What is Division 355?
Division 355 of the Income Tax Assessment Act 1997 (ITAA 1997) is the part of Australian tax law that contains the R&D Tax Incentive (RDTI). It defines what an R&D activity is, which entities can claim, and which expenditure counts. Section 355-20 says R&D activities are either core R&D activities or supporting R&D activities.
Those two definitions, in sections 355-25 and 355-30, decide what counts as R&D for tax purposes. They are statutory definitions, and the Department of Industry, Science and Resources (DISR) notes that the statutory definition of R&D activities "may not be the same as the ordinary commercial, engineering or accounting definition" of research and development. (business.gov.au — Software-related activities and R&D Tax Incentive, May 2024)
Activities also have to be registered. business.gov.au states that companies "can only claim expenditure incurred on R&D activities which are eligible and have been registered by the department." (business.gov.au — Assess if your R&D activities are eligible)
This article explains how the legislation and the official guidance frame the test. It is general information, not advice, and it does not assess any particular activity.
What counts as a core R&D activity under section 355-25?
Under section 355-25(1), a core R&D activity is an experimental activity whose outcome cannot be known or determined in advance from current knowledge, information or experience. The outcome can only be found through a systematic progression of work based on established science, and the activity must be conducted to generate new knowledge.
The full text of subsection 355-25(1) reads:
Core R&D activities are experimental activities: (a) whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that: (i) is based on principles of established science; and (ii) proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and (b) that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).
Source: ITAA 1997, s 355-25(1), Federal Register of Legislation.
DISR's guidance states that an activity must meet both paragraph (a) and paragraph (b), and must not be an excluded activity. The elements break down like this:
| Element | What the guidance says it means |
|---|---|
| Outcome cannot be known in advance | Before starting, you establish that the outcome is unknown on current knowledge. DISR expects a wide search of existing knowledge, with records of that search. |
| Competent professional test | A competent professional in the field could not know or determine the outcome in advance using knowledge available anywhere in the world. |
| Systematic progression of work | The work runs from hypothesis to experiment, observation and evaluation, and on to logical conclusions. |
| Purpose of generating new knowledge | There must be an intention to generate new knowledge when the activity starts. Knowledge generated only by accident is unlikely to be enough. |
Sources: Software-related activities and R&D Tax Incentive (May 2024); business.gov.au — Conducting core R&D activities.
The test is also not decided by success. DISR's guidance notes that a failed or abandoned experiment can still be part of a core R&D activity if the legislative criteria are met, and that a "negative" result may itself be new knowledge. (Software-related activities and R&D Tax Incentive)
Which activities are excluded from being core R&D activities?
Section 355-25(2) lists activities that are never core R&D activities, however experimental they are. They include market research, mineral prospecting, management studies, social sciences, arts and humanities research, patenting and licensing work, compliance testing, reproducing existing products, internal-administration software, and most gambling and tobacco-related activities.
The current compilation of subsection 355-25(2) lists these exclusions:
| Para. | Excluded from being a core R&D activity |
|---|---|
| (a) | Market research, market testing or market development, or sales promotion (including consumer surveys) |
| (b) | Prospecting, exploring or drilling for minerals or petroleum to discover deposits or to work out their location, size or quality |
| (c) | Management studies or efficiency surveys |
| (d) | Research in social sciences, arts or humanities |
| (e) | Commercial, legal and administrative aspects of patenting, licensing or other activities |
| (f) | Activities associated with complying with statutory requirements or standards, such as maintaining national standards, calibrating secondary standards, and routine testing and analysis |
| (g) | Activities related to reproducing a commercial product or process, whether by physically examining an existing system or from plans, blueprints, detailed specifications or publicly available information |
| (h) | Developing, modifying or customising software for the dominant purpose of internal administration by the developer, a connected entity or an affiliate |
| (i) | Activities relating to gambling services, gambling or gambling-like practices, unless the activity is solely for generating new knowledge about minimising harm (s 355-25(3)) |
| (j) | Activities relating to tobacco, tobacco products and accessories, tobacco extract, goods made using tobacco, vaping goods and nicotine goods for human consumption, unless the activity is solely for a harm-minimisation purpose set out in s 355-25(4) |
Source: ITAA 1997, s 355-25(2)–(4). See also business.gov.au — Excluded R&D activities under the R&DTI.
An excluded activity is not automatically shut out altogether. Apart from the gambling and tobacco categories, an activity excluded from being core can still be a supporting R&D activity if it meets the requirements below.
What is a supporting R&D activity under section 355-30?
Under section 355-30(1), supporting R&D activities are activities directly related to core R&D activities. Section 355-30(2) adds a second test for some of them. If an activity is on the excluded list, produces goods or services, or is directly related to producing goods or services, it counts only if done for the dominant purpose of supporting core R&D.
The text of subsections 355-30(1) and (2) reads:
(1) Supporting R&D activities are activities directly related to core R&D activities. (2) However, if an activity: (a) is an activity referred to in subsection 355-25(2); or (b) produces goods or services; or (c) is directly related to producing goods or services; the activity is a supporting R&D activity only if it is undertaken for the dominant purpose of supporting core R&D activities.
