FEDERAL COURT OF AUSTRALIA

Active Sports Management Pty Ltd v Industry Innovation and Science Australia [2024] FCA 1346

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The applicant pay the respondent’s costs of the appeal, as agreed or taxed.

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

REASONS FOR JUDGMENT

GOODMAN J

A.    INTRODUCTION

1    The applicant, by way of an “appeal” under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act), seeks judicial review of a decision of the Administrative Appeals Tribunal, which affirmed an internal review decision made by the respondent as to whether certain activities conducted by the applicant should be registered under the Industry Research and Development Act 1986 (Cth) (IR&D Act).

2    The applicant contends that the Tribunal failed to carry out the review it was authorised and required to conduct; and misconstrued the statutory test to be applied.

3    For the reasons developed below, the appeal should be dismissed.

B.    BACKGROUND

4    The applicant lodged with the respondent applications for the registration of several activities – referred to by the Tribunal as the Claimed Activities – relating to the development of a customised basketball shoe (Delly1) as “core R&D activities” within the meaning of s 355-25 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). That section provided in so far as is presently relevant:

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).

(2)     However, none of the following activities are core R&D activities:

...

(emphasis in original)

5    As is apparent from the text of s 355-25(1), for activities to be considered “core R&D activities”, those activities must have at least the following characteristics.

6    The first characteristic – which is found in the first limb of s 355-25(1)(a) – is that the outcome of the activities cannot be known or determined in advance on the basis of current knowledge, information or experience.

7    The second characteristic – which is found in the second limb of s 355-25(1)(a) – is that the outcome of the activities can only be determined by applying a systematic progression of work, where that systematic progression of work has both of the following features:

(1)    it is based on principles of established science;

(2)    it proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions.

8    The third characteristic – which is found in s 355-25(1)(b) – is that the activities are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).

9    I use the expression “at least” because those three characteristics are central to the present case. There is an additional requirement that the activities do not fall within s 355-25(2).

10    On 6 May 2019, the respondent made a determination under s 27J of the IR&D Act that none of the Claimed Activities satisfied the definition of “core R&D activities”. That determination was subsequently confirmed on an internal review under s 30D(2) of the IR&D Act.

11    The applicant then sought review of the internal review decision by the Tribunal.

12    Following a hearing occupying four days, a senior member of the Tribunal affirmed the internal review decision and published her reasons for doing so: Active Sports Management Pty Ltd and Industry Innovation and Science Australia [2023] AATA 4078 (T, or Reasons).

13    As noted above, the applicant has brought this “appeal” under s 44 of the AAT Act. Properly characterised, it is an application for judicial review of the lawfulness of the Tribunal’s decision: Wills v Chief Executive Officer of the Australian Skills Quality Authority [2022] FCAFC 10; (2022) 289 FCR 175 at 178 [7] (Perry J; Griffiths and Logan JJ agreeing); Equality Australia Ltd v Commissioner of the Australian Charities and Not-for-profits Commission [2024] FCAFC 115 at [6] (Wheelahan, Hespe and Kennett JJ); Manikantan v Secretary, Department of Employment and Workplace Relations [2024] FCAFC 116 at [39] (Collier, Raper and Shariff JJ).

14    The questions of law raised by the applicant are as follows.

15    First, whether the Tribunal failed to conduct the review which it was authorised and required to conduct. The applicant contends that the Tribunal did not: (1) consider at all, or engage in any meaningful way with, the applicant’s submissions; or (2) undertake genuine independent consideration of the issues arising in the review, instead adopting the respondent’s submissions.

16    Secondly, whether the Tribunal erred in its construction and application of s 355-25(1) of the ITAA 1997. The applicant contends that the Tribunal misconstrued s 355-25(1) by considering that: (1) the outcome of the activities had to be directed to a technical or scientific uncertainty; (2) the requirement within that section in relation to uncertainty of outcome could not be satisfied if this depended on the subjective feedback of an individual.

17    In view of the nature of the questions of law and grounds of appeal advanced by the applicant, and the submissions made in support thereof, it is necessary to describe salient aspects of the hearing before the Tribunal. It is also convenient to reproduce the Reasons in full within Schedule 1 to these reasons for judgment, annotated so as to show the parts of the Reasons which the applicant contends were taken verbatim, or substantially adopted, from the respondent’s submissions.

C.    THE HEARING BEFORE THE TRIBUNAL

18    The hearing before the Tribunal commenced on Monday, 1 May 2023. After a brief oral opening by counsel for the applicant and the tender of the “T” documents, the applicant read statements from its sole director, Mr Gregory Bickley, dated 26 August 2019 and 28 April 2023. Mr Bickley was then cross-examined for the remainder of that day.

19    On 2 May 2023, the hearing resumed. The applicant called Dr Peter Ellerton and tendered his expert report dated 23 November 2020. Dr Ellerton was then cross-examined and re-examined.

20    Counsel for the respondent then opened the respondent’s case and tendered several documents, before calling Dr Habil Sterzing and tendering his expert report dated 1 April 2021. Dr Sterzing was then cross-examined for the remainder of that day.

21    On 3 May 2023, the cross-examination of Dr Sterzing continued for several hours. He was briefly re-examined. Counsel for the applicant then tendered a series of further documents, and the hearing was adjourned to 21 July 2023 for closing submissions.

22    After 3 May 2023, the parties prepared written closing submissions. The applicant’s closing submissions (ACS) ran to 63 pages and 273 paragraphs. The respondent’s closing submissions (RCS) ran to 39 pages and 76 paragraphs (many of which included multiple sub-paragraphs), together with a 17 page annexure titled “Inconsistencies in the witness evidence of Mr Bickley”.

23    On 21 July 2023, the Tribunal heard oral closing submissions.

D.    THE REASONS

24    On 6 December 2023, the Tribunal affirmed the internal review decision and published the Reasons.

25    Following an introduction which identified some background matters and the decision under review (T[1] to [6]), the senior member set out or described the centrally relevant legislative provisions, including s 3 of the IR&D Act and ss 355-1, 355-5, 355-20, 355-25 and 355-30 of the ITAA 1997 (T[7] to T[16]).

26    Under the heading “Documentary Evidence”, the senior member noted that “an absence of documentation evidencing the systematic progression of work undertaken in relation to claimed activities, where more extensive documentation is ordinarily an expected feature of that process, may suggest that the requirements of section 355-25 have not been satisfied”. The senior member cited Lakes Oil NL and Innovation and Science Australia (Taxation) [2023] AATA 811 at [219] in support of that proposition (T[17]).

27    The senior member explained that contemporaneous written evidence detailing the process of each activity will be highly persuasive because the recording of such information is an indication that the activity was carried out in a manner consistent with a systematic progression of work (T[17]).

28    The senior member then referred to earlier cases “in which a lack of proper/relevant contemporaneous documents have been ‘fatal’”, namely Lakes Oil NL, Docklands Science Park Pty Ltd and Innovation Australia [2015] AATA 973, Royal Wins Pty Ltd and Innovation and Science Australia [2020] AATA 4320 and Coal of Queensland v Innovation and Science Australia [2021] FCAFC 54; (2021) 285 FCR 286 (T[18]). The senior member then quoted (at T[19]) from Rix’s Creek Pty Ltd; Bloomfield Collieries Pty Ltd and Innovation Australia [2017] AATA 645, in which the (same) senior member had 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] While the creation and provision of documentation is not a statutory requirement to substantiate the R&D activities, … documentary evidence is an expected feature of an activity that is systematic, investigative and experimental. Documentation is necessary to record the activity undertaken, its purpose, progress and, of course, the results of the activities and the evaluation of those results. Without such documentation, it is near impossible to establish the progression of the activities undertaken and that the purpose of the activities was to generate new knowledge in the form of new or improved materials, products, devices, processes or services. It follows, that without such documentation, the experimental activity would have limited application or future use…

29    The senior member concluded this section of the Reasons by recording her understanding that the records provided to the Tribunal comprised “the entirety of the documentary records created and kept by the applicant in relation to the Claimed Activities” (T[20]).

30    The senior member then addressed the Claimed Activities. The senior member first noted the applicant’s contentions that:

(1)    the Delly1 was a new and improved shoe specifically designed for Mr Matthew Dellavedova, an Australian basketballer, and was designed with and for him as a first genuine “signature shoe” in Australia; and

(2)    the project, the first of its type for the applicant, resulted in a “new and improved shoe, in new knowledge and information, in respect of the shoe and the development of such a shoe” (T[21]).

31    After noting the manner in which the applicant had described the activities which had been carried out in the registration forms it had lodged (T[22]), the senior member expressed the view that there is a significant degree of overlap between the Claimed Activities, and how they are described in the registration forms; that all of the Claimed Activities are stated to form part of the same project, namely “Delly1”, starting on 1 July 2015 with an expected completion date of 30 September 2018; and that each refers to the process of developing prototype shoes and testing them to obtain feedback for the development of the Delly1 (T[23]). The senior member then stated (at T[24]):

Activity 1.1 of the Claimed Activities is characterised as prototyping for tests and experiments and appears to have involved the manufacture of each Prototype by Quanzhou Peak Shoes Co, Ltd (PEAK) in China. It appears that any tests and experiments of the prototypes were undertaken as part of Activity 1.2 and 1.3. Given the characterisation of the Claimed Activities, they will be considered collectively as to whether they satisfy the statutory definition of core R&D activities.

(emphasis in original)

32    The senior member then recorded the applicant’s contention that the development of the “Delly1” project included the activities and steps described in Mr Bickley’s statement dated 26 August 2019; and the applicant’s submission that the activities and steps there described extended beyond simple “trial and error” and involved active feedback in relation to the development of the shoe (T[25]). The senior member then set out Mr Bickley’s evidence that:

The development of the Delly I took a long time, with many different prototype versions and development stages. There were many revisions and changes. There were many failures and situations where we had to go back to the drawing board. It was not a case of simply taking an existing off-the-shelf shoe, modifying it a bit for a player’s preferences and then putting the player’s name on the shoe. Numerous hand-made prototype versions were made – bespoke shoes, designed and created only for testing. The Delly I was engineered.

(emphasis in original)

and noted that annexed to Mr Bickley’s statement dated 26 August 2019 was a document titled “Delly1 Prototype Development History” detailing each iteration of prototypes created, with a description of the alleged activities and testing undertaken. The senior member referred to this document as the Development History and set out a detailed description of relevant aspects of the Development History.

33    At T[27] to [28], the senior member dealt with contemporaneous evidence adduced by the applicant, stating:

27.    In addition to the Development History, the applicant has provided some contemporaneous evidence of the carrying out of the Claimed Activities, including photographs of each prototype; videos of Mr Dellavedova’s feedback of prototype 3; video testing of Prototype 4 (Video_testing – 1.07.16); WeChat messages from late June to early July 2016 and October 2016 in relation to Prototype 4; emails dated 30 August 2016 and 15 September 2016 from Mr Dellavedova’s manager, Mr Bruce Kaider, to Ms Christin Wu of PEAK relating to Prototype 4.

28.    I note here that Video_testing – 1.07.16, while described by Mr Bickley as showing Mr Dellavedova testing prototype 4 during a training session, it was plainly taken for promotional purposes which was subsequently shared to the Twitter account of PEAKSportAus to promote the Delly1. There is no evidence of the applicant actually using the video to evaluate Prototype 4. At hearing, Dr Habil Thorsten Sterzing, a scientist in the field of athletic footwear research and development, discussed the video and its application. When asked if he could judge the performance of the shoe by the video, he said it was hard to see how certain components of the shoe perform. I wouldn’t be able to check on the real foot counter whether it improves stability or not. I wouldn’t see whether the foot rolls over and pushes the mesh over the midsole. That video would not allow me to judge on it and the image is not detailed enough to see what really happens in terms of shoe information, the material and whether it restricts, facilitates or allows movement. Dr Sterzing gave evidence that in his experience, he has used video footage of testing sessions to assess the performance of a prototype of an athletic shoe, but in a way more specific way and not in a general way like seen in this style of video. He agreed that high-speed video footage was usually used, as well as infra-red motional analysis systems, and markers on the floor and the body of the athlete. Dr Sterzing added that when he undertook testing of this kind, he usually had a second shoe, a comparative shoe, that as systematically altered, I see how that shoe compares to another shoe; as a matter of what you call standardisation of the evaluation. You have a shoe, ideally isolated and systematically altered, and you ask the person to do exactly the same thing. Human locomotion is never exact, but for the layman, the same movement. That allows me to compare the functionally of two shoes.

