 7.1.^[522]

577. Mr A said although he found articles on the use of wholegrain wheat in poultry feed, he did not locate any research or literature specific to the use of wholegrain in poultry feed on the performance of the Ross 308 in the Queensland environment.^[523]

Systematic progression of work

578. Mr A stated they conducted trials based on the feeding of wholegrain, monitoring of key bird performance and health measures (including average weight gains and FCRs) and comparisons with the performance achieved using traditional rations.^[524]

579. The trials were conducted to test the key hypothesis that the utilisation of wholegrain as the basis for the various broiler feed rations would increase FCRs across the broiler grow out period.^[525]

580. The initial trial took place at the Group's Site C complex which has 8 sheds. Four sheds of chicks were provided with treatment feed (being feed containing wholegrain) with the other four sheds of chicks provided with standard feed.^[526]

581. Mr A stated the question of whether wholegrain could be utilised in poultry feed was first discussed in or around February 2012.^[527]

582. In May 2012 it was proposed that wholegrain would be included in grower, finisher, and withdrawal feeds.^[528]

583. Mr A provided some feed dockets relating to the feed rations for the first trial undertaken at the Site C Complex.^[529]

584. The Site C trial was completed in June 2012. Mr A stated the results indicated the use of wholegrain improved the FCRs. Mr A provided meeting minutes where the trial was discussed and a copy of the results. Mr A stated "the results showed that sheds 1 to 4 which housed broilers on treatment feed produced a better feed conversion ratio of 1.74 compared to sheds 5-8 which housed broilers on standard feed".^[530]

585. GQHC decided to conduct a second trial to validate the results of the first trial.^[531]

586. The results of the second wholegrain trial showed a FCR of 1.77 for birds fed with treatment feed and a FCR of 2.199 for birds fed with standard feed.^[532]

587. Mr A provided some feed dockets relating to the feed rations for the second trial undertaken at the Site C Complex.^[533]

588. Given the success of the trials GQHC discussed whether to introduce wholegrain within the mixer at the Site E and Site A Mills at varying levels for each type of feed.^[534]

589. In early 2013, Mr A prepared a formal scoping document for the balance of the trials to be performed under Activity 7.1.^[535]

590. Further trials were conducted in 2013 Year.^[536]

591. On 15 May 2013 Mr A provided the SLT with a report containing a summary of the experiment, observations and analysis of the data obtained from the additional trials. It was concluded that:^[537]

...with the increase in cost of feed the overall benefit of feeding whole grain does not have financial benefit to [the Group].

Purpose of generating new knowledge

592. Mr A stated GQHC were seeking to develop an improved feeding process that incorporates a new range of poultry rations based on the utilisation of wholegrain. Mr A stated this knowledge was new because:^[538]

(a)

"the effect of using wholegrain in poultry feed on the performance of the Ross 308 in the Queensland environment was unknown"; and

(b)

"there was no publicly available scientific research to confirm whether extending the holding ration earlier into the grow out phase could be viable without affecting bird performance".

Supporting Activity 7.1.1 - Preliminary investigations and background research

593. Mr A's evidence was:^[539]

100. This activity involved [the Group]'s technical personnel performing general and industry specific investigations and research (including literature reviews, industry research and discussions with industry experts) in relation to various alternative wholegrain-based poultry ration mixes and feeding regimes and formulations. It was directly related to Activity 7.1 as [the Group] had to establish that there was no commercially available information with regard to the utilisation of wholegrain in poultry ration mixes, and that trialling would be required to evaluate the ability for such formulations to achieve [the Group]'s objectives.

Wholegrain sorghum feed trials

594. Following the receipt of Professor Scanes' report of 17 December 2020, Mr A filed a subsequent statement to confirm there was another trial experimenting with wholegrain sorghum feed formulations.

595. Mr A's evidence was:^[540]

Experimentation with wholegrain sorghum feed formulations

32. The sorghum trial was conducted on a 7 shed farm. The first 4 sheds were fed whole sorghum and the remaining 3 were control sheds. Noting the table at page 23 of Dr Scanes' report of 17 December 2020, I confirm whole sorghum was used. Testing whole sorghum was the purpose of the trial.

33. I make the following clarification:

(a)

the type of poultry housing used by [the Group] is variable. Most of the tunnel ventilated sheds are converted from conventional style and still use curtain sides; and

(b)

GQHC and YZQC being involved in live bird producing, and not processing, no data was collected in respect of gizzard weight or size.

34. Now produced and shown to me, and marked MR A-77 is a bundle of true copies of emails which, in addition to the minutes of feed meetings exhibited to my previous statements, document the methodology used and results from the Location B farms, including the Site H farm. These emails refer to the experiments conducted at Location B. Two trials were run in Location B over the period September 2012 to May 2013. Relevantly:

(a)

the Location B area was fed from a single feed mill, Site F in Location A, and whole wheat was added to all diets;

(b)

the batch data was then compared to [the Group]'s other growing areas in Site E & Site C; and

(c)

a sub trial was conducted on the Site H farm (a four shed farm in the Location B area), during which whole sorghum was compared to whole wheat.

35. During the same period, an additional trial was conducted at Site E on the Site B Farm in December 2012. While sheds 1 to 4 were used for standard feed plus whole sorghum, sheds 5 to 7 were used standard feed only.

36. Now produced and shown to me at the time of affirming this Fourth Statement:

(a)

marked MR A-78 is a spreadsheet, titled "Whole Grain - Batch Data", showing the batch data in Site C, Site E and Location B (b) marked MR A-79 is a bundle of true copies of emails documenting the methodology used and results from a number of feed trials, including the Site H Trial;

(c)

marked MR A-80 is a bundle of true copies of contemporaneous records of the wholegrain trials.

Core Activity 7.2 - Experimentation with Alternative Feed Formulations and Regimes

596. Mr A stated:^[541]

37. The "holding" ration was designed to assist with maintaining the desired bird liveweights before coming into the abattoir.

Core Activity 7.3 - Experimentation with Organic Mineral Supplements

597. Mr A stated the purpose of this trial was:^[542]

to assess the feasibility in a commercial operation that 'Replacing inorganic minerals with Mintrex-P will improve overall performance, reduce Plant condemnations and show improvement in skin condition.'

