Excluded R&D activities under the R&D Tax Incentive

Market research, market testing or market development, or sales promotion (including consumer surveys) are activities that cannot be core R&D activities for the R&DTI. Sometimes, companies undertake these activities to resolve market or economic uncertainty, rather than technical or scientific uncertainty.

Activities that this exclusion covers include those to:

• discover consumer interest for products or services
• discover consumer preferences about the characteristics of products or services
• promote interest in, or the consumption of, products or services.

Example

You need to conduct experiments to develop a new product. You use the information you collect from a consumer survey to help you design the experiments you conduct.

If your dominant purpose is to support your core R&D activity, then this may be eligible as a supporting R&D activity if it is also directly related to your core R&D activity.

If your dominant purpose for collecting the information is to help you design a marketing strategy for your product or service, it would not be eligible as a supporting R&D activity. This is because your dominant purpose is not to support a core R&D activity.

Prospecting, exploring or drilling for minerals or petroleum for the purposes of one or more of the following:

• discovering deposits
• determining more precisely the location of deposits
• determining the size or quality of deposits

cannot be core R&D activities for the R&DTI.

If your activities involve prospecting, exploring or drilling for minerals or petroleum, assess whether you conduct them to discover deposits, determine the precise location of deposits, or determine the size or quality of deposits. If you conducted these activities for purposes other than those listed above, they are not excluded from being core R&D activities. For example, if you drill for samples that you analyse as part of an experiment.

This exclusion includes prospecting, exploring or drilling activities to:

• find deposits of minerals or petroleum
• pinpoint a more exact location of deposits
• find out how much of a mineral or petroleum is in a location
• analyse how pure a mineral or petroleum deposit might be
• determine the commercial value of a deposit.

What is petroleum?

Petroleum is defined in section 40.730(6) of the ITTA as:

• any naturally occurring hydrocarbon or naturally occurring mixture of hydrocarbons, whether in a gaseous, liquid or solid state; or
• any naturally occurring mixture of:
  • one or more hydrocarbons, whether in a gaseous, liquid or solid state, and
  • one or more of the following: hydrogen sulphide, nitrogen, helium or carbon dioxide
  • whether or not that substance has been returned to a natural reservoir.

The terms prospecting, exploring, drilling and minerals are given their ordinary meaning.

Example

You drill for mineral samples and analyse the samples to evaluate the quality of the deposit. You then use the information to design, conduct or evaluate experiments within a systematic progression of work to develop a new or improved mineral refining process. Where your dominant purpose when drilling for the mineral samples is to support your core R&D activity, then these activities may be supporting R&D activities if they are directly related to your core R&D activity.

If your dominant purpose is to determine whether you will be able to extract the minerals economically using established mining and refining processes, then they will not be eligible as supporting R&D activities.

Management studies and efficiency surveys are activities that cannot be core R&D activities for the R&DTI.

You need to assess whether you conduct activities to collect and evaluate information to help you to make decisions about the operations of your business or any other business. This exclusion covers those activities that study or survey management or business operations or their efficiency.

The exclusion includes studies or surveys you conduct to measure or evaluate certain data. For example:

• the energy efficiency of a business
• the productivity of employees, such as time and motion studies
• management capability
• cost savings for a business
• time-saving measures for a business.

The exclusion does not include studies or surveys unrelated to business or operational management you conduct as part of a systematic progression of work. For example, to measure or evaluate:

• the energy efficiency of a new or improved electronic product or device that you develop
• the physical efficiency of a new or improved product or process that you develop.

Example

You use the information you collect from an energy efficiency survey to help you to design and conduct experiments to develop a new building environmental management software.

If your dominant purpose for conducting the surveys is to support your core R&D activity, then they may be eligible as supporting R&D activities if they meet all requirements for supporting R&D activities.

If your dominant purpose is to help you decide how to use energy in your business, then your surveys would not be eligible as supporting R&D activities.

Activities that involve experimental and non-experimental research in social sciences, arts or humanities are activities that cannot be core R&D activities for the R&DTI.

When you assess your activities, you need to assess whether you conduct research in these areas, even if this is not your area of primary business operations.

In social sciences, arts or humanities, you conduct research when you gather or compare information, or conduct an experiment or some other inquiry or investigation.

