Core Technology

In brief

‘Core technology’ is technology that an R&D entity has acquired, or obtained the right to use, wholly or partially, for the purpose of one or more R&D activities conducted or to be conducted, where the purpose of those R&D activities is to further develop the technology. Additionally, if the R&D activities are an extension or completion of the activities that produced the technology, the technology is core technology. It is effectively an underlying or base technology that has been acquired to be developed further in one or more R&D activities by the R&D entity, as distinct from technology acquired as a tool to enable experimentation.

Under s 355-225(2) of the Income Tax Assessment Act 1997, a notional deduction under the R&D Tax Incentive program is not available for expenditure on the ‘core technology’ itself. The costs associated with further developing the core technology may still be eligible if the relevant criteria are met. Therefore, it is important that R&D claimants are aware of what constitutes ‘core technology’.

In detail

Expenditure on ‘core technology’ is expressly excluded from notional deduction under the R&D Tax Incentive. Such expenditure is defined in s 355-225(2) by reference to the purpose of the R&D activities and, alternatively, their connection to the activities that developed the core technology. Expenditure is incurred on core technology where: 

a) a purpose of the R&D activities was or is: 

i) to obtain new knowledge based on that technology; or 

ii) to create new or improved materials, products, devices, processes, techniques or services to be based on that technology; or 

b) the R&D activities were or are an extension, continuation, development or completion of the activities that produced that technology.

This definition is replicated in para 28E(2) of the Industry Research and Development Act 1986, which gives Industry Innovation and Science Australia the power to find that the technology is core technology for the R&D activities.

AusIndustry and the ATO provide limited guidance on the practical application of the core technology exclusion, notably in ‘Software-related activities and the R&D Tax Incentive’, published in April 2022, which provides an example of an eligible expense and of an excluded expense.

Where technology has been purchased to enable experimentation to take place – as opposed to being the subject of further development – it can be eligible. Below we provide illustrative, simple examples.

Examples: Eligible and ineligible technology acquisition expenses

The above examples are necessarily simple. In practice, it may be complex to determine if a specific technology acquisition – which under some circumstances may be at substantial cost – constitutes core technology. To obtain certainty about the notional deductibility of a specific technology expense, R&D entities may consider seeking a finding.

Takeaways 

Assessing the eligibility for a notional R&D deduction of costs incurred on acquiring, or acquiring the right to use, technology, must be done on a case-by-case basis with reference to the purpose of the R&D activities that use the technology, and their relationship to the activities that developed the technology. While some circumstances will be relatively straightforward to assess, others will be more complex, and may justify seeking a finding from Industry Innovation and Science Australia.

If you would like to discuss any of the topics mentioned above, please contact PwC’s R&D and Government Incentives team.