598. Mr A stated Ms D calculated the amino acid profile of all rations.^[543]

599. The results indicated there was some "foot pad lesions, breast blistering etc". Mr A said that:^[544]

Although [the Group] saw improvements in skin integrity, as a live bird supplier the additional cost of collecting data on skin condition could not be justified as there was no incentive for improved quality.

600. Mr A provided copies of articles GQHC considered prior to the undertaking the further trials.^[545]

Dr E

Activity 7.1 - Experimentation with wholegrain sorghum feed formulations

601. Dr E's recollection of his involvement in this activity included:^[546]

(a)

design of the trials to be undertaken;

(b)

monitoring and observing the test shed facilities;

(c)

data analysis of results from the trials, including FCR, growth rates (in particular weight gain of chickens) and mortality rates; and

(d)

undertaking chicken intestinal health checks, post mortem examinations, particularly of the chicken gizzards.

602. Consistent with Mr A's evidence, Dr E recalled the trial took place in the 2012 year at the Group's Site C Complex using 8 sheds. Four sheds were given wholegrain wheat feed and the remaining four sheds were given standard feed.^[547]

603. Dr E stated the "grains most commonly used in Queensland broiler rations in 2012 were wheat and sorghum".^[548]

604. Dr E explained that "whole grain feeding" is:^[549]

the process of feeding whole grains to broilers as part of the ration, as opposed to the traditional method of feeding a ration that has been hammer-milled or broken down into fine particles prior to being manufactured into broiler feed. One of the principle advantages of whole grain feeding is the positive impact on the function of the gizzard, which is the 'mechanical stomach', a very muscular organ used solely for grinding of food and mixing with digestive acids and enzymes (Tab RJ-28). As a result of feeding whole grain, improvements in gizzard function lead directly to improvements in feed utilisation and subsequent improvements in FCR (Tab RJ-29).

605. Dr E stated the question of whether wholegrain could be utilised in poultry feed was first discussed in or around February 2012. Dr E produced meeting minutes of Farm Meetings on 7 February 2012 and 8 May 2012 noting further consideration of wholegrain diets.^[550]

606. Dr E said the trial concluded in June 2012 and the results "showed that the use of wholegrain improved the feed conversion ratios".^[551]

607. Given the success of the initial trial it was agreed to conduct a second trial to validate the results. The option of using wholegrain sorghum was also discussed.^[552] Dr E noted he was not at the meeting where this was discussed but stated he was provided with a copy of the minutes and was aware that a second trial would proceed.

608. Following the trials Dr E conducted some post mortem examinations. He stated he particularly examined the size and structure of the chicken gizzards of birds that were put on standard feed and compared them to the chicken gizzards of birds that were put on the treatment feed, to determine whether there was any impact from the use of wholegrain.

Subsequent trials and experimentation

609. Further trials were then conducted on a larger scale.^[553]

610. A final report was provided to the SLT on 15 May 2013 containing a summary of the experiment, observations and analysis of the data obtained from the trials on batches 174, 175 and 176, and the conclusions which could be drawn from the experiment.^[554]

Ms D

Feed Formulations

611. Aviagen, the supplier of the Ross 308 broiler farmed by the Group, provides nutrition guidelines for optimum performance and advice on nutrient requirements of the broiler based on its age. GQHC asserted these Aviagen guidelines primarily focus on the British and American markets and they do not take into consideration Australia's specific environment, climate, and feed availability differences – such as the limited availability of corn, and the soft nature of the wheat grown in Australia. Contrary to this assertion Ms D stated, "it is important to follow the guidelines to achieve best performance".^[555]

612. Aviagen provided detailed nutrition specifications for each stage of the feeding program.^[556]

613. Ms D stated ingredients used in poultry feeds are variable and this needs to be considered in the formulation of feeds. Ms D provided the following example of crude protein variation across wheat and sorghum ingredients:^[557]

614. Ms D stated combining ingredients reduces the variation risk.

615. She stated the most used ingredients in Queensland poultry feeds are:^[558]

Expert Evidence

616. The expert evidence set out in the expert reports on this issue is summarised in the following tables (emphasis added).

Wholegrain Sorghum/Wholegrain Wheat

Alternative Feed Formulations

Organic Mineral Supplements

617. The Tribunal repeats its earlier comments regarding Dr E's lack of independence. Dr E only gave evidence about the wholegrain sorghum feed. Again, the Tribunal found little analysis in Dr E's report, and that he simply stated conclusions by reference to documents provided without explanation. The Tribunal places minimal weight on Dr E's evidence.

618. In relation to Associate Professor Groves, it appears, at least in relation to the wholegrain sorghum/wheat activities, that he may not have the appropriate degree of expertise or speciality to comment. In his report he referred to asking an unnamed colleague who Associate Professor Groves stated was an expert in sorghum. This is unsatisfactory. Who is the specialist? Are they in fact a specialist? The person who is providing the information to Associate Professor Groves did not provide a report or make themselves available for questioning. These assertions will not be given any weight. Associate professor Groves provided little in the way of analysis or explanation for his opinion. He did not describe the process he undertook in assessing the projects and often simply repeated the instructions. He also seemed to be attempting to distinguish what was already known from what might happen at the Group's site without explaining why. The Tribunal finds little weight can be given to Associate Professor Groves' evidence. In the circumstances, the Tribunal prefers and relies upon the evidence of Professor Scanes.

CONSIDERATION – BROILER IMPROVEMENT PROJECT

619. GQHC stated the outcome sought from the Broiler Improvement Project was to improve health data and profitability (i.e., through decreased costs) through identification of a more efficient feeding regime.^[587]

620. The Broiler Improvement Project comprised three core R&D activities:^[588]

(a)

experimentation with wholegrain sorghum feed formulations;^[589]

(b)

experimentation with alternative food formulations and regimes;^[590] and,

(c)

experimentation with organic mineral supplements.^[591]

621. On the last day of the hearing GQHC withdrew its applications for review with respect to the 2012 and 2014 activities. Despite this, it is still relevant to consider what happened in 2012 because it provides the background to the activities claimed for the following years. Further, the parties have prepared their submissions on the basis that the 2012 activities formed part of GQHC's case.

