Activities excluded from SIE activities (Schedule 21, Part C)
2007 list of activities excluded from being SIE (systematic, investigative, and experimental) activities in the Research and Development definition.
Certain activities are routinely excluded from R&D tax incentives. This can be because governments do not wish to incentivise a particular activity through an R&D tax concession, to remove uncertainty over whether a particular activity could be considered R&D, to clarify the boundary between development and post-development activity or innovative and routine work.
The activities listed below are excluded from being SIE activities in paragraph (a) of the R&D definition:
- prospecting, exploring or drilling for minerals, petroleum, natural gas or geothermal reserves;
- research in social sciences, arts or humanities;
- market research, market testing or market development, or sales promotion (including consumer surveys);
- quality control or routine testing of materials, products, devices, processes or services;
- the making of cosmetic or stylistic changes to materials, products, devices, processes or services;
- routine collection of information;
- commercial, legal and administrative aspects of patenting, licensing or other activities;
- activities involved in complying with statutory requirements or standards;
- management studies or efficiency surveys;
- the reproduction of a commercial product or process by a physical examination of an existing system or from plans, blueprints, detailed specifications or publicly available information; and
- pre-production activities, such as demonstration of commercial viability, tooling-up and trial runs.
The exclusions are similar to those in Australia. As in Australia, these activities are excluded from being SIE activities only - they may still be support activities within paragraph (b) of the definition. For example, routine data collection will not be eligible as a SIE activity but can qualify as a support activity.
Prospecting, exploring or drilling for minerals, petroleum, natural gas or geothermal energy (clause 1)
It is possible to have R&D in extractive industries - for example, R&D to develop new exploration techniques, but the exploration itself is not R&D. Drilling can be a supporting activity if it is wholly or mainly for the purpose of, required for and integral to the development of a new exploration technique or new equipment - for example, testing new drilling equipment.
Research in social sciences, arts or humanities (clause 2)
Research in these disciplines is excluded in each of the jurisdictions considered in the development of the R&D definition. The focus of R&D tax incentives is on extending business scientific and technological know-how rather than promoting research in these areas which are funded by other means.
The exclusion covers, for example, research in economics, classics, languages, literature, music, philosophy, history, religion, and visual and performing arts. Examples of activities excluded would be the study of the historical development of a language or the role of the family in society, or writing a novel or screenplay.
If a business is developing an innovative product and the development process satisfies the definition in section LH 7, the development is not excluded simply because the product is used in the arts or humanities. For example, if a business develops computer software for use in the film industry in a process that satisfies the criteria in the definition, the software development is not excluded under this paragraph. Similarly, if a business develops and manufactures innovative ceramic glazes, the development is not excluded under this paragraph because glazes are used in the visual arts.
As with the other exclusions, this research is excluded from being a SIE activity only. When research in these fields is required for development of a new product or process, the research can be an eligible support activity. For example, if research into human behaviour is required for the development of an innovative product, the research can be an eligible R&D support activity.
Market research, market testing or market development, or sales promotion (including consumer surveys) (clause 3)
Conducting of market research is excluded. However, it can be a supporting activity if the research is wholly or mainly for the purpose of, required for and integral to development of, a product or process.
ACo is developing a new can opener for use by people with arthritic hands. It has two options for handle design and selects a group to test both trial models to determine which handle is more easily manipulated. This market testing is eligible as a support activity.
Quality control or routine testing of materials, products, devices, processes or services (clause 4)
Quality control in itself is excluded as a SIE activity. However, the development of new or improved methods of quality control testing can be eligible R&D. Quality control may also be a supporting activity - for example, in the development of a new manufacturing process, checking that the products in a trial run meet the desired quality.
Making cosmetic or stylistic changes to materials, products, devices, processes or services (clause 5)
Changes that are purely cosmetic or stylistic (such as changes to colour or pattern) are excluded from being a SIE activity. For example, this would include design changes for fabrics and wallpapers.
However, work to create a desired cosmetic or aesthetic effect through the application of science or technology can advance the science or technology and be R&D.
Cosmetic or stylistic changes that meet the requirements in paragraph (b) of the R&D definition can also be a supporting activity. For example, if a firm is improving a product it manufactures in a way that falls within the definition of a SIE activity, work on required associated stylistic changes can be eligible R&D.
Commercial, legal and administrative aspects of patenting, licensing or other activities (clause 7)
This is post-R&D work which is very unlikely, even in the absence of the exclusion, to qualify as a SIE activity. It is also unlikely to be a supporting activity because patenting or licensing would seldom be wholly or mainly for the purpose of, or required for, a SIE activity.
Activities involved in complying with statutory requirements or standards (clause 8)
This exclusion targets routine testing and analysis of materials, products and processes to check that they comply with statutory requirements or standards. It does not apply to development of new technologies to comply with standards. Activities involved in developing, rather than complying with, standards is also not excluded. Checking that new products meet relevant standards can be an eligible R&D support activity.
Management studies or efficiency surveys (clause 9)
This includes studies relating to inventory control (such as Just-in-Time), work practices, industrial relations and feasibility analysis, and time and motion studies. The exclusion also covers industry research - for example, when a company carries out a survey into a particular industry's characteristics and future needs.
These studies or surveys can be a supporting activity. For example, if a manufacturer's improvement to a process is R&D, a monitored test to determine how efficient the new process is would be eligible as a supporting activity.
The reproduction of a commercial product or process by a physical examination of an existing system or from plans, blueprints, detailed specifications or publicly available information (clause 10)
No R&D is involved in simply reproducing an existing product or process from the plans or publicly available information. As a result, this is excluded as a SIE activity.
Pre-production activities, such as demonstration of commercial viability, tooling-up and trial runs (clause 11)
This paragraph is intended to clarify the boundary between R&D and post-R&D pre-production activities. Activities either satisfy the definition of SIE activities in paragraph (a) of the R&D definition or fall within the exclusion. If activities that satisfy the definition of R&D in paragraph (a) arise during a pre-production process, they will be eligible regardless of the exclusion. However, most pre-production activity is unlikely to be eligible as SIE R&D.
Trial runs could be eligible as a qualifying supporting activity, as could tooling up (for example, to test a new manufacturing process). It is unlikely that demonstration of commercial viability satisfies the test to be a supporting activity.