(emphasis in original)

34    The senior member then noted that the applicant had also provided emails from basketball players Mr Scott Freer and Mr Damien Martin each of which was dated in late April 2023 (i.e. in the days before the hearing commenced on 1 May 2023) (T[29]). The senior member described those emails as follows (T[29]):

They are not contemporaneous records and provide retrospective evidence of the players’ feedback in relation to the Delly1 shoe, recalled at least 6 years after testing. Most significantly, there are significant issues with the evidence contained in the emails. Mr Freer and 30-40 other players apparently tested the “off the shelf” existing PEAK product, referred to as Prototype 1, but as Mr Bickley’s evidence shows, the shoe provided to “other players” was not the version of Prototype 1 tested by Mr Dellavedova. The version of prototype 1 provided to Mr Dellavedova had minor changes. Mr Martin apparently tested Prototype 6, the production version, but in the Development History, Mr Bickley stated that the applicant did not give the production versions to anyone other than Mr Dellavedova to test.

(emphasis in original)

35    The senior member then expressed the following views (at T[30] to T[31]):

30.    There is no documentary evidence of work undertaken by PEAK as part of the process to develop the Delly1 prototypes, other than the fact that it manufactured the prototypes. There is no evidence as to whether PEAK was attempting to formulate any scientific or technical hypotheses in relation to each Prototype. The available evidence suggests that PEAK was simply responding to instructions from Mr Dellavedova, either directly, or as relayed by Mr Bickley.

31.    Also, I note that there is a relevant and substantial inconsistency in the evidence regarding Prototype 1. The Development History and in Mr Bickley’s statement, prototype 1 was described as a “shoe that was not available for sale or off the shelf” however in further written submissions from the applicant, and in the oral evidence of Mr Bickley, it is apparent that the manufacture of the first prototype started largely with an existing PEAK product.

(emphasis in original)

36    The Reasons continued, under the heading “Consideration”. The senior member’s analysis started with consideration of whether the outcome of the Claimed Activities could not have been known or determined in advance on the basis of current knowledge, information or experience (i.e. the first limb of s 355-25(1)(a) being the first characteristic described at [6] above). The senior member expressed the following views at T[32] to [37]:

32.    The ‘outcome’ for the purposes of the statutory test is the outcome of the experimental activities in question. While the precise data produced by the work undertaken 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; Coal of Queensland v Innovation and Science Australia (2021) 285 FCR 286 at [101].

33.    In respect to the whole project, it is unclear precisely what unknown outcome the applicant was seeking to determine, other than to create a basketball shoe which satisfied Mr Dellavedova’s specific requirements. It is accepted that the requirements of Mr Dellavedova could not have been determined in advance. However, I am not convinced that this is an outcome directed to a technical or scientific uncertainty. It is a subjective outcome and one outside of the control of the applicant.

34.    Considering the prototype specific outcomes, it is unclear on the evidence specifically what modifications took place between the various prototypes, and to what degree. The descriptions of the modification in the Development History are in very general and vague terms. Even so, the general outcomes could have been known in advance.

35.    The only available evidence from a competent professional in the relevant field of shoe design is that of Dr Sterzing. He has expensive industry experience in the field of athletic shoe development. He gave evidence about the availability of low-cut basketball shoes on the market since 2008; and he gave evidence about numerous journal articles and research around modifications made to aspects of shoes to affect functionality and performance.

36.    Mr Bickley, who is not an expert in shoe design, gave evidence that he was able to “tell” from his personal examination of each Prototype whether it was going to be suitable or would meet Mr Dellavedova’s needs. For example, he would tell if a prototype was lighter, or more flexible. The applicant also submitted that a modification with an unknown outcome, was the mesh upper. However, Mr Bickley’s evidence was that he was able to “tell” that in relation to the mesh upper, the prototype was stronger in the upper, had additional stiffness and a reduction in movement, suggesting that there was no uncertainty to test whether the mesh upper made the upper stronger. The evidence of Mr Bickley also shows that PEAK suggested the use of the mesh upper to help reduce the weight of the shoe. It can be inferred from this evidence that the outcome of using the mesh upper was known, in that it made the shoe lighter.

37.    There is no evidence to establish that the outcomes of specific modifications made to the prototypes could not have been known in advance.

(bold emphasis added)

37    The views expressed by the senior member in the final two sentences of T[33] are the subject of the second question of law and the third and fourth grounds of appeal advanced by the applicant.

38    The senior member then considered whether the outcome of the Claimed Activities could only be determined by applying a systematic progression of work based on principles of established science, which proceeded from hypothesis to experiment, observation and evaluation, and which leads to logical conclusions (i.e. the second limb of s 355-25(1)(a), being the second characteristic discussed at [7] above). The senior member expressed the following views at T[38] to [51]:

38.    The term ‘hypothesis’ is not defined in the ITAA 1997 and should be given its ordinary meaning. It is plain that a hypothesis must have a scientific basis. This is enforced by section 355-5(2) which provides that the object of the ITAA 1997 is to be achieved in a “scientific way”. Additionally, section 355-25 specifically provides that experimental activities must not only proceed from hypothesis to experiment, but they must also be “based on principles of established science”; see Lakes Oil NL and Innovation and Science Australia (Taxation) [2023] AATA 811 at [206].

39.    The applicant submits that while they may be described or stated the hypothesis in different ways, they are essentially referring to the same thing, the same “particular actions”. The Development History records that “we were testing this prototype to see if it would meet Matthew’s requirements”. The asserted hypothesis found throughout the Development History to test:

(a)     to see if prototype 1 would meet Mr Dellavedova’s requirements for a low-cut shoe that was light and close to the ground, with sufficient support and traction, suitable to his playing position and style;

(b)    the softer upper, a completely different outsole, and the additional heel support to see how that felt and whether it would meet Mr Dellavedova’s requirements;

(c)    whether the revised prototype provided additional flexibility in the upper, offered a sufficient reduction in weight and was low enough;

(d)    the new outsole, for grip, traction, and cushioning, as well as examining how the lower profile outsole would perform;

(e)    the revised upper, as the applicant did not know whether this would provide enough support in the front part of the shoe, with roll- out/push-out by Mr Dellavedova’s foot;

(f)    a revised heel counter designed in response to changes to the outsole and the upper, to see whether this provided sufficient support for Mr Dellavedova;

(g)    whether the strengthened mesh under the 3D printed KPU provided additional stiffness and a reduction in the movement of the upper and sidewall. To test the revised heel counter, to determine if it provided sufficient support;

(h)    the revised outsole to see if it provided enough additional cushioning and support and testing the revised heel counter, to check whether this provided sufficient support; and

(i)    whether the production versions performed in the same way as the handmade prototype.

40.    There is no contemporaneous evidence that the applicant formulated these asserted hypotheses before carrying out either the manufacture of each prototype or the testing of each prototype. The need for contemporaneous evidence of the formulation of a hypothesis is especially important, given it is the essential starting point of the activities and identifies the outcome sought to be achieved.

41.    The evidence does not demonstrate how each hypothesis was tested on each iteration of prototype and how the outcomes were recorded and observed. It also appears on the evidence that feedback provided by Mr Dellavedova on certain prototypes did not relate to the asserted hypothesis. Most significantly, in regard to prototype 3, where feedback provided focused on outcomes related to the shoe eyelets, tongue, toe box, and peeling of the outsole, when these aspects of the prototype were not identified in the asserted hypothesis for testing. It is unclear how these outcomes were factored into the evaluation of the prototype.

42.    Dr Sterzing opined at hearing that the hypothesis put forward are rather objectives and description of what was done and were not hypotheses in the way that postulate a certain fact to be verified.

43.    Dr Peter Ellerton, lecturer and philosopher of science, has provided a report in these proceedings dated 23 November 2020. Dr Ellerton gave evidence about the formulation of a hypothesis. He said at hearing, it’s difficult to see, in fact, how you could do further testing without developing some kind of hypothesis. So at some stage the hypothesis must have been developed and improved and where that occurred I don’t know. When discussing the hypothetico-deductive method, Dr Ellerton accepted in cross-examination that, the outcome of a hypothesis is uncertain until it is tested. This is the purpose of the test.

44.    There is no evidence that the outcome of any of the asserted hypotheses was uncertain or unknown to the applicant or to a competent professional in the field. In fact, the evidence of Mr Bickley was that he was able to anticipate and predict whether certain features and modifications were not going to meet Mr Dellavedova requirements. It is also apparent on the evidence that Mr Bickley provided feedback and PEAK made suggestions about materials and modifications of the shoe, anticipating how particular changes to the features of the shoe between prototypes would impact the shoe’s functionality. While I accept that there is some uncertainty around whether the modifications would satisfy Mr Dellavedova’s requirements, I am not convinced that this uncertainty is an unknown outcome in the context of developing a hypothesis.

45.    The available evidence demonstrates that iterations of prototypes were manufactured by PEAK and the applicant conducted testing of the prototypes. The precise nature of the testing undertaken by the applicant for each prototype is not documented with any precision. It appears that the main testing undertaken was that prototypes were manufactured by PEAK starting with an existing PEAK product, feedback was provided either directly to PEAK or via the applicant to PEAK about subjective requirements or issues identified by Mr Dellavedova.

46.    In his report, Dr Sterzing relevantly stated:

[33] As different components of a shoe construction may interact with each other, thereby resembling confounding factors to causal conclusions made regarding the functional effects of one specified shoe component, ideally only one component of a shoe construction is advised to be altered in science based research and development endeavours.

[34] In addition, such isolated shoe alteration typically takes place in graded approaches during which prototypes are built for direct comparison within one test session (for instance, Brauner et al 2009, Guo and Stefanyshyn 2011, Oriwol et al 2011). This allows determining the desired degree of a shoe alteration for a specific shoe feature, for instance the optimal degree of outsole traction during court sport movements for a specific target group (Guo and Stefanyshyn 2011). Such an approach allows to generate systematic knowledge regarding the type, the physical properties, and the processing of materials applied to achieve mechanical properties that subsequently influence the actual objective and subjective shoe performance of athletes.

47.    There is no evidence about how Mr Dellavedova actually tested each prototype, other than that he wore each prototype either in training conditions or during play. The testing undertaken by Mr Dellavedova did not consist of repeatable, verifiable tests capable of isolating the effects of each of the design modifications actually being tested. As Mr Sterzing’s evidence provided, where multiple modifications were made on a prototype at one time, it would have been unclear what change or feature at each iteration was impacting on the overall shoe performance, other than mere speculation. Mr Dellavedova’s feedback was not technical in nature, but more along the lines of subjective feedback.

48.    It also appears that Mr Bickley tried on some iterations of the prototypes and provided feedback. What utility this would have had, given that the scientific basis for any such testing was undefined nor verifiable, would be limited. Other athletes allegedly tested a version of prototype 1. But as discussed earlier, the prototype tested was merely a stock model manufactured by PEAK. Any other feedback provided by athletes of other later iterations of prototypes was not recorded and, in any event, appeared to be vague and subjective in nature without any technical basis.

