R&D Tax Incentive Bulletin - July 2025

11 July 2025

As we bid farewell to FY25, we recap significant changes affecting the research & development (R&D) tax incentive that took place during the past year.

Body by Michael Pty Ltd and Industry Innovation and Science Australia [2025] ARTA 44 (‘Body by Michael’)

In early 2025, the newly established Administrative Review Tribunal (ART), which replaced the Administrative Appeals Tribunal, handed down its first ruling in a R&D tax incentive case. In Body by Michael, the ART ruled on the eligibility of claimed activities for the R&D tax incentive. 

The ART ruled that Body by Michael Pty Ltd’s activities did not meet the requirements for qualifying R&D. The activities in question were ruled to be ineligible because:

• The taxpayer was unable to prove that the outcome of the activities was unknown.
• In the absence of a hypothesis being formed at the outset (it was formed in a later year), it could not be accepted that there was an experiment.
• The taxpayer did not describe the experiment or establish the knowledge gap and the degree of uncertainty that an eligible experiment must seek to address.
• Little to no analysis was done to lead to the conclusions, nor was it clear why they are logical.
• Hundreds of tests were undertaken and the ART was satisfied this was systematic work. However, the ART was not satisfied that the taxpayer had undertaken the required systematic progression of work from hypothesis to experiment, observation and evaluation, leading to logical conclusions.

For a more detailed overview of the case, refer to our article Tribunal finds that eligible R&D activity needs to address unknown outcomes.

R&D tax incentive transparency reports

In October 2024, the ATO released its first R&D Tax Incentive Transparency Report, covering the 2021-22 income year, following legislation passed in 2020 requiring the ATO to publish certain information about entities claiming the R&D tax incentive. The ATO is expected to publish the next report, covering the 2022-23 income year, in September 2025.

The reports aim to enhance transparency, encourage compliance, and increase public awareness of which companies are claiming the R&D tax incentive. Claimant information made publicly available via the report, for each income year, is:

• name and ABN or ACN and
• total R&D expenditure and adjusted total R&D expenditure.

New guidance materials

In June 2024, the Department of Industry Science and Resources (DISR) released updated versions of key guidance materials: the ‘R&D Tax Incentive Guide to Interpretation’ and ‘Software-related activities and the R&D Tax Incentive’.

The updated Guide to Interpretation provides enhanced detail on record-keeping expectations and clarification on what constitutes ‘current knowledge’, along with other minor changes.

The updated guidance for software R&D claims is aimed at clarifying eligibility criteria and improving compliance. The guidance emphasises the distinction between routine software development and genuine R&D activities, providing specific examples and documentation requirements. The updated guidance seeks to enhance understanding and adherence to the R&DTI program for software companies. 

See our article AusIndustry updates two key R&D Tax Incentive guidance documents for more information. 

No additional guidance materials were released during the last financial year. 

Exclusion of R&D activities relating to gambling and tobacco 

As part of its 2024-25 Mid-Year Economic and Fiscal Outlook, the Federal Government announced its intention to exclude R&D activities relating to gambling and tobacco from R&D tax incentive eligibility for income years starting on or after 1 July 2025. Activities carried out for the sole purpose of harm reduction will remain eligible for the R&D tax incentive. A Bill introducing the proposed changes is yet to be introduced into Parliament.  

Independent panel established for strategic examination of R&D

An independent panel has been established to conduct a strategic examination of Australia’s R&D system. In February 2025, the panel released a discussion paper for public consultation. The paper examined several issues, including the current state of Australia’s R&D system, barriers and risks impacting R&D competitiveness, and ways to ensure equitable distribution of R&D benefits across regions and communities. The panel reportedly received 470 submissions following the paper’s call for feedback. 

Further consultation is planned throughout 2025 to inform final recommendations. The panel is expected to report its findings to the Federal Government in December 2025, outlining a strategic path forward for strengthening Australia’s R&D system.

The discussion paper can be accessed via the DISR website. 

Payments to associates made by the end of financial year 

Finally, we remind claimants that incur R&D expenditure to ‘associates’, that such expenditure must have been paid by 30 June 2025 to receive an R&D tax offset for that expenditure for the 2024-25 income year.  

A claimant may only include expenditure incurred to an ‘associate’ in the R&D tax incentive claim when the expenditure is ‘paid’ before the end of the income year. Where an amount is not paid until a later income year, a claimant will either forgo the R&D notional deduction altogether and claim a normal tax deduction on an incurred basis or defer the claim for the R&D notional deduction until the year in which payment is made. The term ‘paid’ takes its ordinary meaning under income tax law and includes constructive payment.

If you would like to discuss any of these matters further or how these changes will impact on your business, please reach out to your PwC R&D contact.