Were the Claimed Activities "Core Activities"?

622. The Commissioner contends that in the 2012 year:^[592]

(a)

the project was too general;^[593]

(b)

the documentation presented "was not particularly coherent, well-organized or complete";^[594]

(c)

there was an "absence of convincing documentation of activities on wholegrain sorghum despite this being a proposed activity"^[595] and on the basis of the hypotheses.^[596] It appeared that GQHC "initially proposed to test wholegrain sorghum but actually tested wholegrain wheat".^[597]

(d)

the hypotheses were too general and lacked precision, invalid and untestable.^[598] The hypotheses were:

(i)

overall, that it may be possible to improve poultry feed conversion rates and processing yield through the development of a new range of poultry ration mixes based on wholegrain sorghum;^[599]

(ii)

that the utilisation of wholegrain as the basis for the broiler feed rations will increase feed conversion rates across the broiler growout period;^[600]

(iii)

that substituting high-protein feed formulations with the company's unique low energy holding ration at a significantly earlier point during broiler growout will not have an adverse impact on bird performance while providing a more economical formulation;^[601] and,

(iv)

that the skin condition of poultry, and foot pad integrity in particular, is detrimentally impacted by inorganic minerals within feed and that the replacement of these inorganic minerals with an organic mineral blend will potentially contribute to improved skin integrity and reduce plant condemnations.^[602]

(e)

there were disparities between the objectives and hypotheses on the one hand and the trial as performed on the other and therefore the activities did not follow "the principles of established science";^[603]

(f)

the documents were unreliable as they contained inconsistencies regarding the number of feed rations and the compositions of the different rations;^[604]

(g)

the wholegrain feeds tested were different, therefore the comparison being tested was invalid;^[605]

(h)

there was no replication;

(i)

there were no "clear experimental protocol(s) covering all details of the experimentation and what was the statistical analysis employed".^[606] In Professor Scanes' opinion the data provided was "sketchy, cursory and incomplete" and did not include feed formulation, results, and a "research report with an analysis of the data and a logical conclusion".^[607]

(j)

even if the activities carried out by GQHC involved a comparison between wholegrain wheat feed with ground wheat feed:

(i)

the outcome would have been known or expected based on the published scientific literature;^[608]

(ii)

there was no documentation or conclusions demonstrating a systematic progression from hypothesis to experimentation to analysis to conclusion;^[609]

(iii)

no research appears to have been conducted in relation to the activity to examine the effect of novel energy feeds.^[610]

(k)

in relation to the Mintrex-P chemical supplement, this was merely use of a commercially available product as it was intended to be used.

623. The Commissioner repeated the contentions made for the 2012 year for the 2013 Year.

624. In addition, the Commissioner contends that in the 2013 Year:^[611]

(a)

if GQHC was trialling alternative amino acid concentrations and supplementing ration mixes with synthetic amino acids (specifically L-arginine):

(i)

the hypothesis that "arginine may become rate limiting on sorghum-based poultry diets" was invalid because it was based on a presumption L-arginine was the limiting amino acid when there is no evidence to support this;^[612]

(ii)

if wholegrain sorghum was tested, the experiment did not follow principles of established science because there is no evidence of there being a controlled study, replication, or statistical analysis;^[613] and,

(iii)

the project lacked sufficient detail such that it cannot be said to have been conducted to generate new knowledge;^[614]

(b)

in connection with experimenting with alternative feed formulations and regimes:

(i)

the outcome of the project could have been known in advance because there was "huge scientific literature on poultry feeds";^[615]

(ii)

the hypothesis lacked clarity and was not readily testable^[616] and as a result the project did not follow principles of established science;^[617]

(iii)

there was no experiment design documentation;^[618]

(iv)

no conclusion was able to be reached;^[619]

(c)

in relation to experimenting with organic mineral supplements:

(i)

the outcome of the project could have been known in advance based on scientific and technical papers and also because Mintrex-P was commercially available;^[620]

(ii)

there was no experiment design documentation;^[621]

(iii)

there was no analysis or conclusions drawn;^[622]

(iv)

there was no controlled trial with birds at different locations receiving different treatments or any data on the performance of the poultry receiving either treatment.^[623]

Consideration

625. In 2012 the Group claimed it engaged in two different sets of activities, one investigating wholegrain sorghum, the other a low-energy ration. The difficulty with this activity is that although there are documents indicating that a feed trial was occurring,^[624] it is not clear what type of grain was being used.^[625]

626. In 2013 the claimed activities continued, with the addition of experimenting with L-arginine in the sorghum ration and experimenting with organic mineral supplements.

627. Aviagen has breeding and quarantine facilities in Australia which is where GQHC gets its stock.^[626]

628. At the time of this Project's activities the Group was using commercially available feed formulation software.^[627] Ms D confirmed that the Group were using the formulation software to formulate feed rations.

629. Mr A also acknowledged that he has access to an Aviagen document called the "Ross Nutrition Supplement" and that Aviagen has technical staff available in Australia to provide advice and information.^[628]

630. The Aviagen nutrition specification brochure used by GQHC provides nutrient specifications for as hatched broilers per weight. The brochure notes adjustments need to be made for local conditions and markets.^[629] The brochure contains among other things recommendations for the use of arginine and minerals. There is no disclaimer that the information in the Aviagen brochure is relevant only to the American or United Kingdom market. There was no detail provided by GQHC about the specifics of its farm sites that meant the Aviagen information was not relevant or should not be followed. There was also no evidence to support the contention that site specific conditions are relevant. Further, GQHC acknowledged the chicks were purchased from Aviagen in Australia, not the US or the UK.