49.    I accept that designing the Delly1 was a process. But as Dr Sterzing opined, in the circumstances of the development of Delly1, it’s not necessarily a scientific process. It is more likely that the process undertaken to develop the Delly1 was one of trial and error, with the assistance of PEAKs knowledge of materials and shoe design. It was more akin to knowledge discovery and a problem-solving process rather than an experimental activity based on established scientific principles.

50.    While Dr Ellerton opined that the Claimed Activities separately and collectively constituted a systematic progression of work based on established principles of science that proceed from hypothesis to experiment, observation and evaluation, and lead to logical conclusions, I do not accept that to be the case for the reasons already detailed. Additionally, I note that he inferred that the relevant physical principles must have been followed simply from the fact that the shoe was ultimately developed into a commercial product. Such an inference is outside of Dr Ellerton’s expertise. Dr Ellerton has no knowledge of the procedural principles applicable to athletic shoe research and development.

51.    Further, Dr Ellerton’s reasoning expressed in his report in arriving at his opinions was very generalised. However, based on his report and oral evidence, it is apparent that Dr Ellerton’s opinions were based on assumptions about the level of involvement of Mr Bickley and the applicant in the development of the shoe. He recorded in his report that he understood that the applicant generated a sequence of prototypes and that the prototypes were designed by [the applicant]. Dr Ellerton said at hearing that he understood those responsible for testing the prototypes and redesigning it, including Mr Bickley, were responsible for analysing results of testing. He agreed that he had assumed someone somewhere has to take accord of that information and make a modification to that effect and that that was the process of analysis. He said he also assumed that because there were some modifications to the next prototype, there must have been some analysis. This is despite the absence of adequate contemporaneous, quantitative evidence recording the results of testing allegedly undertaken in respect of each prototype. Dr Ellerton’s evidence was simply that the feedback provided by Mr Dellavedova was valid and verifiable as it was given by the person testing it and by the person for whom the shoe is designed and was simply verifiable by anybody else who asked Mr Dellavedova, to use his example, what his experiences were of that shoe, he would give the same response.

(emphasis in original)

39    The senior member expressed the following conclusion (at T[52]) as to the second limb of s 355-25(1)(a):

For these reasons, I am not satisfied that the claimed activities involved a systematic progression of work based on principles of established science, and which proceeded from hypothesis to experiment, observation and evaluation, leading to logical conclusions.

40    Having dealt with both limbs of s 355-25(1)(a), the senior member then turned to s 355-25(1)(b) – whether the Claimed Activities were conducted for the purpose of generating new knowledge (being the third characteristic, discussed at [8] above). After noting that the term “new knowledge” is not defined by the ITAA 1997 and takes its ordinary meaning, the senior member stated at T[53] to T[55]:

53.    ... In the context of Division 355 of the ITAA and the IR&D Act, the new knowledge sought to be generated is not defined by the subjective knowledge or experience of the R&D entity, and the concept of new knowledge must be construed in context, as a feature of the ‘experimental activities’.

54.    As stated, the claimed activities were conducted for the purpose of developing a product that could be marketed as Mr Dellavedova’s ‘signature shoe’ and the claimed activities were conducted for the purpose of determining what modifications of previously known athletic shoe design features would suit the personal preferences or requirements of Mr Dellavedova. As discussed in detail in these reasons, the iterations of the prototypes manufactured by PEAK, were modified based on feedback provided by Mr Bickley and Mr Dellavedova to PEAK, relying on PEAKs knowledge and experience with shoe manufacturing and design to provide solutions. The evidence does not demonstrate that knowledge sought by the Claimed Activities went beyond validating a simple progression from what was already known and went beyond merely implementing existing knowledge in a different context.

55.    The applicant submits that the addition of the mesh to the upper was new knowledge. In the Development History, it was recorded that the applicant was testing whether the strengthened mesh under the 3D printed KPU provided additional stiffness and a reduction in the movement of the upper and sidewall and this process, the 3D printing, was first introduced, and it was the first time it had been done on a shoe...PEAK advised Mr Bickley that the 3D printed mesh was a new manufacturing process that they would use for this prototype and it was new to basketball shoes generally, but it was certainly new to PEAK. However, Mr Bickley’s oral evidence was that the feedback was that the shoe was too heavy and clunky, and the mesh upper was PEAK’s suggestion. The decision to use that particular type of material would have been PEAKs decision, Mr Bickley said that the decision to change the material of the upper to lighter weight material was his, given to PEAK to find a solution. This evidence demonstrates that the development and manufacture of the mesh upper was plainly undertaken by PEAK. There is no evidence to demonstrate that the applicant was involved in the actual design or development of the upper mesh or that its development involved a systematic progression of work based on principles of established science nor formed part of the Claimed Activities.

41    The senior member recorded at T[56] that she was “not satisfied that the Claimed Activities were conducted for the purpose of generating new knowledge”.

42    The senior member’s ultimate conclusions were expressed at T[57] and [58] as follows:

57.    None of the Claimed Activities were core R&D activities within the meaning of subsection 355-25(1) of the ITAA 1997. Rather, the Claimed Activities consisted of the modification of previously known athletic shoe design features to suit the personal preferences or requirements of an individual player, namely Matthew Dellavedova. Accordingly, none of those Activities can be supporting R&D activities for the purposes of subsection 355-30(1) of the ITAA 1997.

58.    The decision under review is affirmed.

43    In summary, the applicant failed to establish both limbs of s 355-25(1)(a); and s 355-25(b) of the ITAA 1997.

E.    THE FIRST QUESTION OF LAW – DID THE TRIBUNAL FAIL TO CONDUCT THE REVIEW WHICH IT WAS AUTHORISED AND REQUIRED TO CONDUCT?

44    I turn now to the questions of law raised by the applicant in its further amended notice of appeal.

45    The first question of law is whether the Tribunal failed to conduct the review which it was authorised and required by s 25 of the AAT Act to conduct. As noted above, the applicant contends that the Tribunal did not conduct the review which it was authorised and required to conduct because: (1) it did not consider at all, or failed to engage in any meaningful way with the applicant’s submissions; and (2) it did not undertake genuine independent consideration of the issues arising in the review, instead adopting the respondent’s submissions.

46    This question is to be answered by reference to all of the relevant circumstances: MZZZW v Minister for Immigration and Border Protection [2015] FCAFC 133; (2015) 234 FCR 154 at 172 to 173 [66] (Tracey, Murphy and Mortimer JJ); Ultimate Vision Inventions Pty Ltd v Innovation and Science Australia [2023] FCAFC 23; (2023) 297 FCR 143 at 147 [12] (Thawley, McElwaine and Hespe JJ).

47    The applicant invites the Court to find error on the basis of inferences to be drawn from, inter alia, the Reasons. In BVD17 v Minister for Immigration and Border Protection [2019] HCA 34; (2019) 268 CLR 29, Kiefel CJ, Bell, Gageler, Keane, Nettle and Gordon JJ observed at 45 [38]:

... To the extent that the factual basis for a claim to relief is sought to be founded on an inference to be drawn from a decision-maker’s statement of reasons, the appropriateness of drawing the inference falls to be evaluated having regard to two settled principles. One is that such a statement of reasons must be read fairly and not in an unduly critical manner. The other is that it must be read in light of the content of the statutory obligation pursuant to which it was prepared.

48    The first settled principle was supported by a footnoted reference to Minister for Immigration and Ethnic Affairs v Liang [1996] HCA 6; (1996) 185 CLR 259 at 272. In that case, Brennan CJ, Toohey, McHugh and Gummow JJ stated:

It was said that a court should not be “concerned with looseness in the language ... nor with unhappy phrasing” of the reasons of an administrative decision-maker. The Court continued: “The reasons for the decision under review are not to be construed minutely and finely with an eye keenly attuned to the perception of error.”

These propositions are well settled. They recognise the reality that the reasons of an administrative decision-maker are meant to inform and not to be scrutinised upon over-zealous judicial review by seeking to discern whether some inadequacy may be gleaned from the way in which the reasons are expressed.

49    See also Plaintiff M1/2021 v Minister for Home Affairs [2022] HCA 17; (2022) 275 CLR 582 at 604 to 605 [38]; and WAEE v Minister for Immigration and Multicultural and Indigenous Affairs [2003] FCAFC 184; (2003) 236 FCR 593 at 604 [47], where the Full Court of this Court (French, Sackville and Hely JJ) explained:

The inference that the Tribunal has failed to consider an issue may be drawn from its failure to expressly deal with that issue in its reasons. But that is an inference not too readily to be drawn where the reasons are otherwise comprehensive and the issue has at least been identified at some point. ...

50    Further, the fact that the Tribunal has not referred to a particular submission does not of itself ground an inference that such a submission was not considered. In KXXH v Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs [2022] FCAFC 111; (2022) 292 FCR 15, the Full Court of this Court (Bromberg, Jackson and Feutrill JJ) explained at 28 to 29 ([54]):

Fifth and in any event, the fact that the Tribunal has not mentioned particular information does not necessarily mean that it has not considered that information. Section 43(2B) of the Administrative Appeals Tribunal Act 1975 (Cth), which requires the Tribunal to include in any written reasons its findings on material questions of fact, only requires the Tribunal to set out the findings of fact which in its opinion are material: Appellant V324 of 2004 v Minister for Immigration and Multicultural and Indigenous Affairs [2004] FCAFC 259 at [8](Hill and Allsop JJ, Stone J agreeing). That entitles the Court to infer that any matter not mentioned in the Tribunal’s reasons was considered by the Tribunal not to be material: Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323 at [69] (McHugh, Gummow and Hayne JJ) (a case about s 430 of the Migration Act, but s 43(2B) of the Administrative Appeals Tribunal Act which applied here is not materially different). However, the Court need not make that inference. The manner in which a statement of reasons is drawn and its surrounding context may detract from or displace the inference; for example, because there is material that is so obviously relevant that it is unthinkable that the Tribunal would not have referred to it if it had actually considered it: SZTMD v Minister for Immigration and Border Protection (2015) 150 ALD 34 at [19] (Perram J). On the other hand, while a failure to deal with an issue in the decision-maker’s reasons may indicate a failure to consider the issue, that inference should not be drawn too readily where the reasons are otherwise comprehensive and the issue has at least been identified at some point: Applicant WAEE at [47]. The appellant’s submission that the Tribunal should not keep the reader guessing does not accurately state the standard to be applied. Cases such as these frequently require the Court, if not to guess, then to draw inferences from matters that have not received complete expression in the Tribunal’s reasons.

51    The second settled principle referred to in BVD17 is that a statement of reasons must be read in light of the content of the statutory obligation pursuant to which it was prepared. In this regard, s 43(2) and (2B) of the AAT Act relevantly provide:

(2)    Subject to this section ..., the Tribunal shall give reasons either orally or in writing for its decision.

...

(2B)    Where the Tribunal gives in writing the reasons for its decision, those reasons shall include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based.

52    The Tribunal is not required to set out a detailed refutation of the case put by the unsuccessful party. In WAEE, the Full Court explained at 604 [46]:

It is plainly not necessary for the Tribunal to refer to every piece of evidence and every contention made by an applicant in its written reasons. It may be that some evidence is irrelevant to the criteria and some contentions misconceived. Moreover, there is a distinction between the Tribunal failing to advert to evidence which, if accepted, might have led it to make a different finding of fact (cf Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323 at [87]-[97]) and a failure by the Tribunal to address a contention which, if accepted, might establish that the applicant had a well-founded fear of persecution for a Convention reason. The Tribunal is not a court. It is an administrative body operating in an environment which requires the expeditious determination of a high volume of applications. Each of the applications it decides is, of course, of great importance. Some of its decisions may literally be life and death decisions for the applicant. Nevertheless, it is an administrative body and not a court and its reasons are not to be scrutinised “with an eye keenly attuned to error”. Nor is it necessarily required to provide reasons of the kind that might be expected of a court of law.

