To the point—the R&D Tax Incentive is not issued for the general everyday business activities.
You may have thought that a fantastic discovery your team came up with during the normal operation qualifies for a tax offset, but the Australian Tax Office thinks in a different way.
The Fine Line Between Innovation and Regular Operations
Have you attempted to classify your standard software testing as R&D that is innovative? You are among many. Beginning in 2017, authorities have been emphasising the businesses which attempt to portray normal business operations as pioneering and groundbreaking research.
Please take one of our clients, who runs a small software company. His team tests every product before launch—it’s standard practice. When his accountant suggested claiming these tests for the R&D Tax Incentive, he nearly got caught in a common trap. Testing is an essential part of software development, not an experimental activity to create new knowledge.
This distinction isn’t just for tech companies. The general rule is that no active business in Australia can claim RDTI under this rule, which applies to every sector, including manufacturing and agriculture.
What Actually Qualifies for the R&D Tax Incentive?
The tax office makes a clear distinction between the two types of activities:
Core R&D Activities
These are experimental activities that aim to create new knowledge through a structured process:
- These are guided by scientific or engineering methodologies
- The result is not predetermined
- They involve genuine technical risk
- They are carried out to deal with some particular technical issues
For example, developing a brand-new manufacturing process that’s never been tried before could qualify.
Supporting R&D Activities
These activities do not create any new knowledge on their own but provide direct support for the core R&D activities:
- Design work for experiments
- Transportation of materials for testing
- Production of prototype materials
However, the key point is that you have to prove that these supporting activities are purposefully or predominantly the ones that enable core R&D work.
Real-World Examples: When Claims Get Rejected
In 2017, a mining company claimed their excavator and explosives projects as R&D. The tribunal shot them down, stating these were simply “conducted during the ordinary business of mining”.
Similarly, the ATO has warned agricultural businesses against the “whole-farm” approach. You can’t claim costs for an entire farm operation and call it research—that suggests limited technical risk and no clear focus on generating new knowledge.
How to Tell if Your Activity Qualifies
Ask yourself these questions:
- Would you be doing this activity regardless of the tax incentive?
- Is the outcome generally predictable based on existing knowledge?
- Is this a standard practice in your industry?
- Are you following established processes without significant modification?
If you answered “yes” to any of these, you’re probably looking at business as usual and not eligible for the R&D tax incentive.
Making Supporting Activities Count
It would be a mistake to completely write off your regular operations. Certain costs related to day-to-day business can be claimed as supportive activities if they are directly linked to your core R&D work.
For instance:
- If you’re designing software specifically to help with an experimental process
- If you need to transport special materials for your R&D testing
- If you’re using part of your workspace exclusively for R&D staff
The essential factor is reasonable and fair distribution. In the case of rent, concentrate on the usage of floor area by the R&D team. For workers’ compensation, focus on the proportion of payroll allocated to R&D employees.
Documentation: Your Best Defense
The responsibility to prove your claim stands with you as mandated by ATO. You should maintain the following detailed records:
- Your hypothesis and experimental design
- How did you identify technical uncertainties
- Your methodical approach to solving these uncertainties
- Results and what new knowledge was generated
- How costs were reasonably apportioned
Also read: Avoid Penalties: 8 Must-Know Insights for R&D Tax Incentive Compliance Audit
Tips to Strengthen Your R&DTI Claim
- Be specific about what’s new: Instead of claiming “product development”, focus on the specific technical challenge you’re trying to solve.
- Separate routine from research: Create clear distinctions between your regular operations and true experimental activities.
- Use digital tools: Track your R&D projects separately with dedicated project management software.
- Get professional advice early: Consult with experts like Pattens Group, who specialise in R&D claims, before you submit.
Common Mistakes to Avoid When Claiming R&D Tax Incentive
- Claiming the whole project without separating R&D components
- It is also wrong to include routine quality assurance testing.
- Misclassifying minor improvements as innovation
- Not keeping the proper records and documentation of the experiment.
The Bottom Line
The R&D Tax Incentive stands out as a great support for businesses that are breaking the limits of technology and creating new knowledge. It shouldn’t be used to support your routine and everyday operations. By distinguishing between real research and development (R&D) and simply conducting business, you get the chance to submit accurate and valid claims that are not subject to question and take full advantage of the valuable government program.
Don’t risk your R&D claim being rejected or facing costly audits. Our team at Australian R&D Tax Specialists has over three decades of experience helping businesses like yours secure government grants with a 100% success rate.
Ready to maximise your R&D tax benefits while staying fully compliant? Contact Pattens Group – Australian R&D Tax Specialists today for a no-obligation assessment of your R&D activities. With our expert assistance, you will be able to find genuine R&D opportunities and document your projects impeccably, and our staff will lead you through the process.
Contact us today to check the potential value of your innovation efforts. It is necessary to remember that business as usual is not eligible for RDTI; however, with the right guidance and support, your innovations in business might stand a chance to receive the valuable funding it deserves.