631. Mr A acknowledged that a well run broiler farm is constantly monitoring its operations and analysing the performance of its birds with a view to maximising its performance, and that it is standard practice to make adjustments when improvement is required.^[630]

Wholegrain Wheat and Wholegrain Sorghum Trials

632. Aviagen's Broiler Management Manual, used by GQHC, provided information on the "Safe Inclusion Rates of Whole Wheat in Broiler Rations" recommending that "Higher inclusions are possible if fed in combination with higher concentration compound or balance of feeds".^[631] This indicates that whole wheat feed was recognised as a potential part of broiler feed practices by at least 2009. Mr A disagreed saying this was only in relation to birds reared in the US,^[632] but Aviagen makes no distinction between different local wheats in this document or any reference to its application only being relevant to chickens in the US. Mr A did accept that feeding poultry with whole wheat in some circumstances, even in Australia, was an accepted potential diet for broilers by 2009.

633. Ms D stated, "it is important to follow the guidelines to achieve best performance". Dr E agreed the guidelines were aimed at achieving genetic potential of the Ross 308.^[633]

634. Mr A accepted that in relation to the Site C 1 to 8 trials in the 2012 year, comparing a feed using ground wheat only with a feed that also had a component of wholegrain wheat, did not involve the trialling of wholegrain sorghum.^[634]

635. There was no evidence in the Tribunal Book of any trials using wholegrain sorghum in the year ended 30 June 2012.

636. The Site C trial showed the wholegrain wheat gave a better performance than the ground wheat. A second trial, conducted in the 2013 Year between 1 to 7 December 2012, was then conducted at a different farm.^[635]

637. The majority of feed dockets in evidence from the second wholegrain trial in December 2012 do not refer to wholegrain sorghum.^[636] There was one feed docket (date illegible) which referred to sorghum. This is not persuasive evidence that the whole flock would have been fed wholegrain sorghum even if the feed docket did not indicate as much. Mr A said "This is an internal sales docket between ourselves. We would have had instructions at the feed mill" that wholegrain meant wholegrain sorghum.^[637] On re-examination Mr A elaborated:^[638]

When the grower rings up and puts an order into the feed mill for a particular feed they will specify the type of feed, the quantity of feed, and where it's to go. That's just an - that's an internal document for us that when we go over the weighbridge they'll put that information on so it then is credited or debited against that farm so we can calculate all of our performance indicating factors and how much feed has been fed to that particular shed.

You say go over the weighbridge?---Yes, every load in and out goes over our weighbridge.

And is that the occasion for generation of this docket or these types of dockets?---It is generated at the weighbridge.

Turning to the second component of your answer. You said, "We would have had instructions at the feed mill." Can you expand upon how those instructions might have been given and what those instructions might have been?---Like many of our projects, we would have instructions in the mill itself for the operators. So they're the guys that are sitting there coordinating what is being manufactured and what is being sent out. So they'll see the list of farms, they'll also have a list above that of what's going on in the farms because things change rapidly. The wholegrain sorghum would have just been called wholegrain. But sorghum was a very manual process, we didn't have an automatic loading system so it would have had to be done specifically in a loader bucket onto the truck. So it was a very - this has to be done for these farms, and it was very - communicated clearly to the operators. So the docket would have just said "wholegrain". It's just an addition to our docket - our system.

Sorry, you said the word "grower" before. I think it was the question and answer before last. But so we can be absolutely clear on terminology, what do you mean by "grower"?---We have a number of farms and the grower is the person who is running those farms. So colloquially called grower.

And we're talking about a truck going over - I take it a truck going over a weighbridge. Is the truck going to the mill, away from the mill, or somewhere else?---This docket is from the feed mill, onto the weighbridge, to the farm.

638. The Tribunal accepts what was outlined by Mr A may have been the usual or expected procedure to be following at the feed mill. However, there is no evidence that this occurred here in relation to these claimed activities in the 2013 Year. It is speculation on Mr A's part. No-one, other than Mr A, who may have been involved, gave evidence on this issue.

639. Later in his oral evidence Mr A then said he remembered this is what happened because he conducted the trial.^[639] There is no documentary evidence of this instruction, nor was it identified who would have given the instruction and when.

640. A further trial conducted in the 2013 Year at Site H was not a trial of wholegrain sorghum either.^[640]

641. Mr A agreed the use of wholegrain in broiler diets was not new prior to the Relevant Year.^[641]

642. In the scoping paper prepared by Mr A, which suggested a larger scale trial take place, no reference to wholegrain sorghum is found.^[642] Mr A said the scoping paper was focussed on wholegrain wheat.^[643] Wholegrain sorghum was added to the feeds at Site C from 18 January 2013.^[644] Three months later the wholegrain sorghum feed was suspended due to crumbly pellet quality.^[645]

643. In January 2013 the Group looked at replacing its feeds at Site E, Location B, and Site A with wholegrain feeds – For Site E and Site A it was going to be wholegrain sorghum and at Location B it was going to be wholegrain wheat.^[646]

644. There is some indication of wholegrain sorghum trials at Site C in the 2014 year but no records for the 2013 Year which is now the only year being considered for the claimed wholegrain broiler feed project.^[647]

645. Associate Professor Groves reported that the Site C 2012 trial was using wholegrain wheat not wholegrain sorghum and that:^[648]

Document "MR A-45" summarises the results of the second trial where four sheds received wholegrain treatments and three were used as controls. The sheds were not randomised as to treatment but this may have been for logistic reasons, and this is not uncommon procedure in commercial field trials...

646. At the hearing Associate Professor Groves acknowledged as part of the principles of established science, it would be ideal to randomise your distribution of control and treatment groups and that this did not occur in these activities.^[649] Standard scientific practice was not followed.

647. Associate Professor Groves reported that:^[650]

"MR A-45(1)" notes some problems with the comparison related to higher mortality in the control groups but decides that there is an advantage for wholegrain despite this possible confounding factor.

648. At the hearing Associate Professor Groves explained:^[651]

By confounding factor, you mean there might be some other variable going on that's leading to that increased mortality that's not related to the grain?---Yes, that's not explained, so we don't know what resulted in that.

Yes?---Whether it was the grain itself, or whether it was something totally unrelated.

Yes, and - - -?---With a small trial with only limited replication like that, particularly when you've got four sheds here and three sheds there, in a row, you don't have the randomisation , so it could have been something happening at that end of the farm that wasn't happening at the other end.