Depending on the circumstances, the exclusion is likely to apply to these subject areas:

• anthropology
• business
• classics
• communication studies
• dance
• economics
• education
• fine art
• geography
• history
• literature
• music
• performing arts
• philosophy
• politics
• psychology (neuropsychology is not excluded)
• sociology
• theatre
• visual arts.

This list is not exhaustive. You should consider your individual circumstances when you assess whether your activities involve research in social sciences, arts or humanities.

For example, the exclusion covers activities you conduct that include:

• study of business or economic theory, functions or processes
• design, production or performance of artistic expression
• study of individuals, society, social functions or relationships
• study or the production of literature.

Examples

• You develop a mobile app for users to learn languages and your aim is a new teaching method that will result in faster or easier learning. The knowledge you seek is about the teaching method. Your activity would be excluded.
• You conduct a study of the learning styles of individuals. You assess that your study is excluded from being a core R&D activity as it involves research in social sciences. You use the information you collect from the study to help you design and conduct experiments to develop a new brain sensor. Through your core R&D activities, you aim to develop a sensor that can detect brain wave frequencies to tailor a learning experience for individual users. If your dominant purpose to conduct the study is to support your core R&D activity, then the study may be eligible as a supporting R&D activity. It will need to meet all requirements for a supporting R&D activity. If your dominant purpose to conduct the study is to help you understand how individuals learn, then it would not be eligible as a supporting R&D activity.

Intellectual property (IP) activities cannot be core R&D activities for the R&DTI.

Your ideas and inventions and the new knowledge you generate about them are your IP. If you conduct core R&D activities to generate new knowledge, then that new knowledge is your IP.

You might also generate IP in other areas of your business. Generally, activities that you conduct to generate IP are not covered by this exclusion.

For example, experiments you conduct to develop a new product or process that you intend to protect with a patent are not excluded from being core R&D activities for the R&DTI.

Yet, activities that you conduct to generate IP are not always core R&D activities.

For example, you invent a new product or process (your IP). You can develop it without the need for experiments because you can know or determine the outcome in advance. This would not be a core R&D activity for the R&DTI because it does not follow a systematic progression of work for which the outcome could not be known or determined in advance.

This exclusion includes commercial, legal and administrative activities you conduct to:

• gain rights to use or access IP from another party
• grant rights to another party to use or access your IP
• negotiate an IP sharing agreement
• negotiate non-disclosure agreements
• research, prepare and file an application to protect your IP.

Forms of IP covered by this exclusion include:

• designs
• domain names
• patents
• plant breeder’s rights
• trademarks
• your know-how or proprietary knowledge.

Example

You conduct a patent search to gather information to refine your hypothesis and design the experiments that you conduct to test your hypothesis.

If your dominant purpose for the patent search is to allow you to design and conduct your experiments, then this may be eligible as a supporting R&D activity. Your activity will need to meet all requirements for supporting R&D activities. If your dominant purpose is to establish a gap in the market for your products or services, it will be excluded.

Activities associated with complying with statutory requirements or standards including one or more of the following:

• maintaining national standards
• calibrating secondary standards
• routine testing and analysis of materials, components, products, processes, soils, atmospheres and other things

cannot be core R&D activities for the R&DTI.

Activities you conduct to meet a requirement or standard contained in legislation or that are associated with meeting such laws, cannot be core R&D activities for the R&DTI.

Activities that you must conduct to meet requirements or standards contained in legislation are covered by this exclusion. This includes activities that a regulator directs you to conduct as required under legislation.

You may need to comply with legal standards or requirements when conducting your R&D activities. Your R&D activities are not covered by this exclusion just because you must conduct them in a regulated manner.

Activities you undertake to show compliance with legal standards or requirements are covered by the exclusion.

Activities this exclusion covers include those you conduct where required by legislation to:

• show compliance with national standards
• calibrate a secondary standard with reference to a primary standard
• routinely test for compliance of your materials, components, products, or processes
• gain certification of your materials, components, products, or processes
• routinely test soils, atmospheres and other things for compliance with a legislative requirement. For example, requirements for environmental protection.

