R&D Tax Incentive – Ineligible Core Activities

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What are ineligible core activities under the R&D tax incentive?

Ineligible core activities are those that do not meet the requirements set out under the R&D tax incentive scheme. These activities might seem like R&D but are explicitly excluded by legislation.

“We spent months on market research!” – That’s great for your business, but not for your R&D claim.

Why is this important to you?

Understanding which activities are ineligible for the R&D tax incentive can save you time, money, and headaches when submitting your claim. Many businesses mistakenly include ineligible activities, which could lead to their claim being rejected or reviewed by the ATO or AusIndustry. This is why getting it right the first time is crucial.

What should you do to avoid issues?

You need to ensure that your R&D activities are truly core activities as defined by the legislation. That means your work must involve experimentation where the outcome is uncertain, and not fall into one of the excluded categories, such as market research or routine software development. Reviewing your activities with an R&D tax consultant like Bulletpoint can help you make sure you’re on the right track.

“But this project improves efficiency!” – Efficiency studies don’t qualify as core R&D.

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Understanding the Legislation

When it comes to determining what activities qualify as core R&D under the R&D tax incentive, the legislation is very specific. According to Section 355.25 of the Income Tax Assessment Act 1997 (source), core R&D activities must meet the following criteria:

Outcome uncertainty – The result of the activity cannot be known or determined in advance using existing knowledge.
Systematic progression of work – The work must follow a methodical process from hypothesis to experiment, observation, and evaluation, leading to logical conclusions.
Purpose of generating new knowledge – The activities must aim to create new or improved products, processes, or services.

However, the Act also lists specific exclusions from being considered core R&D activities. These include market research, routine software development for internal use, and routine testing. Failing to correctly identify activities under these exclusions could lead to the disqualification of your claim, or worse, a review by the ATO or AusIndustry.

To ensure your activities align with this legislation and avoid claiming ineligible activities, it’s crucial to consult the legislation or seek advice from an experienced R&D tax consultant like Bulletpoint.

What Activities Are Specifically Excluded?

The R&D tax incentive aims to encourage innovation, but it comes with strict rules about which activities qualify. Certain activities, regardless of their value to your business, are excluded under Section 355.25 of the Income Tax Assessment Act 1997. These exclusions are designed to ensure that only genuine research and development activities, which generate new knowledge or technological advancements, are eligible for the incentive.

Here’s a breakdown of what cannot be claimed:

Market research or sales promotion – These activities, such as consumer surveys, product testing for market purposes, or promotional campaigns, are commercial in nature. They do not generate new knowledge or involve experimentation, which are key requirements for R&D.
Geological exploration or drilling – Activities focused on locating or assessing mineral or petroleum deposits do not count as R&D. Whether your business is prospecting for new deposits or refining the understanding of existing ones, these tasks are excluded.
Routine testing and analysis – Routine processes, such as quality control or calibration of equipment, are not considered R&D. These tasks don’t involve experimental research or development of new processes, making them ineligible for the incentive.
Management and efficiency studies – Evaluating your company’s operational efficiency through surveys or studies doesn’t contribute to new technological knowledge. While these might improve your business, they don’t meet the criteria for core R&D activities.
Research in social sciences, arts, or humanities – These fields, while valuable in other respects, do not involve technological or scientific experimentation that the R&D tax incentive is designed to support.
Commercial, legal, or administrative activities – Tasks related to managing intellectual property, such as applying for patents or handling licences, are necessary for business but do not involve new research or development. These activities are therefore excluded.
Compliance with statutory requirements – If your activities are focused on meeting existing regulations, such as testing products to maintain standards, they do not qualify. The R&D tax incentive is for new innovations, not for ensuring compliance with existing standards.
Reproducing existing products or processes – Copying an existing system, whether by reverse engineering or using publicly available information, doesn’t involve creating new knowledge. Therefore, it cannot be claimed as R&D.
Internal software development – Software developed for your business’s internal use, such as administrative systems, does not meet the criteria. The incentive is meant to support software projects that push the boundaries of technology, not streamline internal operations.

These exclusions are in place to keep the focus on activities that genuinely push the boundaries of science and technology. Misunderstanding or misclassifying your activities could lead to a denied claim or a costly review by the ATO or AusIndustry.

“Our patent process was lengthy!” – Unfortunately, patenting isn’t eligible for the R&D incentive.

Why Are These Activities Excluded?