Yes?---Totally unrelated to the trial.

Yes, and so you can't really tell what is driving the results of this trial, can you?---No , not from that point of view, with a confounder in there that may have conflicted with things like growth rate as well.

(emphasis added)

649. Associate Professor Groves reported that:^[652]

The concluded "success" of this trial is noted in the Witness Statement of Mr A, paragraph 92. "Success" may have been defined in the lack of a difference in performance, indicating that the use of wholegrain was a possible consideration, although this is opposed to the hypothesis statement. This assessment of the results is a "quality of evaluation issue" but not any criticism of the systematic process that was undertaken.

650. Following his first report Associate Professor Groves was provided with additional documents and instructions:^[653] 10. We understand you may be assisted by further details of the experiment records for the whole grain sorghum experiment. You are instructed as follows:

(a)

you may find some of the requested results in Exhibit MR A-45; and

(b)

we also confirm we provided you today with:

(i)

a spreadsheet titled "Whole Grain - Shed Trial Data.xlsx" - Relevantly:

A.

at Site C, sheds 3, 4, 7 and 8 were used for the whole grain sorghum testing {sheds 1, 2, 5 and 6 being used as control sheds); and

B.

at Site B, sheds 16 to 19 were used for the whole grain sorghum testing {the other sheds being used as control sheds);

(ii)

a spreadsheet titled "Book 1.xlsx Site C trial.xlsx" and covering email, providing some results of the wholegrain sorghum trials conducted at the Site C Complex in November and December 2013;

(iii)

titled "Whole grain feed trial 20120516", an internal memo stating which sheds at the Site C complex would be used for the wholegrain experiment, in May 2012; and

(iv)

titled "Whole grain 20130213" and "Site C Whole Grain 20130118", a memo and a fax transmission discussing the trials, and requesting feeMr Aack and information on the experimented feed.

651. At the hearing Associate Professor Groves acknowledged:^[654]

(a)

he was not given any information about what the control sheds were fed. He presumed it was just their basic, normal ration;

(b)

he was not told whether they were given a feed based on ground sorghum or, say, wholegrain wheat. He presumed it was sorghum; and,

(c)

he accepted GQHC's instructions as to the dates trials started.^[655]

652. The Tribunal finds on the basis of the above that there is insufficient evidence that wholegrain sorghum trials were conducted in the Relevant Year as claimed, let alone conducted as "experimental activities".

653. There was no testable hypothesis. Rather, the claimed activity was a general objective and lacked specificity and replicability. Vague commercial objectives are unlikely to be considered as "hypotheses": see Royal Wins at [47].

L'arginine Trials

654. L'arginine is a synthetic amino acid. Mr A did not address this trial in any of his six witness statements.

655. Mr A prepared a scoping study report, "Research and Development Project for L-Arginine" in January 2013.^[656]

656. The documentary "evidence" of this trial is simply a series of emails from someone at Site H farm to Mr A between February and March 2013.^[657] The first email that the Tribunal was taken to refers to weighing the birds, and the flock having variable reactions.^[658] But there is no data provided. The next email the Tribunal was taken to contained some weight and mortality data; and contained comments such as "I'm disappointed with our Shed 1 sample...the females in the shed are way behind the males".^[659]

657. The contemporaneous emails confirm activities were occurring and were being monitored by someone at the trial location. The author of the email, or monitor of the activities, did not given evidence.

658. On 14 March 2013 the L-arginine Site H trial was reported as finalised with the summary provided to Mr A that:^[660]

...the data for the trial is now finalised and there is there what I submit is a logical conclusion from the data. The feed returned weighed in at [XXX]... This is very close to our estimates.

659. Four months later Mr A reported that in the first stage:^[661]

[The Group] commenced a commercial trail on the 16th of January 2013 to compare a 100% wheat-based diet with [the Group] standard Sorghum based diet with a 25% wheat inclusion (for pellet quality reasons).

...

The results of the trial, as above, while the Feed Conversion Ratio (FCR) was 2 points better on the Wheat based diet. The Sorghum diet had a superior Performance Indicating Factor (PIF) of 13.3 points.

...

On a cost benefit analysis the Sorghum based diet has shown to be 1.6 cents per kilo cheaper to produce a kilo of chicken meat. On this basis it is not advisable to move to a 100% wheat based diet.

Our current rations continue to provide [the Group] with the best nutritional and cost per kilo benefits. This however should not limit the continue investigation in the use of synthetic L-Arginine.

660. It is not clear whether L'arginine trials proceeded after this. There is no documentation evidencing stage two of that trial.

661. The Tribunal finds that the lack of detail about this activity is such that the purported activity cannot be said to be a "core R&D activity" as required by section 355-25 of the ITAA 1997.

662. The hypotheses were too general and lacked precision, invalid and untestable.

663. There was a lack of documentation and the documentation that was available contained inconclusive information and was unreliable.

Low Energy Ration

664. It was put to Mr A that the Group knew that the low energy feed, if it was introduced too early, would have an impact on the birds' weight and performance ratios at the end of their lives. Mr A accepted this proposition and that there is a trade-off between cost, bird performance and animal welfare considerations.^[662]

665. What the Group wanted to know was how far back it could push the low metabolic energy diet without compromising performance. When it was suggested that it was predictable that low energy feed could be extended to an earlier point in time without impacting performance, Mr A said, "Well, that's what we were trialling".^[663]

666. The scoping paper, "Scoping of the Research and Development Project for Variable Metabolic Energy Trial", stated the goal of the project was:^[664]

...to confirm that a low metabolic diet can be fed to birds that will be grown above 3.5kg's without negatively affecting overall performance.

667. Mr A accepted that the Group could predict at the outset that there would be some point at which that diet could be fed without negatively affecting overall performance, they just did not know at which point that would be.^[665]

668. Associate Professor Groves reported that:^[666]

it has been stated to me that [the Group] interpret "significant" as commercial significance, not pure statistical significance. This is a matter of quality of the research, not whether the project is actually "scientific".

669. This is an acknowledgement by GQHC's expert that the project was not conducted based on principles of established science.