(emphasis added)

53    In National Disability Insurance Agency v KKTB [2022] FCAFC 181; (2022) 295 FCR 379, Mortimer and Abraham JJ explained at 410 to 411 ([112] to [113]):

112    On matters of fact and opinion, the Tribunal does not have to set out in its reasons a minute line by line refutation of the case put by one party in the Tribunal which it does not accept. It must of course carefully consider the submissions made by each party on a review before it. Having done so, it is entitled to form its impressions of witnesses before it, and the evidence they give, and so long as in its reasons it sets out those impressions in a rational and reasonable way, explains why it has preferred one witness over another (if indeed it has), and refers to the material on which its conclusions are based, its reasons comply with its obligation in s 43(2B) of the Administrative Appeals Tribunal Act 1975 (Cth). ...

113    The Tribunal’s reasons are compliant with its obligation in s 43(2B), and indeed on this appeal are not alleged by the Agency to be otherwise. It is important that, on an appeal under s 44 of the AAT Act, this Court does not impose unduly arduous or insuperable burdens on a busy merits Tribunal about the level of detail required in its reasons. The Tribunal’s reasons here are coherent, logical and contain sufficient detail in terms of its references to the evidence on which its findings are based. It need not have done more.

(emphasis added)

54    See also Linfox Australia Pty Ltd v Fair Work Commission [2013] FCAFC 157; (2013) 240 IR 178 at 191 [47] (Dowsett, Flick and Griffiths JJ); and KXXH at 28 to 29 [54] (at [50] above).

E.1    Did the Tribunal not consider at all, or fail to engage in a meaningful way with, the applicant’s submissions?

55    In support of its first ground of appeal, the applicant submitted that the Tribunal “did not consider at all or failed to engage in any meaningful way with the applicant’s submissions, as it was required to”.

56    To the extent that this is a submission that there was no consideration of any of the applicant’s submissions, it must be rejected as it is contrary to the various references in the Tribunal’s reasons to submissions made on behalf of the applicant (see, e.g., T[25], [31], [36], [39] and [55]). To the extent that the applicant’s submission is to be taken as a submission that some of its submissions to the Tribunal were not considered at all or engaged with “in a meaningful way”, it is addressed below.

57    The applicant used the expression “engage in a meaningful way” in its further amended notice of appeal and its submissions. The caution expressed by the plurality of the High Court of Australia in Plaintiff M1/2021 at 599 to 600 [26] concerning the use of such labels and the danger they present of inappropriate merits review is to be borne in mind. The expression “engage in a meaningful way” seems to have been taken by the applicant from Ultimate Vision at 147 [12] where the Full Court stated:

The question is whether the Tribunal conducted the review which it was authorised and required to conduct. The answer is supplied by all of the relevant circumstances. Here, the Tribunal copied 64 of 67 paragraphs of the respondent’s submissions, without attribution. It did not state it agreed with what the respondent had submitted much less give any reasons for any such agreement. Whilst it referred to some of the submissions which had been made by the appellant it did not engage with those submissions in any meaningful way. Whilst it stated that it had undertaken a “thorough analysis” of the documentary evidence and had considered the oral testimony, the product of that “thorough analysis” was not apparent from the reasons given.

(emphasis added)

58    I do not understand the Full Court in that passage to have been stating that a failure to engage with a party’s submissions “in any meaningful way” is of itself an error of law. Rather, the Court took into account the level of engagement by the Tribunal with the submissions of the appellant in that case as one of the factors leading to the conclusion that the Tribunal did not conduct the review that it was required to conduct in that case. As is apparent from the above passage from Ultimate Vision and as is explained further in E.2 below, this occurred in a context in which the critical factor was the wholesale unattributed reproduction of the respondent’s submissions.

59    I am not persuaded that the Tribunal fell into error, for the following reasons.

60    First, the applicant’s complaint is expressed at various places as a complaint that the Tribunal did not explain in the Reasons why it did not accept various submissions in the ACS. In particular, in the annexure to the applicant’s submissions in chief on this appeal, which is reproduced as Schedule 2 to these reasons for judgment (see 17, 19, 28, 32 to 38, 40, 41, 42 to 44, 47 to 51, 53 to 55 of Schedule 2). Similarly, the applicant complains that the Tribunal adopted an approach contrary to that advocated for in the ACS without explaining why it disagreed with the applicant’s approach and did not explain why the applicant’s criticisms of the respondent’s expert evidence had not been accepted. These complaints are in substance a complaint about the adequacy of the Reasons. However, the obligation upon the Tribunal to give reasons is as set out in s 43(2) and (2B) of the AAT Act and the Tribunal is not required to explain in its statement of reasons why it preferred particular submissions: see [51] to [54] above.

61    Secondly, to the extent that the applicant’s complaint is treated as a complaint that the Tribunal ignored or overlooked relevant materials or a substantial and clearly articulated argument (see Plaintiff M1/2021 at 600 [27]), a conclusion that the Tribunal ignored or overlooked aspects of the applicant’s submissions (assuming for present purposes, such submissions are of sufficient importance) can usually only be reached by inference. In that regard, the absence of a reference to particular submissions (or why those submissions were not accepted) in the Reasons does not of itself allow an inference to be drawn that such submissions were ignored or overlooked: see KXXH at 28 to 29 [54] and Transcon Holding Pty Ltd v Aged Care Quality and Safety Commissioner [2023] FCAFC 60; (2023) 297 FCR 39 at 61 [106] (Perry, Meagher and Kennett JJ).

62    Thirdly, the Reasons, read fairly and as a whole, invite an inference that the Tribunal approached the statutory task diligently and comprehensively and as such was unlikely to have ignored or overlooked aspects of the applicant’s submissions. In particular:

(1)    the Reasons follow a logical structure and sequence and comply with s 43(2B) of the AAT Act in that they include the Tribunal’s findings on material questions of fact and a reference to the evidence or other material on which those findings were based. This includes the Tribunal’s various statements that it was not satisfied that particular criteria had been met by dint of a want of evidence (see (4)(b) below);

(2)    as part of that logical structure and compliance with s 43(2B), the “Consideration” section of the Reasons addressed, in order, the elements of s 355-25(1) that were in play, namely the three characteristics described at [6] to [8] above;

(3)    as noted above, the senior member referred at T[25], [31], [36], [39] and [55] to submissions made on behalf of the applicant. I do not accept the applicant’s submission on this appeal that these references were perfunctory, being merely summaries or identification of issues;

(4)    the senior member referred to:

(a)    evidence adduced on behalf of the applicant (e.g., T[25] to [31], [36], [43] to [45], [48], [50] to [51] and [54] to [55]);

(b)    the paucity of contemporaneous evidence from the applicant concerning the systematic progression of work undertaken in relation to the Claimed Activities (T[17] to [20], [27] to [28], [30], [34], [37], [40] to [41], [44], [47], [51] and [54] to [55]);

(c)    a “relevant and substantial inconsistency” between Mr Bickley’s written and oral evidence (T[31]);

(5)    the senior member explained why she preferred the evidence of the respondent’s expert witness, Dr Sterzing, over the evidence of the applicant’s expert witness, Dr Ellerton. The senior member recorded that Dr Sterzing was a scientist in the field of athletic footwear research and development (T[28]), who provided “the only available evidence from a competent professional in the relevant field of shoe design” and who had “extensive industry experience in the field of athletic shoe development” (T[35]); and that Dr Ellerton was a lecturer and philosopher of science (T[43]) who “has no knowledge of the procedural principles applicable to athletic shoe research and development” (T[50]), and whose reasoning in arriving at his opinions was “very generalised” (T[51]). The senior member was also persuaded by Dr Sterzing’s evidence but unpersuaded by Dr Ellerton’s evidence, (e.g., T[50] and [51]); and

(6)    the senior member also expressed scepticism as to some of the evidence of Mr Bickley, whom she described as a person “who is not an expert in shoe design, [who] gave evidence that he was able to ‘tell’” various matters (T[36]). As noted above, the senior member also identified a “relevant and substantial inconsistency” between Mr Bickley’s written and oral evidence (T[31]).

63    In all of these circumstances, an inference that the Tribunal has ignored or overlooked particular submissions made in the ACS is far from obvious. Although the Tribunal did not in terms address in the Reasons particular submissions made on behalf of the applicant in the ACS or explain why each of those submissions had not found favour, I am not prepared to draw an inference that the Tribunal erred by ignoring or overlooking such submissions, particularly in view of the Reasons being coherent, logical, compliant with s 43(2B) and comprehensive in the manner described in the previous paragraph: see WAEE at 604 to 605 [47] and KKTB at 411 [113].

64    One of the submissions made by the applicant before the Tribunal concerned objections that the applicant took to the evidence of Dr Sterzing. The applicant complains that these objections were not addressed in the Reasons. For the reasons set out above, this does not bespeak error. It is clear that the parties agreed that these objections would be considered by the senior member and taken into account as a question of weight; and that the senior member considered the weight to be afforded to Dr Sterzing’s evidence and gave reasons for doing so. In any event, the Tribunal, not being bound by the rules of evidence (s 33(1)(c) of the AAT Act), was not obliged to rule on the applicant’s objections and for the reasons set out above was not obliged to provide an explanation as to views reached on objections taken.

65    I note for completeness that a number of the applicant’s submissions on this appeal cavil with various factual findings made by the senior member and invite the Court to engage in merits review of the Reasons. That invitation must be declined.

66    Thus, the first ground of appeal fails.

E.2    Did the Tribunal fail to undertake a genuine independent consideration of the issues arising on the review and instead adopt the respondent’s submissions?

67    I turn now to the applicant’s second ground of appeal.

68    The applicant’s overarching contention is that the senior member did not: (1) make her own findings of material facts or apply her own process of reasoning (citing Ultimate Vision at 146 [10]), relying instead upon the respondent’s submissions; or (2) bring her own mind to bear on the issues arising in the review (citing MZZZW at 171 [59]).

69    Before addressing the detail of this contention it is convenient to consider the two decisions upon which the applicant relies.

70    In Ultimate Vision, the Tribunal published reasons of 100 paragraphs. Of those paragraphs, 64 were reproduced without attribution and entirely verbatim (including typographical solecisms) from the respondent’s 67 paragraph submission. The Full Court held that by proceeding in this manner the Tribunal had failed to conduct the review that it had been authorised and required to conduct. At 146 to 147 ([10] to [12]) the Full Court explained:

10.    The Tribunal should consider the issues for itself as though it were performing the function of the relevant administrator. The Tribunal is required to make its own findings of material facts and apply its own process of reasoning.

11.     A “review” contemplates a consideration and evaluation of the evidence and material before the Tribunal and of the arguments and issues which arise – see, albeit in a Migration Act context: Applicant WAEE v Minister for Immigration and Multicultural and Indigenous Affairs; 236 FCR 593 at [45]; Minister for Immigration and Border Protection v MZYTS (2013) 230 FCR 431. As the Full Court explained in MZZZW at [60], merits review involves considering an application for review and the arguments and claims made “afresh”. What is meant by this is that, within the limits of the applicable law, a new decision-maker should bring his or her own perspective, approach and reasoning to the claims made by an applicant for review. This is the essence of the Tribunal’s statutory task.

12.     The question is whether the Tribunal conducted the review which it was authorised and required to conduct. The answer is supplied by all of the relevant circumstances. Here, the Tribunal copied 64 of 67 paragraphs of the respondent’s submissions, without attribution. It did not state it agreed with what the respondent had submitted much less give any reasons for any such agreement. Whilst it referred to some of the submissions which had been made by the appellant it did not engage with those submissions in any meaningful way. Whilst it stated that it had undertaken a “thorough analysis” of the documentary evidence and had considered the oral testimony, the product of that “thorough analysis” was not apparent from the reasons given.

