R&D Compliance Series: Body By Michael Pty Ltd (BBM) Vs Industry Innovation And Science Australia (IISA)

The R&D Tax Incentive (R&DTI) landscape has continued to evolve over the past year with several key compliance cases shaping the way claims are prepared. In Ascentium Australia’s R&D Compliance Series, we explore these recent cases and share practical insights to help claimants remain compliant.

On the 30th of January, the Administrative Review Tribunal (ART) handed down a decision on a matter between Body by Michael Pty Ltd (BBM) and Industry Innovation and Science Australia (IISA). This case study provides a comprehensive guide for taxpayers on how to approach R&DTI compliance activities.

The matter revolved around whether BBM’s registered activities focusing on a “mental health treatment” were eligible under the R&DTI. These activities centred around determining the impact of “six pillars” consisting of movement, nutrition, breathing, hydration, sleep and mindfulness, on an individual’s health and wellbeing.

The dispute between BBM and IISA focused on the R&D activities registered for the FY19 period. IISA informed BBM that its registration was selected for examination through a referral from the Australian Tax Office (ATO). IISA then made an initial finding in April 2022, which was affirmed following an internal review in April 2023, that the activities were not eligible under the R&DTI. In May 2023, BBM then applied for a review of the internal decision with the ART.

The key issues for determination by the ART were:

1. Whether BBM’s activities met the definition of core R&D activities;
2. Whether the activities related to social sciences, and were therefore excluded from being core R&D activities; and
3. Whether any part of the activities could be considered as a supporting R&D activity.

Outcomes

Ultimately, based on the minimal evidence provided by BBM, the ART agreed with IISA’s decision that the activities would not be eligible due to several reasons:

• Professor Corneel Vandelanotte, IISA’s expert witness, explained that studies on the “six pillars” have already shown their impact on an individual’s wellbeing, meaning the benefits of such a program were already known. Therefore, the outcome of BBM’s activities could have been predicted based on the knowledge available at the time the activities were conducted;
• Professor Vandelanotte also noted that the work was not reproducible from the information provided, meaning the findings could not be confirmed or challenged, and there was no data to support them. As such, BBM’s activities did not show a progression of work;
• The evidence indicated that there was no hypothesis present in 2019, suggesting` that no experiments were conducted that year;
• There was little evidence to demonstrate how the experiments were evaluated and how logical conclusions were reached;
• The activities were deemed simple with minimal expansion on current knowledge; and
• Given there were no core R&D activities, no activities could be considered supporting R&D activities.

However, the ART’s comments around whether the activities related to social sciences and their exclusion as a core R&D activity are noteworthy. There has previously been little case law on this exclusion, with the main guidance coming from IISA’s ‘R&D Tax Incentive Guide to Interpretation’. IISA originally found that this exclusion applied to BBM’s activities on the basis that social sciences is the study of human activity and BBM’s project related to psychology and mental health. However, BBM argued that the “six pillars” program was health-focused, medical or biomedical in nature, and elements of this were clear in its activities. The ART agreed with this, varying IISA’s initial decision, and concluded that mental health and physical health do not fall within the concept of social sciences.

Key Takeaways

There is much to learn from this case study, but the key takeaways can be summarised as:

• Background research: 

  Background research, such as reviewing existing literature, is necessary to identify knowledge gaps, and formulate research questions and hypotheses based on these gaps.

For BBM, whilst no study specifically addressed the combined use of the “six pillars”, it is common sense that movement, nutrition, breathing, hydration, sleep, and mindfulness, when integrated, would have a positive impact on an individual’s mental and physical health.

• Documentation: 

  Whilst not specifically legislated, documentary evidence is an expected feature of an activity that is systematic, investigative, and experimental. Contemporaneous written evidence detailing the process of each activity can be highly persuasive in the event of a review, providing clarity on the activities undertaken and highlighting that the activity was carried out through a systematic progression of work.

For BBM, the evidence submitted was too vague. The hypothesis submitted was written in 2024, with BBM claiming that the original was lost in storage. The ART believes this was written after the fact, as an attempt to construct or discover a hypothesis. Additionally, BBM had no written protocols, and data to substantiate their findings. As such, the ART could not find that the activities satisfied the required scientific method.

• Describing the R&D activities:

  IISA reviews R&D activities undertaken solely in the income year in question. As such, activities should be clearly described on a granular level, with outcomes specific to that income year, to avoid confusion over excluded research fields (i.e. social sciences).

