In brief
On 25 November 2024, the Federal Court dismissed Active Sports Management Pty Ltd’s appeal against an Administrative Appeals Tribunal (AAT) decision denying R&D tax incentives for the ‘Delly1’ basketball shoe. The AAT found the activities lacked systematic scientific progression and did not generate new knowledge, merely adapting existing designs based on subjective feedback. The taxpayer argued the AAT failed to consider their submissions and misapplied legal standards. The Court upheld the AAT’s decision, noting it independently evaluated the case and applied the correct legal framework, emphasising that subjective outcomes do not meet the scientific method required for eligible core R&D activities for the purposes of the Income Tax Assessment Act 1997 (Cth) (ITAA).
In detail
Active Sports Management Pty Ltd, an Australian company involved in importing and selling sports apparel, footwear and accessories, sought to register certain activities as ‘core R&D activities’ under s 355-25(1) ITAA for the 2015–16 and 2016–17 income years. These activities were related to the development of a customised basketball shoe, the ‘Delly1’, designed to meet the personal requirements and playing style of the Australian professional basketball player, Matthew Dellavedova.
Industry Innovation and Science Australia initially determined that the claimed activities did not meet the definition of ‘R&D activities’ and this decision was confirmed after an internal review. The taxpayer then sought a review by the AAT.
The AAT affirmed the decision, finding that the activities did not involve a systematic progression of work based on established scientific principles and were not conducted to generate new knowledge. The AAT concluded that the activities were more about modifying existing athletic shoe designs to suit individual preferences rather than conducting genuine R&D activities. The AAT noted the lack of documentary evidence demonstrating how hypotheses were formulated, tested and recorded, and how the outcomes were uncertain or unknown to a competent professional in the field.
The taxpayer appealed to the Federal Court, arguing that the AAT failed to engage with their submissions by dismissing the subjective feedback of an individual as insufficient and that the AAT erred in its interpretation of s 355-25(1) ITAA by requiring the outcome of the activities to be directed to a technical or scientific uncertainty.
The Federal Court dismissed the appeal, finding no error in the AAT’s review. The Court held that the AAT had conducted a thorough and independent review, and the inclusion of some verbatim text from the respondent’s submissions did not detract from this conclusion. The court found that the AAT’s reasons were coherent, logical, and complied with s 43(2B) of the Administrative Appeals Tribunal Act 1975.
The Court clarified that the AAT did not apply a different test but used a shorthand for the requirements of s 355-25(1)(a) ITAA, which deals with technical or scientific uncertainty. The Court found that the AAT’s reasoning on the uncertainty of the outcome was not a misinterpretation of the section but a finding that the outcome of the work was subjective and outside the taxpayer’s control, thus not meeting the scientific method required by s 355-25(1)(a) ITAA.
The Federal Court upheld the AAT’s decision, concluding that the activities related to the development of the ‘Delly1’ shoe did not qualify as ‘core R&D activities’.
The takeaway
The case of Active Sports Management Pty Ltd underscores the critical importance of maintaining detailed and contemporaneous documentation when claiming R&D tax incentives. The AAT was unable to determine the specifics of the work done, the timing, the hypothesis initiation, or whether the activities followed a systematic scientific progression. This lack of documentation led to the conclusion that the activities did not qualify as core or supporting R&D activities.
Companies should ensure thorough record-keeping and adherence to regulatory guidelines to support their R&D claims.
If you would like to discuss any of these matters further or require assistance regarding your R&D documentation, please reach out to your PwC local R&D contact.
Sophia Varelas
PwC | Private | National Leader - R&D and Government Incentives, Melbourne, PwC Australia
+61 417 208 230
Daniel Knox
Amanda Gell
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