71    The Full Court then considered particular paragraphs of the Tribunal’s reasons, including those which had not been reproduced from the respondent’s submissions. At 148 [15(f)], the Full Court discounted the Tribunal’s statement that it had undertaken a thorough analysis of the documentary evidence, stating that: “[t]he wholesale and uncritical adoption of the respondent’s submissions tells against an inference that there was a “thorough analysis” or independent consideration of the documentary evidence, oral testimony or submissions of the appellant”.

72    At 149 ([18] to [19]), the Full Court set out the following conclusions:

18    Helpfully, the primary judge had ordered the respondent to file before the hearing a copy of the Tribunal’s reasons that highlighted in yellow those passages of the reasons that the respondent accepted had been copied verbatim, or at least substantially, from the respondent’s submissions. When this document is examined, it is difficult to accept that the appellant received the review to which it was entitled. One is left positively persuaded that the Tribunal member simply accepted the respondent’s case uncritically and without bringing its mind to bear on the various issues raised.

19    By adopting the respondent’s submissions verbatim, the Tribunal adopted the respondent’s reasoning, perspective and conclusions, both quantitatively and qualitatively. The submissions which were adopted included conclusions to be drawn as to the credibility of witnesses and the evaluation and weighing of evidence. Adding phrases such as “on balance, the Tribunal finds” to text otherwise copied from the respondent’s submissions does not provide any real support for a finding that the Tribunal engaged with and considered the matter afresh.

(emphasis added)

73    The other authority relied upon by the applicant in support of its overarching submission is MZZZW. In that case, the Court upheld an application for judicial review of a decision of the Refugee Review Tribunal (RRT) and remitted the matter to the RRT, differently constituted, for re-determination.

74    The reasons for decision of the second RRT member involved the extensive reproduction of the text of the reasons for decision of the first RRT member (see MZZZW at 163 to 165 [32]). At 170 to 171 ([58] to [61]), the Full Court explained:

58    The emphasis of the Full Court in Minister for Immigration and Border Protection v MZYTS (2013) 230 FCR 431 at [32] that a tribunal on review must consider “for itself” whether it is satisfied a person meets the prescribed criterion for a protection visa is, with respect, an appropriate emphasis. The nature of the task was described by Gummow and Hayne JJ in Minister for Immigration and Multicultural Affairs v Wang (2003) 215 CLR 518 at [71]-[73]:

In adversarial litigation, findings of fact that are made will reflect the joinder of issue between the parties. The issues of fact and law joined between the parties will be defined by interlocutory processes or by the course of the hearing. They are, therefore, issues which the parties have identified. A review by the Tribunal is a very different kind of process. It is not adversarial; there are no opposing parties; there are no issues joined. The person who has sought the review seeks a particular administrative decision — in this case the grant of a protection visa —and puts to the Tribunal whatever material or submission that person considers will assist that claim. The findings of fact that the Tribunal makes are those that it, rather than the claimant, let alone adversarial parties, considers to be necessary for it to make its decision. Those findings, therefore, cannot be treated as a determination of some question identified in any way that is distinct from the particular process of reasoning which the Tribunal adopts in reaching its decision.

The Tribunal’s written statement of its reasons and, in particular, its statement of the findings on any material questions of fact, must be understood in this way. Indeed, so much follows from Minister for Immigration and Multicultural Affairs v Yusuf, where six members of the Court held that the Act’s requirement for the Tribunal to set out findings of fact was a requirement that focused upon the subjective thought processes of the Tribunal, not some objectively determined set of “material” facts. That is, it was held that the Act required the Tribunal to set out the findings it did make rather than findings it ought to have made.

Necessarily, the findings that are recorded in the Tribunal’s written statement of its decision and reasons will reflect the matters that the applicant for review will have sought to agitate. No less importantly, the findings that are recorded will reflect what the Tribunal considered to be material to the decision which it made on the review. And what was material to that decision will depend upon the view that the Tribunal formed about the relevant legal questions that the review presented.

59    It need hardly be said that the extraordinary circumstances of the present appeal would not have been in the contemplation of their Honours when they described the nature of the review task and the purpose of discharging the reasons obligation under s 430. What the extract does reveal is the underlying assumption in a scheme such as Pt 7 (or for that matter any merits review scheme which has similar features, including constitution of a body by particular members) that the member constituted to the review will bring her own mind to bear on the issues arising in the review, freed not only from infections such as prejudgment or other bias but from the inevitable constraints on thought, consideration and reflection which flow from the adoption of not only the conclusions of others, but the way those conclusions have been formulated and framed in language.

60    As Beazley J stated in Huluba, merits review involves considering an application for review, and the arguments and claims put forward in it, “afresh”. In SZDFZ v Minister for Immigration and Citizenship (2008) 168 FCR 1 at [20] — to which we refer below — Flick J spoke of a reconstituted tribunal being called upon to “resolve afresh the claims made”. That does not mean the merits review decision-maker considers matters uninstructed by what has gone before, whether at first instance or in other review applications which have not finally determined the merits review process. In our opinion “afresh” is simply a shorthand way of saying “with fresh eyes”, and is intended to encapsulate the essence of merits review, and indeed its strength in any robust process of administrative decision-making: namely, that within the limits of the applicable law, a new decision-maker brings her or his own perspectives, approach and reasoning to the claims made by an applicant for review.

61    We do not accept that Member Boddison considered the appellant’s claims “afresh” in this manner. As our findings at [32] above indicate, the adoption of Member Corrigan’s reasons, and reasoning, by Member Boddison is substantial and substantive. It includes many passages where there are findings about the credibility of the appellant’s claims, at a specific level. The structure of Member Boddison’s findings and conclusions under the heading “Consideration of claims and evidence” uses four sub-headings describing four aspects of the appellant’s claims, each of which she determines adversely to the appellant. Of those four aspects, three of them involve substantial and substantive copying from Member Corrigan’s reasons for decision. To this we add the first part of her reasons under the heading “Consideration of claims and evidence”, where she summarises the appellant’s claims in terms which are lifted from Member Corrigan’s reasons almost entirely, including paragraphs (such as [26]) which represent her findings.

(emphasis in original)

75    Recently, a Full Court of this Court (Collier, Logan and Goodman JJ) considered and upheld an appeal from the Federal Circuit and Family Court of Australia (Division 2) which involved the unattributed reproduction by a judge of that Court from the submissions of one party: Atanaskovic Hartnell Corporate Services Pty Limited v Kelly [2024] FCAFC 137. There are important differences between: (1) the reproduction of submissions in the reasons for judgment of a judicial officer; and (2) such reproduction in the reasons for decision of an administrative decision-maker: see LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90; (2012) 203 FCR 166 at 189 to 190 [98] (North, Logan and Robertson JJ). Nevertheless, there is some overlap in the analyses to be undertaken and in particular that although regard ought be had to quantitative aspects of the reproduction, the focus ought be upon the qualitative aspects of the reproduction: see MZZZW at 163 [31]; Ultimate Vision at 149 [19] and, in the context of judicial reasons, Atanaskovic at [98], [119] and [138] (Logan J) and [159] to [164] (Goodman J).

76    Against that background, I return to consider the applicant’s second ground of appeal.

77    Schedule 1 to these reasons for judgment contains the text of the Reasons, annotated so as to indicate:

(1)    in double underline, those parts of the Reasons which the applicant contends (in Schedule 2) were taken verbatim from the RCS (verbatim text); and

(2)    in single underline, those parts of the Reasons which the applicant contends (in Schedule 2) involved a substantial adoption of particular paragraphs of the RCS by reason of parts of the Reasons being “essentially the same”, “substantially the same” or “largely the same” as text in the RCS (substantial adoption text).

78    Qualitatively, it is plain on the face of the Reasons (even as annotated in Schedule 1) that the whole of the Reasons, and in particular the section of the Reasons under the heading “Consideration” (i.e. T[32] to [56]) involved the application of the senior member’s independent mind to the issues raised on the review: see in particular [62] above. The inclusion of some extracts of verbatim text is insufficient to detract from this conclusion. Further, a good part of the verbatim text addresses matters which cannot be said to be controversial, e.g., (1) the statements referable to decided cases in T[17] and [18] (see Beaman v Bond [2017] FCAFC 142; (2017) 254 FCR 480 at 506 [68] (McKerracher J; Gilmour and Charlesworth JJ agreeing)); and (2) the contents of underlying documents.

79    The conclusions reached above are not altered by taking into consideration the substantial adoption text. Even combined, the verbatim text and the substantial adoption text represent a small part of each of the RCS and the Reasons; and do not detract from the clear impression, when the Reasons are read as a whole, that the senior member brought an independent mind to the statutory task she performed.

80    I also note, with respect to the substantial adoption text, that the strength of contended correspondence between the Reasons and the RCS is variable and in some cases tenuous. This can be seen by reference to Schedule 2. Further, it is to be expected that a Tribunal member, when writing a statement of reasons after taking into account the submissions of the parties, will use some of the language found in those submissions in the statement of reasons. Error is not established by a mechanical comparison of words in submissions and words in a statement of reasons unless the correlation between the two is such as to compel an inference that the statement of reasons was not the product of an independent mind brought to the statutory task. Further, as noted above, statements of reasons are to be read fairly and not in an unduly critical manner.

81    Thus, having considered Schedule 1 (as well as the ACS and the RCS), I am far from persuaded that the senior member failed to carry out the statutory task conferred upon her by reason of the adoption of some submissions from the RCS. Rather, the clear impression that I am left with is that the Reasons reflect the considered analysis of the senior member. I am not prepared to draw the inference sought by the applicant that the Tribunal did not undertake a genuine independent consideration of the issues arising on the review.

82    The applicant also placed reliance upon the contended brevity of the Reasons, which run to 22 pages. In this regard, the applicant submitted that:

(1)    decisions of the Tribunal in relation to the “R&D provisions” are generally detailed and long. The applicant cited GQHC and Commissioner of Taxation (Taxation) [2024] AATA 409 (230 pages), Lakes Oil (80 pages), Moreton Resources Ltd and Industry Innovation and Science Australia (Taxation) [2022] AATA 3804 (81 pages) and PKWK and Innovation and Science Australia (Taxation) [2021] AATA 706 (116 pages); and

(2)    the present case involved: evidence from two experts; extensive evidence in the form of witness statements, photographs, videos, and other materials; a Tribunal Book exceeding 1,800 pages; a hearing which ran for two and a half days, with an additional half-day for closing submissions; and closing submissions of 63 pages (not including separate objections to evidence of 10 pages) from the applicant and 56 pages from the respondent.

83    I do not find such reasoning persuasive. The brevity of reasons may, in rare cases, suggest a failure to engage with the issues requiring determination. However, there is no necessary correlation between the length of reasons and the depth of analysis therein; and the focus must be upon the quality or substance of the statement of reasons, rather than upon its quantity or length. Indeed, detailed consideration will often shorten what would otherwise be longer reasons; and brevity may be the product of a dispositive issue which reduces or removes the need to deal with other issues. As noted earlier, the Reasons are coherent, logical and comply with s 43(2B) of the AAT Act. Their length of 22 pages is thus of no moment. I respectfully agree with the observations of Lee J in Aged Care Quality and Safety Commissioner v Amana Community Services Pty Ltd [2024] FCA 1241 at [22]:

As an aside, one complaint made by the Commissioner is that the Tribunal’s reasons are confined to 15 pages and 39 paragraphs. I do not consider that this, in and of itself, is a pointer to anything. Aside from the fact that lengthy decisions by their very nature often defend themselves against the risk of being read, brevity in decision-making is to be encouraged, provided that attention is given to all matters to which the decision-maker is to have regard and provided that the appropriate reasoning process is sufficiently exposed.

84    I also note that there is no necessary correlation between the volume of materials placed before a decision-maker and the length of reasons required. There is often a large amount of material (including submissions) which are superfluous or tangential to the issues requiring determination. Conversely, other cases involving a minimal amount of material may require a lengthy exposition on, say, questions of law.