670. The Tribunal finds that for the reasons outlined above the purported activity cannot be said to be a "core R&D activity" as required by section 355-25 of the ITAA 1997.

671. The hypotheses were too general and lacked precision, were invalid and untestable.

Organic Minerals

672. The organic mineral activities were conducted in the 2013 Year. Mintrex-P was the organic supplement used.

673. According to the manufacturer of Mintrex-P in 2010, industry research has been conducted which proves that these minerals are better and available under the Mintrex-P product and ought to lead to better skin integrity and foot pad integrity.^[667]

674. Mr A stated this does not mean Mintrex-P would have worked in their situation.^[668] As referred to earlier, it is unclear what the site specific factors are that would suggest Mintrex-P would not have worked as intended at the Group's site.

675. In a briefing note to the Group on 22 October 2013 it was recorded that:^[669]

In late 2012 [the Group] made an agreement with Novus International to trial 'Mintrex-P' a chelated source of Zinc, Copper and Manganese. The data made available by Novus to the management team including Mr A , Mr C and Ms D , nutritionist, showed that when used in combination, there were potentially significant benefits for the birds and the operation. There is a large store of data from previous work showing improvements such as reduced breast blisters and hock burn, skeletal integrity, greater bird welfare outcomes, disease tolerance and specific improvements in the area of carcase integrity at process.

(emphasis added)

676. Professor Scanes considered the hypothesis to be reasonable, but that this briefing note indicated that improvement to bird quality from the use of Mintrex-P was known prior to GQHC commencing its activities.

677. The proposal prepared by Mr A, "Scoping of the Research and Development Project for Mintrex-P",^[670] referred to the fact that based on the information from the manufacturer, a previous study from the Novus laboratory, MINTREX(r) Mn was reported to have greater biological availability than inorganic forms.

678. Mr A acknowledged that it was expected that "Replacing inorganic minerals with MINTREX P will improve overall performance, reduce plant condemnations, and show improvement on skin condition".^[671]

679. On 6 March 2013 Mr A reported "preliminary results show a significant difference between grow out area with the local farms, fed Mintrex-P for whole of life, having a lower instance of condemn, seconds and hock burns".^[672] The preliminary trial was conducted with over 2,800,000 birds.

680. Mr A accepted that in this trial they were using the Mintrex-P product as it was intended.^[673]

681. Despite the success of the trials, the cost of using Mintrex-P was not equating to additional revenue because the Group's payment model related to payment per kilo as opposed to improved performance quality.^[674]

682. The experts agreed there was a reasonable hypothesis. The Tribunal concurs with the opinions of the experts.

683. There was a lack of documentation and the documentation that was available contained inconclusive information and was unreliable.

Findings

684. Based on the available material, the Tribunal finds that in relation to the Broiler Improvement Project:

(a)

GQHC did not approach the research in a scientific and systematic manner;

(b)

the activities were not "experimental" as that word is used in section 355-25; and therefore,

(c)

the activities are not "core R&D activities" under section 355-25 of the ITAA 1997.

685. The Tribunal is not satisfied the activities undertaken by GQHC in the Broiler Improvement Project were based on principles of science as required by section 355-25(1)(a) of the ITAA 1997.

686. Given this finding it follows that the claimed supporting activities for the Broiler Improvement Project are not "supporting R&D activities" as required under section 355-30 of the ITAA 1997.

ISSUE 3: FEEDSTOCK ADJUSTMENT

687. For some R&D entities, an adjustment to their assessable income is required where they have received a tax offset for expenditure on R&D activities. This adjustment, known as a feedstock adjustment, applies in relation to certain feedstock expenditures. An amount needs to be included as part of an R&D entities taxable income when the R&D activities have produced tangible goods.

688. As the Tribunal has found that GQHC has not engaged in R&D activities, it is not necessary to determine whether any feedstock adjustment is required. However, it is appropriate that the Tribunal make findings on this issue given the significant time and expense incurred, including on expert witness evidence, by the parties on this issue.

689. Section 355-465(1) of the ITAA 1997 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 tor the purpose of transforming that production for supply.

690. To satisfy section 355-465(1)(a), the following must be present:

(a)

expenditure incurred in acquiring/producing goods/materials;

(b)

the goods/materials must have been transformed or processed;

(c)

the transformation or processing must have occurred during R&D activities;

(d)

a tangible product must have been produced as a result.

Contentions – Summary

GQHC

691. GQHC contends that there should be no amount included in its assessable income as a feedstock adjustment by operation of section 355-465 of the ITAA 1997 because:^[675]

(a)

section 355-465 of the ITAA 1997 does not apply to the agricultural growth of livestock, poultry, and crops;

(b)

expenditure on feed for the chickens is not expenditure to which section 355-465(1)(a) applies;

(c)

expenditure incurred on poultry feed fed to chickens during R&D activities is not expenditure on "feedstock inputs" in accordance with subsection 355-465(1);

(d)

as the chickens are not "transformed or processed" during R&D activities, section 355-465(1) does not apply and therefore the feed is not a feedstock input.

Commissioner

692. The Commissioner contends that GQHC's assessable income should include a "feedstock adjustment" pursuant to section 355-465(2) of the ITAA 1997 in respect of the expenditure on poultry feed and the expenditure on acquiring chicks.^[676]

693. The Commissioner stated:^[677]

65. The expenditure on poultry feed was expenditure that was incurred in acquiring or producing goods, or materials, transformed or processed during the Purported R&D Activities in producing one or more tangible products (being the broiler chickens), within the meaning of s 355-465(1)(a) of the ITAA 1997. The poultry feed is transformed and processed when it is consumed and digested by the breeder and broiler chickens in the Purported R&D Activities.

66. ... in the alternative:

a)

that to the extent that some or all of the expenditure on poultry feed is not expenditure within the meaning of s 355-465(1)(a) of the ITAA 1997 (which the Commissioner denies), that part was expenditure on an energy input directly into transforming or processing during the Purported R&D Activities within the meaning of s 355-465(1)(b)(ii) of the ITAA 1997; and

b)

that 100% of the expenditure on poultry feed was reasonably attributable to the production of the feedstock output (being the broiler chickens) for the purpose of s 355-465(2) of the ITAA 1997.