BBM’s evidence generally focused on the overall project and was not contemporaneous. This made it difficult to determine the activities conducted in the year in question and assess whether the activities met the statutory tests.

• Use of artificial intelligence in submissions:

  Using artificial intelligence software, such as ChatGPT, to write up any R&D submissions to IISA or the ART is risky and unwise as they can be inaccurate and non-factual.

BBM admitted to using ChatGPT in the preparation of its Statement of Facts, Issues and Contentions, leading to the withdrawal of some paragraphs for referencing non-existent cases and citing sentences not found in referenced articles. As such, the use of artificial intelligence was not favourable for BBM’s case.

Learnings for Industry Innovation and Science Australia (IISA)

Whilst BBM was ultimately not successful in this case, the ART also identified some shortcomings of IISA and comments on how they can do better moving forward. These are also summarised as follows:

• Statutory Tests:

  • Hypothesis: IISA stated that BBM’s hypotheses did not identify a knowledge gap with “causal relationships between technical variables, which directed claimed experimental activities”. Whilst this is stated in IISA’s guidance material, the ART notes that this is not a statutory test.

• • New Knowledge: IISA stated that BBM’s activities were not carried out for the purpose of “generating new scientific or technical knowledge based on the principles of established science”. The ART notes that once again, this is not a statutory test. The statutory tests does not require “new scientific or technical knowledge”, but merely “new knowledge”. This new knowledge also does not need to be “based on the principles of established science”. Rather, it is the progression of work that should be based on the principles of science.

• Social Science:

  IISA asked BBM to what extent the project related to “the mental function and behaviour of individuals”, alluding to the exclusion provision (subsection 355-25(2)(d) of the ITAA 1997). Whilst IISA refers to the relevant provision, they do not tell BBM what the provision is about. Given that BBM was a small unrepresented party, the ART encourages IISA to always fairly outline what the question relates to.

As such, IISA was recommended to always state the statutory tests and formulate questions against that test correctly. R&D claimants are also advised to understand the statutory tests for a core R&D activity when assessing whether their activities are eligible under the R&DTI.

• Industry vs Scientific Research and Development:

  The ART notes that industry R&D and scientific R&D are vastly different. Thus, IISA was advised to not set a scientific research equivalent to industry activities. They should assess activities with a realistic understanding of a commercial approach when interpreting relevant legislation. Additionally, IISA’s communication with BBM reflected a standard that is both not in the statutory provisions and is unrealistic for an industry-based program. For example, IISA states that to meet the observation and evaluation sections in the legislation, an “analysis of numerical data using established statistical techniques” is required. However, they do not specify what those techniques are, or where that requirement comes from. The ART is also concerned that IISA reflects the need for scientific words, which may not easily align with industry R&D, resulting in submissions that become unclear and even farcical.

As such, the ART advises that IISA needs to adopt a standard in good faith that is realistic, commercial and applicable to industry whilst also being consistent with statutory words.

• Reviewing documentation:

  IISA’s submissions repeatedly emphasised the need for “contemporaneous” documents. However, the ART supports that all evidence, whether contemporaneous or not, should be considered to determine if the statutory tests are met. As such, the ART reprimands the actions of IISA for examining the metadata behind BBM’s ‘laboratory’ photo and declaring it not contemporaneous within the 2019 income year. Instead, IISA is encouraged to understand the context behind the evidence submitted first, before making a judgement about its relevance.

Conclusion

Overall, BBM was not successful in this case as the activities lacked technical merit, and documentation was not maintained to show that the R&DTI eligibility criteria had been satisfied. However, the ART reassured claimants that they do not want to deter smaller companies from utilising the R&DTI. This was highlighted by the ART’s focus on the industry-related goals of the R&D legislation and their reminder that IISA should not expect the same standards as academic research. In addition, the case highlights the importance of keeping contemporaneous documentation on hand to showcase the R&D activities conducted in the year.

If you would like more information on the above and the impact that this could have on your R&D Claim, please reach out to your Ascentium Australia engagement team or Victoria Campbell at victoria.campbell@incorpadvisory.au. 

We're here to help

Get in touch for more insights or direct support - we are here to help. You can also find news, webinars and resources online, and contact us on (02) 8999 1199 for all your tax, accounting and advisory needs.