Examples

• Clinical trials you conduct to develop a new or improved drug or device are not excluded from being core R&D activities. Yet, activities that you must conduct to comply with the legal requirements of your clinical trial are excluded. They cannot be core R&D activities. This might include where you prepare and submit your application to a regulator to seek approval to conduct your trial where this application is required by legislation.
• Your business is a mining company, and the regulator requires you to produce an environmental impact statement under the relevant environmental legislation to show compliance for your site. You conduct a study to determine the potential impacts on flora and fauna in the area. This would be an excluded activity because the law requires you to conduct the study.

Qualifying as supporting R&D activities

Activities covered by this exclusion can be supporting R&D activities if the activities are directly related to a core R&D activity and your dominant purpose is to support one of your core R&D activities. This may include if you gather information such as the qualitative or quantitative data you need to conduct your systematic progression of work.

Examples of how activities may qualify as supporting activities

• You apply to the Therapeutic Goods Administration to gain approval to conduct a clinical trial. If your dominant purpose to gain approval is to allow you to conduct the trial, these activities can qualify as supporting R&D activities. They must be directly related to your clinical trial and your clinical trial must meet all requirements for core R&D activities.
• You conduct routine tests on your product to show they meet a statutory requirement or standard. If the reason you test some groups of products is to use them in core R&D activities, then testing these products can be supporting R&D activities.

Any activity related to the reproduction of a commercial product or process:

• by a physical examination of an existing system
• from plans, blueprints, detailed specifications or publicly available information

cannot be core R&D activities for the R&DTI.

Your activities are not excluded from being core R&D activities if you conduct them to:

• reproduce a product or process in some way other than those listed above
• develop a new or improved product or process
• develop a new or improved method for creating an existing product or process.

Excluded activities include those you conduct to:

• obtain documents that tell you how a product or process works, or how to produce it
• analyse a sample of a product to gain information about how to make the product
• collect data about the operating parameters of a production process, so that you can replicate the process.

Your activities to gather information, including qualitative or quantitative data about an existing product or process, can be supporting R&D activities. They must be directly related to your core R&D activity, and your dominant purpose must be to support your core R&D activity.

Example

You reproduce an industrial process from the information you find in academic papers or patents.

If your dominant purpose is to collect data to help you refine your hypothesis about how to improve the process or develop a new process, this can qualify as supporting R&D activities. If your dominant purpose is to understand the process so you can replicate it exactly, this will not qualify as supporting R&D activities.

Developing, modifying or customising computer software for the dominant purpose of use by any of the following entities for their internal administration (including the internal administration of their business functions):

• the entity (the developer) for which the software is developed, modified or customised
• an entity connected with the developer
• an affiliate of the developer, or an entity of which the developer is an affiliate

cannot be core R&D activities for the R&DTI.

If you conduct activities to develop, modify or customise computer software, you need first to assess if the software is for use by you, an entity connected with you, or an entity affiliated with you. If it is, you then need to assess if the dominant purpose of using the software is for either your (or that entity’s) internal administration, or the internal administration of your (or that entity’s) business functions.

Activities that you conduct to develop, modify or customise computer software include those to:

• design software
• write new code or modify existing code
• test software
• customise an off-the-shelf software package. For example, to make the software perform a different function.

This exclusion does not apply where you are developing, modifying or customising software and the dominant purpose is for use:

• by entities other than you, a connected or affiliated entity; or
• for purposes other than internal administration of a business or a business function.

Example

You have a range of software you sell to other businesses to use for their internal business administration (including internal administration of their business functions). Developing, modifying or customising your software products is not excluded from being a core R&D activity. This is because the dominant purpose of use is the internal administration of companies that are not connected or affiliated with you. You will need to assess that the activity meets the other requirements for an R&D activity for you to register it for the R&DTI.

How to determine if the exclusion applies to your software

To determine if the dominant purpose is use by you, or entities connected or affiliated with you, for internal business administration, you need to consider:

• which entities the software is being developed, modified or customised for
• how those entities will use that software
• the strength of each purpose and how important each is compared to the other purposes for using the software.

There may be several purposes for using software, but you can only have one dominant purpose.

The exclusion does not apply when you develop, modify or customise software for a dominant purpose of use by you, or entities connected or affiliated with you, other than for internal business administration. This may include software you develop, modify or customise that:

• forms part of an electrical or mechanical device, such as industrial equipment or consumer products
• you used to collect and analyse data from experiments
• is used by your customers and is unrelated to your internal administration.