85    Thus, the second ground of appeal fails.

F.    THE SECOND QUESTION OF LAW – DID THE TRIBUNAL ERR IN ITS CONSTRUCTION AND APPLICATION OF S 355-25(1) OF THE ITAA 1997?

86    The second question of law is whether the Tribunal erred in its construction and application of s 355-25(1) of the ITAA 1997. This question is focussed upon the final two sentences of paragraph [33] of the Tribunal’s reasons (which paragraph is reproduced for ease of reference):

In respect to the whole project, it is unclear precisely what unknown outcome the applicant was seeking to determine, other than to create a basketball shoe which satisfied Mr Dellavedova’s specific requirements. It is accepted that the requirements of Mr Dellavedova could not have been determined in advance. However, I am not convinced that this is an outcome directed to a technical or scientific uncertainty. It is a subjective outcome and one outside of the control of the applicant.

(emphasis added)

87    In support of the third ground of appeal, the applicant contends that the senior member applied a different test than that required by s 355-25(1)(a) by requiring that the outcome “be directed to a technical or scientific uncertainty”, which the applicant contends is a reinstatement of the test under the predecessor provision, s 73B(2B)(b)(i) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). I do not accept these contentions for the following reasons.

88    First, and bearing in mind that statements of reasons are to be read fairly and not with an eye keenly attuned to error, I do not read the penultimate sentence of T[33] as a statement by the senior member that she was substituting a different test or reverting to the previous test. Rather, I read that sentence as involving the use of a shorthand expression for some of the requirements of s 355-25(1)(a), which sub-section refers to outcomes of experimental activities that can only be determined by the application a systematic progression of work that is based on principles of established science proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions. Those requirements suggest that the systematic progression of work referred to in s 355-25(1)(a) is one that concerns technical or scientific uncertainty.

89    Secondly, it is clear from the Replacement Explanatory Memorandum to the Tax Laws Amendment (Research and Development) Bill 2010 (Cth) that such a shorthand expression was apt. Paragraph 2.7 of the Explanatory Memorandum states that: “The rationale of the new R&D incentive lies in the potential for R&D activities to generate new information that benefits the wider Australian economy, while the risk of scientific and technological uncertainty may discourage them from taking place”. Paragraphs 2.12 and 2.13 refer to the matters set out in the second limb of s 355-25(1)(a), described as the scientific method, which method is explained to establish a threshold for the knowledge gap and uncertainty that an “eligible experiment” must seek to address. Paragraph 2.13 continues: “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 and experience”.

90    Thirdly, although as the applicant contends the words “technical or scientific outcome” appear in s 73B(2B)(b)(i) of the ITAA 1936 , it does not follow that the senior member was seeking to “reinstate” the former test which had been replaced by the present provisions. The better inference, as noted above, is that the senior member was using the expression “technical or scientific uncertainty” as a shorthand expression for some of the requirements of the present section.

91    In support of its fourth ground of appeal, the applicant contends that the Tribunal misconstrued s 355-25(1) by considering that the requirement within s 355-25(1) in relation to uncertainty of outcome could not be satisfied if it depended upon the subjective feedback of an individual. I do not accept that this contention. I read the ultimate sentence of T[33] not as a construction of the section but instead as a finding by the Tribunal that in the present case, the outcome was a subjective one and one outside of the control of the applicant (and as such one which did not meet the scientific method required by s 355-25(1)(a)).

92    In any event, the establishment of the errors for which the applicant contends in its third and fourth grounds of appeal would be an insufficient basis upon which to uphold the appeal. As noted at [5] to [9] above, for activities to be “core R&D activities” they must have at least the three characteristics there mentioned. That is, both s 355-25(1)(a) and (b) must be proven. The establishment of the errors for which the applicant contends might vitiate the senior member’s findings concerning the first limb of s 355-25(1)(a) at T[37]. However, the senior member’s findings at T[52] and T[56] concerning the second limb of s 355-25(1)(a) and s 355-25(1)(b) would stand as independent findings of fact with the result that the Claimed Activities are not “core R&D activities”. In other words, any error with respect to the first characteristic was not material in the sense that the Tribunal’s decision might have been different if such an error had not occurred: Comptroller-General of Customs v Pharm-A-Care Laboratories Pty Ltd [2020] HCA 2; (2020) 270 CLR 494 at 513 [40] (Kiefel CJ, Bell, Gageler, Keane and Gordon JJ).

G.    CONCLUSION

93    For the foregoing reasons, the appeal should be dismissed. Neither party has suggested that costs should not follow the event or otherwise sought a variation to the usual costs order. I will make orders accordingly.

Associate:    

Dated:    25 November 2024

SCHEDULE 1

Set out below is the text of the Reasons. Bold and italic emphasis is as per the Reasons.

The text in double-underline is text which the applicant contends has been reproduced verbatim from the RCS (see Schedule 2). It may be noted that in some instances the reproduction is not in fact verbatim, albeit it is substantively similar.

The text in single-underline is text which the applicant contends is “essentially the same”, “substantially the same” or “largely the same” as text in the RCS (see Schedule 2).

The underlining has been included, favourably to the applicant, even where the third column of Schedule 2 does not refer to the text being verbatim or substantially similar.

1    Active Sports Management Pty Ltd, the applicant, carries on a business which includes importing and selling sports apparel, footwear, accessories, hoodies, and tracksuits, among other things. It also designs and develops products for the Australian market or with unique Australian features and styles.

2    The respondent, Industry Innovation and Science Australia, (IISA) is jointly responsible with the Commissioner of Taxation for the administration of the R&D Tax Incentive scheme, established by Division 355 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and the Industry Research and Development Act 1986 (Cth) (IR&D Act), for entities engaged in research and development activities (R&D Tax Incentive). The R&D Tax Incentive is administered on behalf of the respondent by the Department of Industry, Science and Resources.

3    By applications lodged in respect of the 2015-16 income year and the 2016-17 income year (the Applications), the applicant applied for registration of the following activities as “core R&D activities” for the purposes of the IR&D Act (the Claimed Activities):

For both the 2015-16 and the 2016-17 income years:

(a)    Activity 1.1 – Prototyping for tests and experiments; and

(b)    Activity 1.2 – Tests and experiments.

For the 2016-17 income year only:

(a)    Activity 1.3 – Other tests and experiments.

4    The Claimed Activities related to the development of a customised basketball shoe, referred to as the “Delly1”, to suit the personal requirements and playing style of Matthew Dellavedova, an Australian professional basketball player who at that time played in the National Basketball Association in the United States of America.

5    On 6 May 2019, following examination of the applicant’s 2015-16 and 2016-17 registrations, the respondent determined under section 27J of the IR&D Act that none of the claimed activities satisfied the definition of “R&D activities”.

6    On 8 November 2019, following an internal review, the respondent confirmed the decision notified on 6 May 2019, that pursuant to section 27J of the IR&D Act, the claimed activities are neither core nor supporting R&D activities. This is the decision under review in these proceedings.

Relevant Legislative Provisions

7    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

8    Provisions concerning research and development are set out in Division 355 of the ITAA 1997. Section 355-1 of the ITAA 1997 provides an “R&D entity” may be entitled to a tax offset for “R&D activities”. It is accepted that the applicant is an R&D entity.

9    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]

10    R&D entities are required to register annually with the respondent, in respect of an income year, before they can claim the R&D Tax Incentive. Registration does not conclusively render the activities eligible R&D activities (as defined by the ITAA 1997) and is not an indication of compliance with the statutory criteria.

11    For an entity to be correctly offsetting their tax pursuant to the R&D Tax Incentive they must be conducting R&D activities as defined under section 355-20 of the ITAA 1997. Section 355-20 of the ITAA 1997 defines R&D activities to mean “core R&D activities or supporting R&D activities”.

12    Section 355-25 of the ITAA 1997 defines core R&D activities as follows:

(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).

13    As to core R&D activities, the Replacement Explanatory Memorandum to the Tax Laws Amendment (Research and Development) Bill 2010 (Chapters 1 & 2) relevantly explains:

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.

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.

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]

14    Section 355-25(2) of the ITAA 1997 specifies particular activities which are taken not to be core R&D activities (excluded activities). The only potentially relevant excluded activity is:

(a) market research, market testing or market development, or sales promotions (including consumer surveys).

15    Supporting R&D activities are defined in subsection 355-30(1) to mean “activities directly related to core R&D activities”.

16    Section 355-30 provides that activities are not supporting R&D activities where they are excluded under subsection 355-25(2), produce goods or services or are directly related to producing goods or services unless they are undertaken for the dominant purpose of supporting core R&D activities.

Documentary Evidence

17    An absence of documentation evidencing the systematic progression of work undertaken in relation to claimed activities, where more extensive documentation is ordinarily an expected feature of that process, may suggest that the requirements of section 355-25 have not been satisfied; Lakes Oil NL and Innovation and Science Australia [2023] AATA 811 at [219]. Contemporaneous written evidence detailing the process of each activity will be highly persuasive because the recording of such information is an indication that the activity was carried out in a manner consistent with a systematic progression of work.

18    There are a number of Tribunal matters in which a lack of proper/relevant contemporaneous documents have been “fatal” to an application; see Lakes Oil NL and Innovation and Science Australia [2023] AATA 811, Docklands Science Park Pty Ltd and Innovation Australia [2015] AATA 973, Royal Wins Pty Ltd and Innovation and Science Australia [2020] AATA 4320 and Coal of Queensland v Innovation and Science Australia (2021) 285 FCR 286.

19    In Rix’s Creek Pty Ltd; Bloomfield Collieries Pty Ltd and Innovation Australia [2017] AATA 645, 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] While the creation and provision of documentation is not a statutory requirement to substantiate the R&D activities, … documentary evidence is an expected feature of an activity that is systematic, investigative and experimental. Documentation is necessary to record the activity undertaken, its purpose, progress and, of course, the results of the activities and the evaluation of those results. Without such documentation, it is near impossible to establish the progression of the activities undertaken and that the purpose of the activities was to generate new knowledge in the form of new or improved materials, products, devices, processes or services. It follows, that without such documentation, the experimental activity would have limited application or future use…

20    It is understood that the records provided to the Tribunal in these proceedings comprises the entirety of the documentary records created and kept by the applicant in relation to the Claimed Activities.

Claimed Activities

21    The applicant contends that the Delly1 was a new and improved shoe, specifically designed for Matthew Dellavedova, a world-renown, Australian basketball player. It was designed with and for him, a first genuine ‘signature shoe’ in Australia. The applicant further contends that the project, a first of its type for the applicant, an Australian company, resulted in a new and improved shoe, in new knowledge and information, in respect of the shoe and the development of such a shoe.

22    In the registration forms, the applicant described the core activity which was carried out as follows:

Activity 1.1

“PEAK have developed many prototypes for this project with the dominant purpose being to do tests and experiments, to obtain data for the continual improvement of the project. Testing has been undertaken with many athletes both in Australia and in the USA, and continual refinement has taken place after each trial and test. Matthew Dellavedova has been integral to the testing process along with other athletes with different requirements. Different materials were trialled for different applications and new techniques were used for materials under different conditions. Some basketball players have specific requirements for shoe performance, depending on the position they play in on-court. PEAK have used different prototypes to develop different materials and used a combination of raw materials and designs to improve each prototype.

The development of each prototype has increased the understanding of better performance for the project shoe. Peak believes that the new shoe can significantly improve the performance of players and reduce the negative effects of inferior design variables. So by reducing negative variables, there will be a safer and more efficient product.”

Activity 1.2

“Regular testing and measuring of results means that PEAK are improving the new shoe with input from a number of players and retail focus groups. New prototypes have been tested during training sessions with Matthew Dellavedova and other elite athletes, to ascertain the suitability for different applications. A high degree of subjective evaluation by athletes provides data for improvement. This data is used to improve (or reduce) the strength, flexibility and cushioning of the various elements of each prototype. The data will determine where the weaknesses are and any vulnerabilities of the new shoe.

