Demystifying R&D compliance: Lessons from Body by Michael

The Administrative Review Tribunal (Tribunal) has started strong with its first R&D case, providing a measured and comprehensive guide for taxpayers and regulators on how they should approach R&D Tax Incentive (RDTI) compliance activities.

While the taxpayer was ultimately unsuccessful, the Body by Michael Pty Ltd and Industry Innovation and Science Australia (Taxation and business) [2025] ARTA 44 (24 January 2025) decision considers how the RDTI legislation and case law apply in relation to small businesses.

Background

The applicant, Body by Michael Pty Ltd (BBM), registered R&D activities relating to development of an integrated ‘six pillars’ health and wellbeing program and an associated software application in the 2019 income tax year.

Following an ATO referral, Industry Innovation and Science Australia (IISA) selected BBM’s 2019 R&D registration for examination. The outcome of this examination resulted in IISA issuing a certificate of finding which decided that BBM’s activities in the 2019 income year were not eligible R&D activities.

BBM requested an internal review of IISA’s decision, which ultimately confirmed the original decision that BBM’s activities were not R&D activities. BBM subsequently applied to the Tribunal for a review of the internal review decision.

The key issues for determination by the Tribunal were:

Whether any of BBM’s activities met the definition of core R&D activities
Whether BBM’s activities were excluded from the definition of core R&D activities (specifically, the social sciences exclusion)
If any of BBM’s activities were core R&D activities, and whether the remainder of activities met the definition of supporting R&D activities.

Outcome

The Tribunal found that none of BBM’s activities were R&D activities on the following bases:

The outcome of BBM’s activities could be known or determined in advance on the basis of knowledge, information or experience available in the 2019 income year
Although the activities were ‘systematic’, there was no ‘progression of work’
The activities were consistent with ‘the principles of established science’
There may have been a hypothesis relating to comparing isolated and integrated approaches to the six pillars, but the evidence does not indicate that it was present in 2019
As there was no hypothesis to be tested in 2019, there was no experiment conducted in 2019
While there were observations, there was little evidence demonstrating how BBM evaluated the tests undertaken, nor much analysis showing what led to the conclusions nor why they were logical
As there was no unknown outcome, the activities were not conducted for the purpose of generating new knowledge
As there were no core R&D activities, none of the activities were supporting R&D activities.

Although this was sufficient to resolve the case before it, for completeness, and because there is no case law on the matter, the Tribunal went on to consider whether BBM’s activities would have been excluded by the social sciences core activity exclusion. The Tribunal found that if any of BBM’s activities had qualified as core R&D activities, the social sciences core activity exclusion would not have applied to exclude them.

Analysis

Unknown outcomes

BBM argued its six pillars program was innovative because no prior research combined all six elements, making the outcome uncertain. The Tribunal disagreed, stating the lack of papers on a specific topic doesn't automatically make it unknown; existing knowledge can still predict outcomes. The Tribunal compared it to a blood test where the result may be unknown, but the process is well understood. Existing knowledge showed that each pillar positively affects health, which was predictable.

Key takeaways for RDTI applicants:

Simply combining known elements doesn't make the outcome uncertain if existing knowledge can predict results
Claiming unpredictability requires more than just the absence of specific research; it needs to be genuinely beyond current knowledge.

Social science core R&D activity exclusion

IISA and BBM differed on whether BBM's activities were mental health or medical focused. BBM argued its six pillars program was health focused. The Tribunal noted IISA's question was unclear and BBM misunderstood the context. The Tribunal found BBM's activities were health and medical focused, not just psychology or sports science.

Key takeaways for RDTI applicants:

Be clear and precise in describing your activities, especially when they have the potential to overlap with excluded fields of research
Respond accurately to examination questions and understand their context
Even if activities focus on mental health, they can be considered medical science, not social science, for tax purposes where evidence is available to substantiate the medical nature of the research.

Documentation — Not strictly a requirement

The Tribunal acknowledged that while IISA argued documentation is necessary to show scientific principles and systematic progression, the Tribunal found this isn't a legislative requirement. Instead, documentation is seen as beneficial, helping to meet the evidential burden on the applicant. The Tribunal emphasised that all forms of evidence must be considered to determine if the statutory tests are met, and the absence of documentation alone is not decisive.

Key takeaways for RDTI applicants:

While documentation is not a legislated requirement and the R&D activities may be substantiated by various means, best practice is to keep contemporaneous records that demonstrate the legislative requirements are met
Descriptions of activities should focus on what was actually done, without needing to use complex scientific language.

Caution against the use of AI

BBM admitted that some parts of its Statement of Facts, Issues, and Contentions were created using ChatGPT and asked to remove those sections before the Tribunal hearing. The Tribunal noticed that BBM had quoted sentences from articles that were not actually in the cited sources. Although the Tribunal did not directly blame ChatGPT for these errors, it is possible the mistakes came from AI.

The Tribunal warned against using ChatGPT, as it might reference non-existent case law or make incorrect legal conclusions. The Tribunal emphasised that it reviews all cases and conclusions in submissions, and misleading information could lead to negative assumptions.

Key takeaways for RDTI applicants:

Avoid using AI tools like ChatGPT for legal documents, as they can introduce errors and hallucinations that are inconsistent with the facts
Ensure that all evidence, whether documentary or otherwise, demonstrates the statutory tests for R&D activities.

Our commentary

Though the applicant was not successful in this case, the Tribunal made it clear they do not want to deter small businesses from claiming the RDTI. This was shown by the Tribunal'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. These comments should reassure small businesses that may not have the resources to conduct R&D activities at an academic level.

The Tribunal also expressed concern there may be an implicit encouragement from IISA to use scientific jargon in applications and correspondence, which runs the risk of making submissions unclear. There may be situations where scientific words do not correlate easily with an applicant’s intended industrial research, such as research relating to improved production processes.

The Tribunal reiterates that no particular label or form of words is necessary when describing what has been done, and that the question to consider is what has in fact been done and whether it meets the statutory test, no matter the type of language that is used.

How BDO can help

We can help determine whether your organisation’s activities meet the legislative requirements to access the R&D tax incentive. Our team also has significant experience in preparing responses to regulator reviews. Contact us for advice in relation to your R&D tax incentive claim.