The R&D tax incentive is designed to support businesses undertaking risky, experimental activities that generate new knowledge or technological advancements. The activities listed above are excluded because they don’t fit within this scope. Let’s explore why:

Routine business tasks such as market research or compliance activities are focused on business operations, not the advancement of technology or science. These tasks might improve how you run your business, but they don’t create anything new.
Geological exploration and similar activities may involve technical processes, but they are based on established methods of discovery rather than generating new knowledge. The incentive is intended to support projects that test scientific hypotheses and result in technological breakthroughs.
Administrative tasks, such as applying for patents or managing legal aspects of a project, are important for protecting intellectual property, but they do not involve experimentation or the creation of new products, processes, or knowledge.
Software developed for internal use is excluded because the incentive aims to support projects that create advancements in technology, rather than tools for internal administration.

Essentially, these activities are excluded to ensure that the R&D tax incentive is directed toward genuine innovation. The incentive is meant for businesses that are undertaking challenging, experimental projects—not for those performing routine business functions or commercially focused activities.

Need help distinguishing your eligible R&D activities? Bulletpoint has successfully lodged over 500 claims and has the expertise to ensure your application meets the strict eligibility criteria. With our decade of experience, we’ll help you avoid mistakes and maximise your R&D tax benefits.

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Why is Research in Social Sciences Excluded from the R&D Tax Incentive?

Research in the social sciences, which includes fields like economics, psychology, sociology, and political science, is explicitly excluded from the R&D tax incentive. While this type of research is valuable in understanding human behaviour, society, and market trends, it doesn’t meet the criteria set out by the Income Tax Assessment Act 1997 for core R&D activities.

Here’s why:

No technological or scientific experimentation – The R&D tax incentive is focused on activities that involve systematic experimentation based on established scientific principles, where the outcome cannot be determined in advance. Social science research generally doesn’t involve this type of experimental progression. Instead, it often involves qualitative research, surveys, or observational studies, which are not considered experimental in the scientific sense.
Lack of technological advancement – The incentive is designed to support advancements in science and technology. Social sciences, while contributing to knowledge in their own fields, do not typically lead to the development of new products, processes, or technological innovations.
Not aimed at generating new knowledge in science or technology – Activities in social sciences usually aim to understand social phenomena, human behaviour, or economic trends. This kind of research doesn’t align with the R&D tax incentive’s purpose of fostering innovation in technology, engineering, or physical sciences.

This exclusion is important to ensure that the R&D tax incentive remains focused on supporting activities that push the boundaries of science and technology. If your business is conducting research in social sciences, it won’t qualify under the R&D tax incentive, but there may be other funding opportunities or grants better suited to this type of work.

“But I’m developing a great product!” – If you’re not experimenting, AusIndustry doesn’t care.

Social Sciences in Software Projects: Why They’re Excluded from Core R&D Activities

When it comes to software development, it’s easy to assume that any research connected to your project might qualify for the R&D tax incentive. However, if your research involves social sciences, it’s likely to be excluded as a core R&D activity. Here are a few common examples of how social sciences often come into play in software projects—and why they don’t meet the criteria for eligible R&D activities:

User Behaviour Studies – Let’s say you’re developing a new app and spend time researching how users interact with current products in the market through surveys, focus groups, or interviews. While this research may be essential for shaping your product, it falls under social sciences and is aimed at understanding human behaviour, which isn’t considered a core R&D activity.
Market Testing for User Preferences – If you conduct A/B testing to evaluate user preferences or attitudes toward a new feature or design, that’s considered market research. Even though it’s closely tied to your software development, it’s focused on consumer behaviour rather than advancing scientific or technological knowledge.
Economic Feasibility Studies – You might invest in an analysis of the potential economic impact or market viability of your new software product. While this can be important for business decisions, it’s an economic analysis, which is a branch of social sciences and therefore ineligible as a core R&D activity.
Psychological Research for User Experience (UX) Design – If your software project involves understanding how users emotionally respond to certain interfaces or how cognitive load affects usability, these fall under psychology, a social science. Although it’s integral to the design process, this research doesn’t involve experimenting with new technology or advancing scientific principles in a way that qualifies as core R&D.

Internal Software Development: Making It Eligible by Focusing on White Labelling or External Use

While internal software development—such as systems created for streamlining your business operations—doesn’t typically meet the criteria for the R&D tax incentive, there are ways to make your project eligible. A key strategy is to shift your software from being solely for internal administration to a project with an outward focus or potential for white labelling. By developing software that could be used or customised by other businesses, or by focusing on customer-facing innovations, you may bring your project into the realm of eligible R&D.