You may assess your internal administration software development activities as core R&D activities that are not subject to this exclusion. If so, you should provide records that support your assessment around internal administration and your dominant purpose.

Activities covered by this exclusion may be supporting R&D activities if the activities are directly related to a core R&D activity and your dominant purpose for conducting those activities is to support a core R&D activity.

If you assess your activities as supporting R&D activities you will need to show how the software development, modification or customisation activities are directly related to your core R&D activities and how the dominant purpose of the activities was supporting at least one of those core R&D activities. You need to maintain records that support your assessment.

What is software for internal administration?

Software for internal administration functions include:

• business applications such as payroll and accounting, invoicing, ordering, quality control reports and information management
• management information systems
• enterprise resource planning.

Connected and affiliate entities

Your company is connected with another company if either entity controls the other entity, or both entities are controlled by the same third entity. Control is not limited to having more than 50% of the shares in the entity.

Your company is an affiliate with another company if that company acts or you can expect it to act according to the directions or wishes of your company.

These relationships do not apply simply because your company has a commercial relationship with another company – such as with a supplier.

The meaning of the terms connected and affiliate are defined in sections 328.125 and 328.130 of the ITAA.

Activities related to gambling services, gambling and gambling-like practices are excluded from being core or supporting R&D activities except if they are undertaken for the sole purpose of harm minimisation. 

An activity is conducted for a harm minimisation purpose if it is conducted for the sole purpose of generating new knowledge about minimising harm from: 

• gambling services (within the meaning of the Interactive Gambling Act 2001), or 
• gambling or gambling-like practices

in relation to a person or the Australian community. 

This exclusion is outlined under Schedule 4 – Exclusion of tobacco and gambling related activities from the R&DTI.

Examples

• A risk analytics company is developing and testing a new software method for forecasting events. The company compares prototype forecasting models against historical probability tables to determine whether the new method can more accurately predict the likelihood and timing of insured events.
  
  This is not an excluded activity. The activity does not relate to gambling services, gambling or gambling-like practices. The forecasting method is used to assess insurance risk, such as the likelihood and timing of insured events, and is not used to place, make, receive or accept bets, determine gambling odds, or operate a betting platform.
• A gambling operator has an online betting platform that needs to be updated to handle thousands of transactions per second during major international sporting events. It designs and evaluates a new method for allocating execution threads and reducing transaction processing times to achieve the required throughput.
  
  This is an excluded activity. The online betting platform is a gambling service because it is a service for the placing, making, receiving or acceptance of bets. Designing and evaluating the new method to handle large numbers of transactions is an activity that relates to this gambling service. The activity is not covered by the harm minimisation purpose because it is not conducted solely for the purpose of generating new knowledge about minimising harm.

Activities related to tobacco, as well as nicotine products and vaping goods, are excluded from being core or supporting R&D activities except if they are undertaken for the sole purpose of harm minimisation. 

An activity is conducted for a harm minimisation purpose if it is conducted for the sole purpose of generating new knowledge about: 

• the therapeutic use of therapeutic goods (within the meaning of the Therapeutic Goods Act 1989), or 
• ceasing the ingestion or transfer of nicotine into the human body.

This exclusion is outlined under Schedule 4 – Exclusion of tobacco and gambling related activities from the R&DTI.

Examples

• A pharmaceutical company is developing improvements to a therapeutic product designed to help people stop smoking.
  
  This is not an excluded activity. Although the activity relates to tobacco or nicotine use, it is conducted solely for the purpose of generating new knowledge about the therapeutic use of an improved smoking cessation product for minimising harm from tobacco.
• A company that manufactures vaping products is testing whether a tobacco extract can be used to reproduce the taste, mouthfeel and throat sensation of smoking in a new vape product. The company compares different tobacco extract concentrations, carrier liquids and flavour blends to assess whether consumers experience the product as more similar to smoking.
  
  This is an excluded activity. The activity relates to tobacco and vaping products because it uses a tobacco extract to develop or improve the sensory characteristics of a vape product. The activity is not conducted solely for the purpose of generating new knowledge about:
  • a therapeutic use of a therapeutic good for minimising harm from tobacco; or
  • ceasing the ingestion or transfer of nicotine into the human body.
  
  Instead, the activity is conducted to make the vape product more acceptable or commercially attractive to consumers by reproducing the taste or mouthfeel of smoking.