67. Expenditure on acquiring breeder and broiler chicks was expenditure incurred in acquiring or producing goods, or materials, transformed or processed during the Purported R&D Activities in producing one or more tangible products (being the broiler chickens), within the meaning of s 355-465(1)(a) of the ITAA 1997. The breeder and broiler chicks are transformed in the Purported R&D Activities.

(emphasis added)

Expenditure

694. GQHC confirmed that it incurred the following expenditure during the Projects:^[678]

(a)

Incubation/Hatchery Project - GQHC incurred expenditure on eggs for the incubator experiments and feed fed to the broilers during post hatching monitoring;

(b)

Water Quality Project - GQHC incurred expenditure on the broilers observed during the experiments and the feed given to those broilers during the experiments;

(c)

Shed Cleaning Project - GQHC incurred expenditure on the broilers observed during the experiments and the feed given to those broilers during the experiments.

695. The feed given during the Incubation/Hatchery, Water Quality Treatment and Shed Cleaning Projects was the standard feed used by the Group.

696. During the Broiler Improvement Project, GQHC incurred expenditure on:

(a)

trial formulations of feed;

(b)

standard feed; and

(c)

broilers observed during the experiments.

697. It is not in dispute that the expenditure incurred by GQHC (as identified in paragraphs 120-121 above) were incurred in acquiring feed and chicks.

"Transformed or processed"

698. For expenditure on feed to be a "feedstock input", the goods in question, here the chickens, must have been "transformed or processed" during the Registered Activities.

699. What does "transformed or processed" mean?

700. The terms "transformed or processed" are not defined in the Act and therefore the ordinary meaning should be applied.

Applicant's Contentions

701. In summary GQHC submits that in relation to the feed:^[679]

(a)

feed and chicks cannot be "feedstock inputs" because the chickens are not "transformed or processed";

(b)

as a matter of statutory construction, the words "transformed or processed" import notions of manufacture and fabrication and are not apt to the Registered Activities under examination in this matter;

(c)

"the limited nature and magnitude of the intervention by human agency does not constitute the feed being "processed" for the purposes of section 355-465(1)(a)."

702. Rather, GQHC contends that the feed was used to grow and maintain the chickens, not transform or process them.

703. GQHC submit:^[680]

that the poultry feed consumed by the broilers does not represent an energy input directly into the transformation or processing. In chickens, it is the microbiota in the gut that have the capability to break down the feed into the relevant nutrients. The microbiota release the dietary components into a form that are predominately absorbed in the intestine and affect the nutrition and health of the chicken (rather than the feed directly). The feed in the taxpayer's R&D activities has been specifically designed for this microbiota to break down the feed, not the chickens themselves. Consequently, experimentation on optimising chicken feed is targeted at ensuring the microbiota in the chicken gut prosper, so that nutritional compounds can then be absorbed in the chicken intestines. Therefore, any effect of the feed on the transformation and processing of the broilers is indirect and does not represent an energy input directly into the transformation/processing of the broilers.

704. In relation to the expenditure incurred in acquiring the chickens GQHC submit (for reasons similar to those submitted in relation to the feed):^[681]

(a)

the chickens are not feedstock because they are not "transformed" by natural growth; and,

(b)

the chickens are not feedstock because they are not "processed".

705. GQHC submit alternatively that if the chicken is a feedstock input, less than 100% of the expenditure on the feed is reasonably attributable.

706. Overarchingly GQHC submit that Subdivision 355-H of the ITAA 1997 imports a requirement of a level of fabrication or manufacture, and therefore is not applicable to the basic farming activities of growing and raising livestock and crops.

Commissioner's Contentions

707. The Commissioner contends poultry feed was transformed or processed during each of the Registered Activities as follows:^[682]

(a)

in relation to the Incubation Project and Slat Washing Project, poultry feed was fed to the broilers in the part of the project which involved observing the broilers after the incubation/slat washing work to see whether there were adverse or positive impacts on the broilers as they grew out;

(b)

in relation to the Water Project, poultry feed was fed to the broilers which drank the drinking water; and

(c)

in relation to the Broiler Project, poultry feed was fed to the broilers.

708. The Commissioner contends the chickens were transformed or processed during each of the Registered Activities because they were the central character of all the activities.^[683] The purported activities were aimed at bird quality, reducing mortality and disease transfer and improved performance.^[684]

709. Although the Commissioner noted there "is a limit to the usefulness of dictionary definitions in statutory construction because dictionaries do not have regard to the specific statutory context in which a term is used in a piece of legislation", it may be helpful in this instance as their ordinary defined meaning is consistent with the statutory text.^[685]

710. The Macquarie Dictionary defines "transform" (as a verb to mean):^[686]

1. to change in form, change to something of a different form; metamorphose.

2. to change in appearance, condition, nature or character, especially completely or

extensively.

3. to change (one substance, element, or nuclide) into another.

[...]

6. Physics to change (one form of energy) into another.

7. to change in form, appearance, or character; become transformed...

711. The Macquarie Dictionary defines "process" as:^[687]

noun

1. a systematic series of actions directed to some end: the process of making butter.

2. a continuous action, operation, or series of changes taking place in a definite manner: the process of decay.

[...]

5. Biology a natural outgrowth, projection, or appendage: a process of a bone.

Verb (t)

11. to treat or prepare by some particular process, as in manufacturing.

12. to convert (an agricultural commodity) into marketable form by some special process.

Is the Expenditure on Poultry Feed and Expenditure Acquiring Chicks "Feedstock Inputs" Within the Meaning of Section 355-465(1)(a)?

712. Expert evidence on this issue was given by:

(a)

Dr E and Ms D for GQHC; and

(b)

Dr Ruhnke on behalf of the Commissioner.

713. No challenge was made to the experts' expertise to provide their opinions on the topics of transformation and processing as it applied to poultry feed and chickens used in the course of GQHC's activities.