Here’s how you can make your software project eligible:

White labelling potential – If the software you’re developing for internal use has the potential to be sold or licensed to other businesses, it moves from being purely administrative to having a broader, external application. For example, if you’re creating a tool for managing your internal workflow but you develop it in such a way that it could be adapted for other businesses, that opens up eligibility. The key is that your software needs to have external value and application beyond your own company.
Customer-facing innovations – Another way to qualify your software project is to focus on customer-facing aspects. If part of your project is aimed at enhancing how customers interact with your business or if it includes novel features aimed at the market, this could involve eligible R&D. For example, building a unique e-commerce platform for customers or developing software that automates client services with new AI capabilities could qualify, as the focus is on solving external-facing challenges rather than just streamlining internal operations.
Starting with internal use, but with external scalability – If you’re developing software primarily for your own company’s use, but your goal is to eventually scale and offer it to others, you may still be eligible. The idea is that your use case starts with your business, but the R&D process is oriented towards creating a product that has a broader commercial application. For instance, creating an innovative data management tool for your company with plans to white-label or sell the tool to other industries would likely involve the necessary experimentation and innovation to qualify.

Example: Making Internal Software Eligible

Let’s say your company is developing a CRM system for managing client interactions. On its own, this would be considered internal software and ineligible for the R&D tax incentive. However, if you develop it with the intention of selling a white-labelled version to other companies, or if the software includes customer-facing features with new technologies, such as AI-driven customer insights or predictive analytics, you’ve now moved into the territory of eligible R&D. The project’s focus shifts from internal use to solving external challenges, making it a stronger candidate for the R&D tax incentive.

How to Ensure Eligibility

To ensure your internal software development is eligible for the R&D tax incentive, focus on:

Potential external applications or white-labelling – Ensure the software has value beyond your own business.
Customer-facing innovations – Highlight any features designed for customer interaction or market use.
Technological advancements and experimentation – Make sure that your project involves overcoming technical challenges through experimentation.

Need help structuring your software project to qualify for the R&D tax incentive? At Bulletpoint, we’ve successfully lodged over 500 R&D claims and have extensive experience guiding businesses through AusIndustry and ATO reviews. Book a meeting, call us on 1300 658 508, or send us a message to maximise your claim and ensure your software development project meets the eligibility criteria.

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They Can’t Be Core Activities, But Can They Be Supporting Activities?

While certain activities like market research, social sciences, and internal software development are excluded from being core R&D activities, you might wonder if they can still be claimed as supporting activities under the R&D tax incentive. The answer is yes—in some cases, excluded activities can be considered supporting activities, but only under specific conditions.

Here’s what you need to know:

What is a supporting activity? – A supporting activity is one that is directly related to the core R&D work. These are activities that help enable the core experimental process but do not, by themselves, generate new knowledge or involve experimentation. For an excluded activity to be considered supporting, it must have a direct, close connection to the eligible core R&D activities and must be necessary for the core work to proceed.When can excluded activities be supporting activities? – To qualify as a supporting activity, the work must be directly related to the core R&D. For instance:

Market research could be considered a supporting activity if it is required to test the viability of a product resulting from your core R&D work.
Social sciences research might be a supporting activity if it helps inform the design of a new product being developed through core R&D, though it cannot stand as R&D on its own.
Internal software development could be a supporting activity if it is needed to facilitate the running of a core R&D project, like building a platform to collect data from experimental tests.
Key consideration – The key point to remember is that supporting activities cannot stand alone. They must always be part of a larger core R&D project, and they must be essential to the experimental process. Routine activities like market research or compliance work are not enough on their own to qualify as R&D, but they may be claimable if they are necessary to advance the core R&D process.

What should you do?

When assessing whether your activities qualify as supporting activities, consider whether they are integral to the core R&D activities. For example, does your market testing directly impact the core R&D project? Is the software development you’re doing vital to carrying out the experimental process? If so, you may be able to claim these as supporting activities.

Need help determining your supporting activities? Bulletpoint can guide you through the process of identifying and documenting supporting activities, ensuring they are eligible and directly linked to core R&D. With over 500 successful claims and a decade of experience, we know how to structure your claim to maximise your R&D benefits.

Book a meeting, call us on 1300 658 508, or send us a message to ensure your supporting activities are compliant and connected to your core R&D work.

How to Properly Document Supporting Activities

One of the most common pitfalls when claiming supporting activities is poor documentation. Even if an activity is closely linked to your core R&D, you need to demonstrate that connection clearly to the ATO or AusIndustry. Here’s what you should consider documenting:

Purpose of the activity – Clearly state why the activity was necessary to advance your core R&D project.
Relationship to core R&D – Explain how the activity directly supports the experimental process.
Records and evidence – Keep detailed records of the time spent, costs incurred, and the outcomes of the supporting activity. This includes invoices, reports, and any data collected.

Good documentation is key to ensuring that your claim is successful and withstands any potential audits.

Don’t Risk Your R&D Claim – Work with Bulletpoint

Claiming ineligible activities as part of your R&D tax incentive application can lead to serious consequences, and it’s not a risk you want to take. If the ATO or AusIndustry reviews your claim and finds it non-compliant, you could face:

Denial of your claim – If ineligible activities are included, all or part of your claim could be rejected, potentially costing you tens of thousands in tax offsets.
Audits – A non-compliant claim can trigger a full audit by the ATO, leading to significant disruptions and financial costs.
Penalties and interest – If your claim is found to be non-compliant, you could be required to repay the tax offsets, along with interest and penalties.