To complement the manufacture of a newly designed Outsole, Various Upper Lasts for the shoes have been used in incremental millimetre measurements of volume and elasticity. These are coupled with many Mid Sole inserts of various materials that provide a sliding scale of suitability for cushioning and comfort.

These tests are conducted systematically to obtain data and feedback to work with the technical designers to improve the product and support our conclusions in the production of the next prototype.”

Activity 1.3

“The development of the shoe has undergone many tests and prototypes. There have been a number of experiments conducted with different upper materials, in conjunction with various prototype outsoles. The result has been many months of specific testing with different combinations of outsole and upper materials.

…

The testing was conducted over many months in Australia, and overseas, only to compare results. The basis of many of these experiments were as follows:

The anatomical requirements of the shoe were measured with individual Athletes. This required extensive examination of particular Athletes’ playing condition requirements, their particular physiological characteristics, and also the suitability of various materials to perform specific functions within various components of the shoe. Individual foot mouldings, body measurements and weights were recorded to identify individual characteristics that would guide product design.

Tests were conducted in professional Basketball environments in real time, during NBA team “training and competition. Material integrity and strength were evaluated along with Athlete feedback for various prototype combinations, also we did experimental activities with new materials and observe results.

Wear tests and anatomical performance tests were carried out with several different upper materials under training conditions, These were filmed and recorded for examination by the Athletes medical advisors and our designers. The outcomes of these tests altered our project R&D planning and expectation”

23    There is a significant degree of overlap between the Claimed Activities, and how they are described in the registration forms. All of the Claimed Activities are stated to form part of the same project, entitled ‘Delly1’ starting 1 July 2015 with an expected completion date of 30 September 2018. Each refers to the process of developing prototype shoes and testing them to obtain feedback for the development of the Delly1.

24    Activity 1.1 of the Claimed Activities is characterised as prototyping for tests and experiments and appears to have involved the manufacture of each Prototype by Quanzhou Peak Shoes Co, Ltd (PEAK) in China. It appears that any tests and experiments of the prototypes were undertaken as part of Activity 1.2 and 1.3. Given the characterisation of the Claimed Activities, they will be considered collectively as to whether they satisfy the statutory definition of core R&D activities.

25    The applicant contends that the development of the Delly1 included the activities and steps described in the statement of Gregory Bickley, sole director of the applicant, dated 26 August 2019 (Bickley statement). The applicant submits that the activities and steps described extended beyond simple ‘trial and error’ and involved active feedback in relation to the development of the shoe. Mr Bickley said:

The development of the Delly I took a long time, with many different prototype versions and development stages. There were many revisions and changes. There were many failures and situations where we had to go back to the drawing board. It was not a case of simply taking an existing off-the-shelf shoe, modifying it a bit for a player’s preferences and then putting the player’s name on the shoe. Numerous hand-made prototype versions were made – bespoke shoes, designed and created only for testing. The Delly I was engineered.

26    Annexed to the Bickley statement is a document titled ‘Delly1 Prototype Development History’ detailing each iteration of prototypes created with a description of the alleged activities and testing undertaken (Development History). The Development History shows that 6 prototypes were manufactured by PEAK. Relevant aspects of the Development History for each prototype are extracted and summarised as follows:

(a)    Prototype 1 was described as, a bespoke shoe, designed as a first step in the process of designing a low-cut shoe, to meet Mr Dellavedova’s unique requirements for a low-cut shoe that was light and close to the ground, with sufficient support and traction, suitable to his playing position and style. The prototype was initially tested by Mr Bickley himself and then tested by Mr Dellavedova. The prototype was tested by Mr Dellavedova in a shootaround training session and in shooting practice and feedback was provided. The prototype was also sent to other basketball players to gauge their feedback on the design. Approximately 30 to 40 pairs were sent to players and most players trained or did a shootaround in the prototype.

(b)    Prototype 2 was manufactured by PEAK in response to feedback provided about prototype 1. Testing of the prototype was to see whether the revised prototype provided additional flexibility in the upper, offered a sufficient reduction in weight and was low enough. Mr Bickley examined and tested the prototype before it was sent to Mr Dellavedova to see if the new prototype was consistent with feedback and instructions given or was in the ‘ball-park’. Mr Bickley’s testing of the prototype is described as, I walked around in the shoes but did not play basketball, as there was only one pair made, and these were to be given to Matthew. Mr Dellavedova tested the prototype during a shootaround training session. Feedback was communicated back to PEAK.

(c)    Prototype 3 was manufactured by PEAK in response to feedback provided about the previous version. Changes included a new outsole, revised upper and revised heel counter. Mesh upper was included in the prototype to reduce weight and the design of the pattern was not random - it was deliberate to provide strength through minimal use of material and minimal addition of weight. There were two sub-prototypes with this version. The first with a softer mesh, then the next with a firmer and stronger mesh. The 3D printing of the KPU [mesh upper] on the lightweight mesh was critical new technology that had not been tested on a basketball shoe before. As with previous prototypes, Mr Bickley tested the prototype first. He examined the prototype and walked around in the shoes but did not play basketball, as there was only one pair made, and these were to be given to Matthew. Mr Dellavedova tested the prototype during a shootaround and light training sessions. This involved wearing the prototype while doing jump shot exercises, light ball movement drills and lots of lateral movement play. Feedback was provided by Mr Dellavedova and Mr Bickley to PEAK. In addition, photos were provided by Mr Dellavedova demonstrating peeling and stripping of the outsole. Videos provided by Mr Dellavedova showed issues he experienced with the insole, mesh, toe box and heel counter, tearing of eyelets and upper, and feedback about ankle support and the tongue.

(d)    Prototype 4 was manufactured by PEAK in response to feedback provided about the previous version. Changes included a strengthened mesh and revised heel counter. As with previous prototypes, Mr Bickley tested the prototype first. He examined the prototype and walked around in the shoes but did not play basketball, as there was only one pair made, and these were to be given to Matthew. Mr Dellavedova tested the prototype during a shootaround and low intensity training and exercises. Mr Dellavedova subsequently wore the prototype at the NBA pre-season training camp. Feedback was provided from examining and wearing the prototype.

(e)    Prototype 5 was manufactured by PEAK in response to feedback provided about the previous version. Changes incorporated a change to the outsole and a related modification to the heel counter. This prototype was tested by Mr Dellavedova during a shootaround, low intensity workout and then at the Milwaukee Bucks training camp. Several hand-made bespoke colour variations were produced. Prototype 5 was successful.

(f)    Prototype 6 is the final prototype and production version. Due to the change in manufacturing process for production, testing was done to test the final product. Several different colour versions were manufactured by PEAK. Production runs were ordered for each colour version. Mr Dellavedova tested the production version of the prototype during NBA training and games.

27    In addition to the Development History, the applicant has provided some contemporaneous evidence of the carrying out of the Claimed Activities, including photographs of each prototype; videos of Mr Dellavedova’s feedback of prototype 3; video testing of Prototype 4 (Video_testing – 1.07.16); WeChat messages from late June to early July 2016 and October 2016 in relation to Prototype 4; emails dated 30 August 2016 and 15 September 2016 from Mr Dellavedova’s manager, Mr Bruce Kaider, to Ms Christin Wu of PEAK relating to Prototype 4.

28    I note here that Video_testing – 1.07.16, while described by Mr Bickley as showing Mr Dellavedova testing prototype 4 during a training session, it was plainly taken for promotional purposes which was subsequently shared to the Twitter account of PEAKSportAus to promote the Delly1. There is no evidence of the applicant actually using the video to evaluate Prototype 4. At hearing, Dr Habil Thorsten Sterzing, a scientist in the field of athletic footwear research and development, discussed the video and its application. When asked if he could judge the performance of the shoe by the video, he said it was hard to see how certain components of the shoe perform. I wouldn’t be able to check on the real foot counter whether it improves stability or not. I wouldn’t see whether the foot rolls over and pushes the mesh over the midsole. That video would not allow me to judge on it and the image is not detailed enough to see what really happens in terms of shoe information, the material and whether it restricts, facilitates or allows movement. Dr Sterzing gave evidence that in his experience, he has used video footage of testing sessions to assess the performance of a prototype of an athletic shoe, but in a way more specific way and not in a general way like seen in this style of video. He agreed that high-speed video footage was usually used, as well as infra-red motional analysis systems, and markers on the floor and the body of the athlete. Dr Sterzing added that when he undertook testing of this kind, he usually had a second shoe, a comparative shoe, that as systematically altered, I see how that shoe compares to another shoe; as a matter of what you call standardisation of the evaluation. You have a shoe, ideally isolated and systematically altered, and you ask the person to do exactly the same thing. Human locomotion is never exact, but for the layman, the same movement. That allows me to compare the functionally of two shoes.

29    The applicant has also provided emails from players Scott Freer dated 27 April 2023 and Damien Martin dated 28 April 2023. They are not contemporaneous records and provide retrospective evidence of the players’ feedback in relation to the Delly1 shoe, recalled at least 6 years after testing. Most significantly, there are significant issues with the evidence contained in the emails. Mr Freer and 30-40 other players apparently tested the “off the shelf” existing PEAK product, referred to as Prototype 1, but as Mr Bickley’s evidence shows, the shoe provided to “other players” was not the version of Prototype 1 tested by Mr Dellavedova. The version of prototype 1 provided to Mr Dellavedova had minor changes. Mr Martin apparently tested Prototype 6, the production version, but in the Development History, Mr Bickley stated that the applicant did not give the production versions to anyone other than Mr Dellavedova to test.

30    There is no documentary evidence of work undertaken by PEAK as part of the process to develop the Delly1 prototypes, other than the fact that it manufactured the prototypes. There is no evidence as to whether PEAK was attempting to formulate any scientific or technical hypotheses in relation to each Prototype. The available evidence suggests that PEAK was simply responding to instructions from Mr Dellavedova, either directly, or as relayed by Mr Bickley.

31    Also, I note that there is a relevant and substantial inconsistency in the evidence regarding Prototype 1. The Development History and in Mr Bickley’s statement, prototype 1 was described as a “shoe that was not available for sale or off the shelf” however in further written submissions from the applicant, and in the oral evidence of Mr Bickley, it is apparent that the manufacture of the first prototype started largely with an existing PEAK product.

Consideration

32    The ‘outcome’ for the purposes of the statutory test is the outcome of the experimental activities in question. While the precise data produced by the work undertaken 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; Coal of Queensland v Innovation and Science Australia (2021) 285 FCR 286 at [101].

33    In respect to the whole project, it is unclear precisely what unknown outcome the applicant was seeking to determine, other than to create a basketball shoe which satisfied Mr Dellavedova’s specific requirements. It is accepted that the requirements of Mr Dellavedova could not have been determined in advance. However, I am not convinced that this is an outcome directed to a technical or scientific uncertainty. It is a subjective outcome and one outside of the control of the applicant.

34    Considering the prototype specific outcomes, it is unclear on the evidence specifically what modifications took place between the various prototypes, and to what degree. The descriptions of the modification in the Development History are in very general and vague terms. Even so, the general outcomes could have been known in advance.

35    The only available evidence from a competent professional in the relevant field of shoe design is that of Dr Sterzing. He has expensive industry experience in the field of athletic shoe development. He gave evidence about the availability of low-cut basketball shoes on the market since 2008; and he gave evidence about numerous journal articles and research around modifications made to aspects of shoes to affect functionality and performance.

36    Mr Bickley, who is not an expert in shoe design, gave evidence that he was able to “tell” from his personal examination of each Prototype whether it was going to be suitable or would meet Mr Dellavedova’s needs. For example, he would tell if a prototype was lighter, or more flexible. The applicant also submitted that a modification with an unknown outcome, was the mesh upper. However, Mr Bickley’s evidence was that he was able to “tell” that in relation to the mesh upper, the prototype was stronger in the upper, had additional stiffness and a reduction in movement, suggesting that there was no uncertainty to test whether the mesh upper made the upper stronger. The evidence of Mr Bickley also shows that PEAK suggested the use of the mesh upper to help reduce the weight of the shoe. It can be inferred from this evidence that the outcome of using the mesh upper was known, in that it made the shoe lighter.

