New AAT decision – Development of customised basketball shoe not eligible under R&DTI

The decision, handed down in December 2023 (Active Sports Management Pty Ltd and Industry Innovation and Science Australia), found that activities relating to the development of a customised basketball shoe to suit the requirements of an Australian professional basketball player (playing in the NBA at the time) were neither core nor supporting activities, within the meaning of the relevant Income Tax Assessment Act 1997 R&D provisions.

Background

The applicant in this case carried out the business of importing and selling sports apparel, footwear, accessories, hoodies, and tracksuits, among other things. It also designs and develops products for the Australian market or with unique Australian features and styles.

For the 2015-16 and 2016-17 income years, the applicant applied for the registration of several core R&D activities, including:

• ‘Prototyping for tests & experiments’;

• ‘Tests and experiments’; and

• ‘Other tests and experiments’ 

All relating to the development of the customised basketball show.

The respondent, Industry Innovation and Science Australia (IISA), following an examination and internal review, found that the claimed activities were neither core nor supporting activities. On review, the AAT affirmed this decision.

Key takeaways

There are several points from the decision that are worth highlighting, including:

• Lack of unknown outcome – the AAT found that the project was directed at a subjective outcome (the relevant player’s specific requirements) outside the control of the applicant and not “an outcome directed to a technical or scientific uncertainty”.

• The AAT found that the evidence was not clear what modifications were made to the various tested prototypes (descriptions were general and vague) and the general outcomes could have been known in advance.

• No documentary evidence around prototype development (other than that they were made) or the formulation of any scientific or technical hypotheses in relation to each prototype.

• Lack of contemporaneous evidence of hypothesis formulation.

• The AAT noted that it was, “not satisfied that the claimed activities involved a systematic progression of work based on principles of established science, and which proceeded from hypothesis to experiment, observation and evaluation, leading to logical conclusions”. 

This is another case clearly articulating the importance of contemporaneous documentation and proper assessment of activities in the light of regulator guidance and legislative requirements.