714. The meaning of transformed or processed must be given its ordinary meaning in context. There was no dispute that the experts could provide guidance to the Tribunal of the meaning of these terms in the context of poultry farm production.

Is The Poultry Feed Transformed or Processed

Dr E

Chicken Anatomy

715. Dr E provided the following diagrammatic representation of the internal organs of a mature hen (female chicken). Dr E stated a day-old chicken's anatomy is identical to an adult.

Figure 1: Internal anatomy of a chicken

716. In Dr E's opinion:^[688]

The chicken farmer cannot transform the genotype or genetic potential of chickens in any way. This is biologically fixed. Optimal nutrition, optimal growing conditions, optimal health and avoidance of stress and disease are some of the key variables over which a farmer can influence the phenotypic expression of traits such as growth rate, feed conversion rates and mortality in a chicken flock.

The intestinal tract of a chicken does not change its form or function at any stage of the broiler's life.

(emphasis added)

717. While the anatomy remains the same regardless of the age of the chicken, Dr E explained farmers can influence the phenotypic expression of a chicken's genetic potential though environmental conditions, and diet. That is, the chicken is born with its optimal potential – its genetic code. Different environmental and dietary factors can have an influence on whether that potential is met. This was also explained by Dr Ruhnke (see paragraphs 745 and 747 below).^[689]

Biomechanical Chicken Digestion Process

718. To better understand whether feed has been transformed, Dr E provided an image of the gastrointestinal tract and a description of the digestive process.

Figure 4: Schematic anatomy of the avian digestive system (Poultry Hub, 2019).

719. Dr E described the chickens digestive process as follows:^[690]

Food is picked up and mixed with small amounts of saliva, mucus and amylase (an enzyme to break down carbohydrates) in the mouth before it is swallowed and transported to the crop via the oesophagus. It is stored in the crop for varying periods before being moved into the proventriculus. Here hydrochloric acid, pepsins (for protein digestion) and other enzymes are mixed with the food to continue the breakdown of nutrients. Food is then moved by a process called peristalsis into the gizzard where the strong muscular walls physically crush larger particles into smaller ones, increasing the surface area of the particles to improve penetration and activity of acids and enzymes. Food moves backwards and forwards between the gizzard and proventriculus until it has formed a liquid slurry of fine particles. It then moves via peristalsis into the duodenum. Here other enzymes produced in the pancreas, and bile salts from the liver are added and mixed into the food slurry.

As food continues down the duodenum into the jejunum, digestion of complex nutrients into smaller chemical nutrients occurs. This allows absorption of these simpler nutrients across the intestinal wall into the blood stream. Water is also absorbed during the passage down the jejunum and ileum. At the point where the caeca join the ileum, only indigestible chemicals remain (for example non-starch polysaccharides). These chemicals move into the caecum where a resident bacterial population ferments and breaks down the indigestible compounds into products that can be utilised by the chicken, or by the bacterial population, which in turn becomes a source of nutrients for the chicken. Any residual material at this point becomes waste products and is excreted as faeces.

Gastrointestinal microbiota are an extremely important component of the gastrointestinal function. In some scientific circles, the intestinal microbial population is being classified as a digestive organ in its own right. It is estimated that at least ten percent of the DNA in the body is in fact microbial DNA. The composition of the gastrointestinal microbiota (the community of commensal, symbiotic and pathogenic microorganisms) is a key functional component of general and gastrointestinal health and productivity in poultry.

(emphasis added)

720. 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]

721. 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]

722. Dr E did not accept that its cellular form changes as it matures. He stated it is just "increased numbers of cells".^[695]

Associate Professor Dragana Stanley

723. Associate Professor Stanley was not cross-examined on her report.

724. 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)

725. 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

726. Ms D reported that "broiler feed ingredients do not directly (without change) become part of the body".^[697]

727. 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.

728. 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)

729. 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)

730. 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]

731. 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]

732. 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]

733. 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.

Dr Isabelle Ruhnke

734. 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.

735. No challenge was made to Dr Ruhnke's expertise.

736. 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".

737. The question asked of Dr Ruhnke is the question the Tribunal has to answer.

738. 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.

739. 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 ...

740. The molecules are then used by the chicken to generate energy.

741. 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.

742. 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]

743. 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]

744. 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.

745. 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)

746. Dr Ruhnke goes on to describe the technical chemical and mechanical transformation and processing of feed through the chicken's digestion process.

747. 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)

748. 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.

749. In relation to broilers, it was Dr Ruhnke's opinion that feed is also transformed and processed in the production of the broilers:^[716]

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)

750. 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)

751. 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."

752. Apart from two minor instances which do not need to be outlined, Dr Ruhnke agreed with the report of Dr Stanley.

753. 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.

Tangible Product

754. The term "tangible product" is not defined in the Act and therefore its ordinary meaning, in context, should be applied.

755. 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.

756. Here the issue is whether the chickens are tangible products.

757. 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."

758. The evidence of Dr Ruhnke is that the chick and the chicken are "different" structurally and physically.^[723]

759. 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.

Conclusion

760. Assuming GQHC had engaged in R&D activities, are the other elements of section 355-465(1)(a) satisfied?

761. There is no dispute that GQHC has incurred expenditure on poultry feed and the acquisition of chickens.

762. The issue is whether that expenditure constitutes a feedstock input that has been transformed or processed.

763. 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.

764. 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]

765. 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.

766. 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.

767. Similarly, here, the steps/processes undertaken by GQHC are for the ultimate aim of production of chickens and eggs for consumption.

768. 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.

769. 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]

770. 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]

771. 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.

772. 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.

773. 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.

774. 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.

775. 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.

776. Broiler chickens are transferred from a zero-day-chick to slaughter age at 5 to 7 weeks.

777. 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

778. 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.

779. 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.

780. 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.

781. The Tribunal finds the feed and chickens were transformed and processed during the Registered Activities.

782. The chicken is the beneficiary of the feedstock. The output is the chicken meat and eggs.

Reasonably Attributable Amount

783. 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).

784. 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)

785. 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]

786. 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).

787. 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)

788. 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.

789. 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%.

790. 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

791. The Tribunal affirms the decision under review.