R&D Tax: Excluded Activities

The R&D Tax Incentive program is broad based and covers a diverse range of industries and experimental work. But there is a selection of activities that are excluded from being registered as core R&D activities under the program, as described in section 355-25(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

What is excluded from being a core R&D activity?

In brief, activities that are excluded from being registered as core R&D include activities involving:

• Market research, market testing, market development, or sales promotion - this includes consumer surveys

• Prospecting, exploring or drilling for minerals or petroleum for the purpose of discovering deposits or determining a more precise location, the size or the quality of deposits

• Management studies or efficiency surveys

• Research in social sciences, arts or humanities

• Commercial, legal and administrative aspects of patenting, licencing or other IP activities

• Compliance with statutory requirements or standards

• Reproduction of a commercial product or process

• Developing, modifying or customising software used for the dominant purpose of the claimant’s internal administration. 

For further examples for each type of excluded core activity, the Department of Industry, Science and Resources have published the ‘R&D Tax Incentive: Guide to Interpretation’ as a helpful reference.

Does this mean I can’t claim these activities at all?

Even though these activities can’t be registered as core R&D activities, it is possible that they can still be registered for the R&D Tax Incentive as supporting activities. This is only possible where they are undertaken for the dominant purpose of supporting a registered core R&D activity.  

To assess this, an applicant will need to consider how and when the activity was conducted in relation to the registered core activity, and why the activity was required to support the core R&D and experimentation. In assessing whether the dominant purpose test is able to be met it is important to determine:

• whether there were any other purposes for conducting the activity,

• whether any of the identified purposes for conducting the activity were more influential than the support of the core R&D activity,

• why the activity needed to be completed as part of the systematic progression of work to address the central R&D hypothesis, and

• whether the activity could be considered beyond the scope of normal work if the core activity did not occur?

Once it is established that the activity was conducted for the dominant purpose of supporting the core R&D activity, it may then be registered as an eligible supporting activity and the costs associated with the activity included as part of the R&D Tax Offset calculation.

 Examples

A program developed for learning linguistic patterns, where the purpose is to seek knowledge to improve teaching methods, would be an excluded activity as it constitutes research in social sciences.

However, if this knowledge surrounding teaching methods was used to develop a sensor capable of detecting brain waves to tailor an individual’s learning experience, it could be said that the dominant purpose of the study was to support the development of the sensor rather than to understand how people learn. On this basis, an argument may be able to be made that activity is claimable as an eligible supporting activity.

Patent and other IP protection activities are typically within the scope of core R&D activity exclusion related to commercial, legal and administrative aspects of patenting.

However, if a patent or prior art search was conducted with the intent of gathering information to define a hypothesis, determine the scope of existing knowledge, and inform the design of a set of experiments and trials to test a defined hypothesis, then it may be possible to establish that the dominant purpose of this activity is to support and facilitate experimental activities. Thus, it may be eligible to be registered as a supporting activity.

These examples are not exhaustive, and applicants need to assess their own individual circumstances. In all cases, regardless of the type of core activity exclusion, the activity must be able to meet all requirements of a dominant purpose supporting R&D activity to be registered as part of an R&D Tax Incentive claim.  

Case Update: Body By Michael and the Social Sciences Exclusion

A recent decision by the Administrative Review Tribunal in the Body by Michael (BBM) case offers some valuable clarification on the social sciences research exclusion in section 355-25(2)(d) of the ITAA 1997. 

In the ruling, the Tribunal noted that whilst the core R&D activity exclusion provision excludes "research in social sciences, arts or humanities" from being core R&D, this must be interpreted in context.  

The Tribunal emphasised that health-focused research, particularly where it is medical or biomedical in nature, does not fall under the social sciences exclusion, even if it touches on behavioural or psychological aspects. It affirmed that “mental and physical health do not fall within the concept of ‘social sciences’” for the purposes of the R&D Tax Incentive. To conclude otherwise, the Tribunal noted, would effectively disqualify medical research from the incentive, which is clearly not the intention of the legislation.

Feel free to reach out to our team of experts if you want to understand the R&D activity requirements or need advice to ensure your R&D claims remain compliant.