This is why it’s critical to ensure that every activity in your claim is eligible, properly documented, and compliant. At Bulletpoint, we have over 10 years of experience in lodging successful R&D claims, with more than 500 claims submitted and defended during ATO and AusIndustry reviews. We know what it takes to build a strong, compliant application that can withstand scrutiny.

Bulletpoint is Australia’s highest-rated R&D tax consultant, with over 250 Google reviews averaging 4.8 stars. Our experience means we know how to maximise your claim while staying fully compliant with the law. We’ve helped businesses just like yours avoid the costly consequences of claiming ineligible activities and get the most out of their R&D tax incentive.

Ready to ensure your R&D claim is rock solid? Book a meeting, call us on 1300 658 508, or send us a message right now. Let us handle the complexity so you can focus on driving innovation in your business.

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Beware: AusIndustry’s Red Flag on “Trial and Error” Claims

In recent times, we’ve seen an increase in the number of letters issued by AusIndustry to companies that mention trial and error in their R&D tax incentive applications. The use of this phrase is a red flag for AusIndustry, and it’s likely that they’re conducting automated searches to flag any claims that include it. If your claim contains phrases like “trial and error,” there’s a good chance it will be flagged as non-compliant with the R&D tax requirements.

Here’s what happens:

The Warning Letter – AusIndustry may send you a letter highlighting concerns that your claimed activities don’t meet the definition of core R&D activities. For example, they may state that trial and error suggests a lack of systematic progression of work, which is essential for eligibility. Example: In a recent Notice of Integrity Check, a company received feedback stating their use of “trial and error” demonstrated that their activities were not hypothesis-driven
Your Application Is Now Flagged – Even though you may be safe for now, the warning letter effectively places a red flag on your application. This means AusIndustry will be keeping an eye on your future claims, and if you lodge again without addressing these concerns, you’re highly likely to face a full audit.
Potential Audit Risk – Once flagged, the scrutiny will increase significantly. If you lodge future claims without clearly demonstrating a systematic progression of work, you risk a comprehensive review or audit by AusIndustry or the ATO. This could result in significant delays, additional paperwork, and even the denial of your claim.

The message is clear: Avoid using “trial and error” at all costs. Instead, focus on demonstrating a structured, hypothesis-led approach to your R&D.

If you’ve already received a warning letter or need help making sure your claim meets the requirements, Bulletpoint can help. With over 500 successful claims and experience navigating audits, we’ll ensure your next submission stands up to scrutiny. Book a meeting or call us at 1300 658 508 before your next lodgement to avoid audit risks!

Need Help Navigating the R&D Tax Incentive? We’re Here to Help

At Bulletpoint, we’ve seen first-hand how easily companies can fall into the trap of using terms like “trial and error” in their R&D applications, leading to red flags from AusIndustry and potential audits from the ATO. With over 10 years of experience and more than 500 successful R&D lodgements, we understand the intricacies of the R&D tax incentive better than anyone.

We’ve successfully defended clients against both AusIndustry and ATO reviews and audits, ensuring their claims stand up to scrutiny. Our expertise means we know how to craft applications that can withstand intense reviews—we don’t just submit claims, we defend them.

If you want to make sure your next R&D claim is bulletproof, reach out to us today. With a 4.8-star rating from over 250 Google reviews, you can trust Bulletpoint to get it right the first time.

Check out our Google reviews, or better yet, book a meeting with us today! You can also call us at 1300 658 508 or send a message—we’re here to help you maximise your R&D tax incentive without the hassle of audits or reviews..

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Our approach is straightforward and personable, focusing on cutting through the jargon to help businesses truly understand the definition of R&D in government terms. We’re passionate about what we do, and our clients appreciate this, often commenting on the difference our expertise has made to their businesses. They’ve praised us for uncovering grants they wouldn’t have otherwise known about and for making the whole process less stressful for them.

We’re proud to have an average rating of 4.8 stars from over 250 Google reviews. Despite our success, we continue to strive for improvement, learning from every piece of feedback we receive.

At Bulletpoint, we excel in helping businesses navigate the complexities of the R&D tax incentive process, ensuring they reap the benefits they deserve. As experts in our field, we’re well-versed in what works and what doesn’t when it comes to aligning businesses’ perceptions of R&D with the government’s eligibility criteria.

So, if you’re looking for accessible expertise and a proven success rate, you’ll find it with us at Bulletpoint. We’re ready to guide you through the R&D tax incentive process with a blend of professionalism and personality, ensuring your experience with us is not just successful, but enjoyable as well.