37    There is no evidence to establish that the outcomes of specific modifications made to the prototypes could not have been known in advance.

38    The term ‘hypothesis’ is not defined in the ITAA 1997 and should be given its ordinary meaning. It is plain that a hypothesis must have a scientific basis. This is enforced by section 355-5(2) which provides that the object of the ITAA 1997 is to be achieved in a “scientific way”. Additionally, section 355-25 specifically provides that experimental activities must not only proceed from hypothesis to experiment, but they must also be “based on principles of established science”; see Lakes Oil NL and Innovation and Science Australia (Taxation) [2023] AATA 811 at [206].

39    The applicant submits that while they may be described or stated the hypothesis in different ways, they are essentially referring to the same thing, the same “particular actions”. The Development History records that “we were testing this prototype to see if it would meet Matthew’s requirements”. The asserted hypothesis found throughout the Development History to test:

(a)    to see if prototype 1 would meet Mr Dellavedova’s requirements for a low-cut shoe that was light and close to the ground, with sufficient support and traction, suitable to his playing position and style;

(b)    the softer upper, a completely different outsole, and the additional heel support to see how that felt and whether it would meet Mr Dellavedova’s requirements;

(c)    whether the revised prototype provided additional flexibility in the upper, offered a sufficient reduction in weight and was low enough;

(d)    the new outsole, for grip, traction, and cushioning, as well as examining how the lower profile outsole would perform;

(e)    the revised upper, as the applicant did not know whether this would provide enough support in the front part of the shoe, with roll- out/push-out by Mr Dellavedova’s foot;

(f)    a revised heel counter designed in response to changes to the outsole and the upper, to see whether this provided sufficient support for Mr Dellavedova;

(g)    whether the strengthened mesh under the 3D printed KPU provided additional stiffness and a reduction in the movement of the upper and sidewall. To test the revised heel counter, to determine if it provided sufficient support;

(h)    the revised outsole to see if it provided enough additional cushioning and support and testing the revised heel counter, to check whether this provided sufficient support; and

(i)    whether the production versions performed in the same way as the handmade prototype.

40    There is no contemporaneous evidence that the applicant formulated these asserted hypotheses before carrying out either the manufacture of each prototype or the testing of each prototype. The need for contemporaneous evidence of the formulation of a hypothesis is especially important, given it is the essential starting point of the activities and identifies the outcome sought to be achieved.

41    The evidence does not demonstrate how each hypothesis was tested on each iteration of prototype and how the outcomes were recorded and observed. It also appears on the evidence that feedback provided by Mr Dellavedova on certain prototypes did not relate to the asserted hypothesis. Most significantly, in regard to prototype 3, where feedback provided focused on outcomes related to the shoe eyelets, tongue, toe box, and peeling of the outsole, when these aspects of the prototype were not identified in the asserted hypothesis for testing. It is unclear how these outcomes were factored into the evaluation of the prototype.

42    Dr Sterzing opined at hearing that the hypothesis put forward are rather objectives and description of what was done and were not hypotheses in the way that postulate a certain fact to be verified.

43    Dr Peter Ellerton, lecturer and philosopher of science, has provided a report in these proceedings dated 23 November 2020. Dr Ellerton gave evidence about the formulation of a hypothesis. He said at hearing, it’s difficult to see, in fact, how you could do further testing without developing some kind of hypothesis. So at some stage the hypothesis must have been developed and improved and where that occurred I don’t know. When discussing the hypothetico-deductive method, Dr Ellerton accepted in cross-examination that, the outcome of a hypothesis is uncertain until it is tested. This is the purpose of the test.

44    There is no evidence that the outcome of any of the asserted hypotheses was uncertain or unknown to the applicant or to a competent professional in the field. In fact, the evidence of Mr Bickley was that he was able to anticipate and predict whether certain features and modifications were not going to meet Mr Dellavedova requirements. It is also apparent on the evidence that Mr Bickley provided feedback and PEAK made suggestions about materials and modifications of the shoe, anticipating how particular changes to the features of the shoe between prototypes would impact the shoe’s functionality. While I accept that there is some uncertainty around whether the modifications would satisfy Mr Dellavedova’s requirements, I am not convinced that this uncertainty is an unknown outcome in the context of developing a hypothesis.

45    The available evidence demonstrates that iterations of prototypes were manufactured by PEAK and the applicant conducted testing of the prototypes. The precise nature of the testing undertaken by the applicant for each prototype is not documented with any precision. It appears that the main testing undertaken was that prototypes were manufactured by PEAK starting with an existing PEAK product, feedback was provided either directly to PEAK or via the applicant to PEAK about subjective requirements or issues identified by Mr Dellavedova.

46    In his report, Dr Sterzing relevantly stated:

[33] As different components of a shoe construction may interact with each other, thereby resembling confounding factors to causal conclusions made regarding the functional effects of one specified shoe component, ideally only one component of a shoe construction is advised to be altered in science based research and development endeavours.

[34] In addition, such isolated shoe alteration typically takes place in graded approaches during which prototypes are built for direct comparison within one test session (for instance, Brauner et al 2009, Guo and Stefanyshyn 2011, Oriwol et al 2011). This allows determining the desired degree of a shoe alteration for a specific shoe feature, for instance the optimal degree of outsole traction during court sport movements for a specific target group (Guo and Stefanyshyn 2011). Such an approach allows to generate systematic knowledge regarding the type, the physical properties, and the processing of materials applied to achieve mechanical properties that subsequently influence the actual objective and subjective shoe performance of athletes.

47    There is no evidence about how Mr Dellavedova actually tested each prototype, other than that he wore each prototype either in training conditions or during play. The testing undertaken by Mr Dellavedova did not consist of repeatable, verifiable tests capable of isolating the effects of each of the design modifications actually being tested. As Mr Sterzing’s evidence provided, where multiple modifications were made on a prototype at one time, it would have been unclear what change or feature at each iteration was impacting on the overall shoe performance, other than mere speculation. Mr Dellavedova’s feedback was not technical in nature, but more along the lines of subjective feedback.

48    It also appears that Mr Bickley tried on some iterations of the prototypes and provided feedback. What utility this would have had, given that the scientific basis for any such testing was undefined nor verifiable, would be limited. Other athletes allegedly tested a version of prototype 1. But as discussed earlier, the prototype tested was merely a stock model manufactured by PEAK. Any other feedback provided by athletes of other later iterations of prototypes was not recorded and, in any event, appeared to be vague and subjective in nature without any technical basis.

49    I accept that designing the Delly1 was a process. But as Dr Sterzing opined, in the circumstances of the development of Delly1, it’s not necessarily a scientific process. It is more likely that the process undertaken to develop the Delly1 was one of trial and error, with the assistance of PEAKs knowledge of materials and shoe design. It was more akin to knowledge discovery and a problem-solving process rather than an experimental activity based on established scientific principles.

50    While Dr Ellerton opined that the Claimed Activities separately and collectively constituted a systematic progression of work based on established principles of science that proceed from hypothesis to experiment, observation and evaluation, and lead to logical conclusions, I do not accept that to be the case for the reasons already detailed. Additionally, I note that he inferred that the relevant physical principles must have been followed simply from the fact that the shoe was ultimately developed into a commercial product. Such an inference is outside of Dr Ellerton’s expertise. Dr Ellerton has no knowledge of the procedural principles applicable to athletic shoe research and development.

51    Further, Dr Ellerton’s reasoning expressed in his report in arriving at his opinions was very generalised. However, based on his report and oral evidence, it is apparent that Dr Ellerton’s opinions were based on assumptions about the level of involvement of Mr Bickley and the applicant in the development of the shoe. He recorded in his report that he understood that the applicant generated a sequence of prototypes and that the prototypes were designed by [the applicant]. Dr Ellerton said at hearing that he understood those responsible for testing the prototypes and redesigning it, including Mr Bickley, were responsible for analysing results of testing. He agreed that he had assumed someone somewhere has to take accord of that information and make a modification to that effect and that that was the process of analysis. He said he also assumed that because there were some modifications to the next prototype, there must have been some analysis. This is despite the absence of adequate contemporaneous, quantitative evidence recording the results of testing allegedly undertaken in respect of each prototype. Dr Ellerton’s evidence was simply that the feedback provided by Mr Dellavedova was valid and verifiable as it was given by the person testing it and by the person for whom the shoe is designed and was simply verifiable by anybody else who asked Mr Dellavedova, to use his example, what his experiences were of that shoe, he would give the same response.

52    For these reasons, I am not satisfied that the claimed activities involved a systematic progression of work based on principles of established science, and which proceeded from hypothesis to experiment, observation and evaluation, leading to logical conclusions.

53    In relation to section 355-25(b), the term ‘new knowledge’ is not defined by the ITAA 1997 and similarly, takes its ordinary meaning. In the context of Division 355 of the ITAA and the IR&D Act, the new knowledge sought to be generated is not defined by the subjective knowledge or experience of the R&D entity, and the concept of new knowledge must be construed in context, as a feature of the ‘experimental activities’.

54    As stated, the claimed activities were conducted for the purpose of developing a product that could be marketed as Mr Dellavedova’s ‘signature shoe’ and the claimed activities were conducted for the purpose of determining what modifications of previously known athletic shoe design features would suit the personal preferences or requirements of Mr Dellavedova. As discussed in detail in these reasons, the iterations of the prototypes manufactured by PEAK, were modified based on feedback provided by Mr Bickley and Mr Dellavedova to PEAK, relying on PEAKs knowledge and experience with shoe manufacturing and design to provide solutions. The evidence does not demonstrate that knowledge sought by the Claimed Activities went beyond validating a simple progression from what was already known and went beyond merely implementing existing knowledge in a different context.

55    The applicant submits that the addition of the mesh to the upper was new knowledge. In the Development History, it was recorded that the applicant was testing whether the strengthened mesh under the 3D printed KPU provided additional stiffness and a reduction in the movement of the upper and sidewall and this process, the 3D printing, was first introduced, and it was the first time it had been done on a shoe...PEAK advised Mr Bickley that the 3D printed mesh was a new manufacturing process that they would use for this prototype and it was new to basketball shoes generally, but it was certainly new to PEAK. However, Mr Bickley’s oral evidence was that the feedback was that the shoe was too heavy and clunky, and the mesh upper was PEAK’s suggestion. The decision to use that particular type of material would have been PEAKs decision, Mr Bickley said that the decision to change the material of the upper to lighter weight material was his, given to PEAK to find a solution. This evidence demonstrates that the development and manufacture of the mesh upper was plainly undertaken by PEAK. There is no evidence to demonstrate that the applicant was involved in the actual design or development of the upper mesh or that its development involved a systematic progression of work based on principles of established science nor formed part of the Claimed Activities.

56    For these reasons, I am not satisfied that the Claimed Activities were conducted for the purpose of generating new knowledge.

Decision

57    None of the Claimed Activities were core R&D activities within the meaning of subsection 355-25(1) of the ITAA 1997. Rather, the Claimed Activities consisted of the modification of previously known athletic shoe design features to suit the personal preferences or requirements of an individual player, namely Matthew Dellavedova. Accordingly, none of those Activities can be supporting R&D activities for the purposes of subsection 355-30(1) of the ITAA 1997.

58    The decision under review is affirmed.

SCHEDULE 2

NOTE

    Headings are adopted from the Reasons. Underlined text indicates overlap.

    ACS means Applicant’s closing submissions to the Tribunal

    RCS means Respondent’s closing submissions to the Tribunal

Documentary Evidence

Claimed activities