Home » News » New Administrative Review Tribunal Case Activities NOT Eligible under the R&D Tax Incentive

New Administrative Review Tribunal Case Activities NOT Eligible under the R&D Tax Incentive

A recent Decision dated 30 January 2025, Body by Michael Pty Ltd and Industry Innovation and Science Australia (Taxation and business), has found a company’s registered activities were not eligible under the R&D Tax Incentive.

This is the first matter handed down by the new Administrative Review Tribunal of Australia (with previous cases at this level of court handled by the old Administrative Appeals Tribunal).

The project under review in the case was entitled “BBM stress release system (new innovated services).”, and specifically a registered Core Activity of this project titled “Activity 1”. This activity related to “an experiment with a mental health treatment, which will include the creation and development of several equipment prototypes and laboratories” and “a tool system and … mobile App (Body by Michael)”.

The dispute was focused on a R&D registration in the FY19 period, on which Industry Innovation and Science Australia (IISA) made an initial finding in April 2022, then an internal review decision in April 2023. This Administrative Review Tribunal case related to a review of IISA’s 2023 internal review decision.

The main points to be considered by the Administrative Review Tribunal were:

(a) Whether Activity 1 or any part of Body by Michael Pty Ltd’s (BBM’s) activities met the definition of core R&D activities as defined in subsection 355-25(1) of the ITAA 1997.

(b)  Whether Activity 1 was excluded from the definition of core R&D activities by virtue of paragraph (d) of subsection 355-25(2) of the ITAA 1997. Paragraph 355-25(2)(d) of the ITAA 1997 provides that ‘research in social sciences, arts or humanities’ is excluded from being within the scope of core R&D activities.

(c)   If the answer to paragraph ‎(a) is yes in relation to any part of BBM’s activities, whether the remainder of Activity 1 met the definition of supporting R&D activities in section 355-25(1) of the ITAA 1997.

The activities were ultimately found by the Administrative Review Tribunal to not be eligible as R&D Activities for a number of reasons, including that the tribunal was:

• Not satisfied that “the outcome of those activities could not be known or determined in advance on the basis of current knowledge, information or experience” available in the 2019 income year;
• Not able to establish a progression of work;
• Not able to be satisfied from the evidence a hypothesis was present in the 2019 year. That conclusion adversely impacts the issue of whether there was an experiment in the 2019 year;
• Not satisfied that BBM’s activities in 2019 were “conducted for the purpose of generating new knowledge.”

However, interesting points in this case arise from the Tribunal’s comments around the scope of the 355-25(2) exclusion relating to ‘research in social sciences, arts or humanities’. There has previously been little (or possibly no) case law on this exclusion and the prime guidance on the matter has historically been the AusIndustry Guide to Interpretation.

The Administrative Review Tribunal noted the following on the scope of the 355-25(2) exclusion relating to ‘research in social sciences, arts or humanities’:

• ‘Paragraph 355-25(2)(d) of the ITAA 1997 provides that “research in social sciences, arts or humanities” is excluded from being core R&D activities. I have found above that for several reasons, BBM’s activities in 2019 are not core R&D activities, so strictly this matter does not need to be considered. However, for completeness, and because there is no case law on this particular provision, I do so below. I have concluded that paragraph 355-25(2)(d) of the ITAA 1997 would not apply to exclude BBM’s activities if they had been core R&D activities.
• Considering the arguments, IISA’s focus is on BBM’s six pillars project being research in social sciences. IISA’s conclusion on this aspect was put very weakly – that it “appears to” apply. Presumably it was put in this weak manner in the internal review decision as part of IISA’s ongoing complaint that it had insufficient details of BBM’s activities. IISA’s position was, in essence, that in ordinary meaning “social sciences” is the study of human activity, and that BBM’s project related to psychology (in the sense, presumably, of behaviours and habits) and mental health. BBM’s argument is that its six pillars program was health‑focussed, medical or biomedical in nature, and that IISA’s suggestion it was research in social sciences was incorrect.
• Taking into account the context, “social sciences” is connected to arts and humanities. It can be maintained under the noscitur a sociis principle of statutory interpretation that those later concepts assist to determine the meaning of “social science.” I note that to a limited degree IISA’s R&D Tax Incentive Guide to Interpretation supports that approach. It refers to the following non-exhaustive list as falling within the social sciences exclusion – anthropology, business, classics, communication studies, dance, economics, education, fine art, geography, history, literature, music, performing arts, philosophy politics, psychology (other than neuropsychology), sociology, theatre, visual arts.
• In terms of purpose, the social sciences exclusion was first enacted by the Income Tax Assessment Amendment (Research and Development) Act 1986 (Cth). By way of section 7 of that Act, amongst other matters, subsection 73B(2) was inserted into the Income Tax Assessment Act 1936 (Cth), providing that specified research was not “systematic, investigative or experimental activities” which meant that those matters could be “research and development activities.” Included amongst those specified matters was “research in social sciences, arts or humanities.” There is nothing noted in the 1986 EM that directly assists in the interpretation of social sciences. In context though, the R&D regime is about industry R&D such as products and processes – not academic research.
• Cases confirm that broadly, the plain meaning cited by IISA is correct, that is, that “social science” is about human behaviour/activity. Other resources reviewed by the Tribunal to determine ordinary meaning provide that “social science” involves:
  • “[T]he study of individuals, communities and societies and their interactions with each other, and their built, technological, and natural environments.” 
  • “The social sciences include cultural (or social) anthropology, sociology, social psychology, political science, and economics. Also frequently included are social and economic geography and those areas of education that deal with the social contexts of learning and the relation of the school to the social order. … Historiography is regarded by many as a social science. … The study of comparative law may also be regarded as a part of the social sciences.”
  • In relation to health, the Academy of the Social Sciences in Australia includes “health” as a social science discipline. However, it is included in “social science” to the extent of “public health”,for example, considering issues such as health ethics, social factors influencing health (for instance, the role of prejudice and discrimination in health policy and the impact of socioeconomic position on health inequality) and the history of health care. This is as opposed to health per se being a “social science.”
  • The Australian and New Zealand Standard Research Classification 2020 (as published by the Australian Bureau of Statistics) includes “sports science and exercise” under “health” within the overriding topic of “social science” when classifying research.
  • There is a distinction between social sciences and health and medical sciences, and the latter are said to be at the ‘intersection’ of social sciences.
• My conclusion is that mental health and physical health do not fall within the concept of “social sciences” in the ITAA 1997. Were this the position, medical research could not comprise core R&D activities and that cannot be seriously maintained to be correct.’

This case again highlights the importance of documenting and assessing activities in accordance with programme regulator guidance so as to minimise the likelihood of ending up in costly dispute with the regulators.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.