“Dominant Purpose” test in the R&D Tax Incentive

When does the “dominant purpose” test arise?¹

The “dominant purpose” test must be considered for supporting R&D activities that:

1. Fall under the exclusions list of core R&D activities, or
2. Are directly related to the producing of goods or services.

Common activities that fall under the “exclusions list” of core R&D activities include (but are not limited to):

• Market research
• Research in social sciences
• Activities associated with complying with statutory requirements or standards
• Developing computer software for internal administration of business functions.

R&D activities undertaken in a manufacturing setting can often trigger the dominant purpose test as production trials are usually related to producing goods or services 

What does “dominant purpose” mean?

Dictionary definitions for:

“Dominant”:

• Ruling, governing, or controlling; having or exerting authority or influence
• Exercising the most influence or control
• Most important, powerful or influential

“Purpose”:

• The reason for which something exists or is done, made, used, etc.
• An intended or desired result

Case law authority provides  that the dominant purpose is “the ruling, prevailing or most influential purpose”.

Interpretation according to the Explanatory Memorandum:

• The fact that an activity serves a commercial objective as well as being directly related to R&D does not preclude it from qualifying as supporting R&D activity
• The fact that certain activities are necessary in order for core R&D to occur is not sufficient to show that those activities are undertaken for the dominant purpose of supporting core R&D activities

What are the practical considerations for the taxpayers accessing the R&D Tax Incentive?

• Do you know whether the supporting activities you are registering fall under the dominant purpose test?
• Do you know whether those supporting activities were conducted for the dominant purpose of supporting core R&D activities?
• Do you have contemporaneous documentation to substantiate the position that the supporting activities were conducted for the dominant purpose of supporting core R&D activities?

Some relevant questions for determining the purpose of the supporting activity/ties:

• If there is more than one purpose of undertaking the supporting activity, which is the dominant purpose(s)?
• What is the commercial vs the R&D purpose of the supporting activity?

The R&D Tax Incentive seeks to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities. Contact us if you would like to understand whether and how this impacts on your R&D claims, and what documentation you need to substantiate the positions you have taken.

¹ Income Tax Assessment Act 1997 (Cth) s355-30(2)

²  Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404