Source: ITAA 1997, s 355-30.
Sections 355-30(3) and (4) treat gambling and tobacco-related activities differently. The dominant purpose test does not apply to them, and they can be supporting R&D activities only where they have the harm-minimisation purpose described in section 355-25(3) or (4).
On "directly related", DISR expects you to identify the core R&D activity a supporting activity relates to, and its relationship to the elements of the systematic progression of work. Its examples:
| Could be directly related | Usually not directly related |
|---|---|
| A literature review to refine your hypothesis before an experiment | A literature review or internet search to find a market niche for a new product |
| Cleaning and maintaining equipment used in experiments | Cleaning and maintaining equipment not used in an experiment |
| Decommissioning equipment used in experiments after reaching logical conclusions | Decommissioning equipment that was not used to conduct experiments |
Source: business.gov.au — Conducting supporting R&D activities.
Supporting activities can happen before, during or after the core activity they relate to, including in a different income year. In that case, the core R&D activity has to be identified when the supporting activity is registered. (business.gov.au — Conducting supporting R&D activities)
How does the dominant purpose test work?
Dominant purpose means the prevailing or most influential purpose. Where the test applies, supporting core R&D must be the main reason for the activity, ahead of any commercial or other purpose. An activity can have several purposes but only one dominant purpose, which you work out by weighing the strength of each purpose against the others.
DISR's guidance on supporting activities sets out factors to consider. They include when the need for the activity arose, what other purposes exist, and whether the activity goes beyond what would have been done without the core R&D. It gives these indicators:
| Likely to have the dominant purpose of supporting core R&D | Unlikely to have that dominant purpose |
|---|---|
| Activities with no purpose other than to assist or facilitate a core R&D activity | Producing a good or service that is not used to conduct an experiment |
| Activities that support core R&D where the commercial benefit is insignificant | Activities you would undertake even if you were not conducting R&D |
| Producing items you consume, or expect to consume, in the experiment | |
| Creating a component, such as part of the experimental apparatus, that serves no other purpose |
Source: business.gov.au — Conducting supporting R&D activities.
Where supporting activities produce goods that are sold or used, DISR's software guidance also points to the ATO's feedstock adjustment rules. (Software-related activities and R&D Tax Incentive)
Core vs supporting R&D: what is the difference at a glance?
Core activities are the experiments themselves: hypothesis-led work to resolve an outcome nobody could know in advance. Supporting activities make those experiments possible, for example background research, test set-up or data preparation. A company needs to conduct, or plan to conduct, at least one core activity before any activity can be supporting, because supporting activities are defined by their relationship to core ones.
| Core R&D activity (s 355-25) | Supporting R&D activity (s 355-30) | |
|---|---|---|
| Defined by | Its own nature: experimental, unknown outcome, systematic progression, new-knowledge purpose | Its relationship to a core R&D activity |
| Can stand alone? | Yes, and at least one is required | No, it must be directly related to a core activity |
| Excluded activities (s 355-25(2)) | Cannot be core | Can be supporting if done for the dominant purpose of supporting core R&D (gambling and tobacco: harm-minimisation purpose only) |
| Produces goods or services | Must still meet every core requirement | Must pass the dominant purpose test |
| Typical examples in the guidance | Testing a hypothesis through planned experiments | Literature review to refine a hypothesis, setting up test beds, collating a data sample for an experiment |
Sources: ITAA 1997, Division 355; Software-related activities and R&D Tax Incentive (May 2024).
For how this line plays out in one sector, see Are software development activities eligible for the R&D Tax Incentive?.
What is proposed for supporting R&D activities from 1 July 2028?
The 2026–27 Budget proposes removing eligibility for expenditure that only supports R&D from 1 July 2028, while increasing the offset for experimental core R&D. The ATO states the measure is not yet law. Treasury consulted on exposure draft legislation in September 2026. Until the start date, the current rules continue to apply.
The Budget papers describe the change as "increasing the offset for experimental core R&D by around 25 to 50 per cent and removing eligibility for expenditure that only supports R&D" from 1 July 2028. (Budget 2026–27 — Tax reform)
- The ATO's summary of the measure says it "is not yet law" and that all changes will take effect from 1 July 2028. (ATO — Tax Reform: better targeting the R&D Tax Incentive)
- Treasury's consultation on the exposure draft opened on 10 September 2026 and closed on 28 September 2026. (Treasury — Better targeting the R&D Tax Incentive: exposure draft)
- business.gov.au states that until 1 July 2028 "the program will continue running under the current rules." (business.gov.au — R&D Tax Incentive)
The detail could change before the measure is legislated. If it passes in its announced form, the ATO's summary says eligibility for supporting R&D activities would be removed, so the core-vs-supporting line would decide whether expenditure counts at all. For what that means for records, see When "supporting" R&D loses eligibility: documenting core activities from 2028. For the wider package, see the 2026–27 Federal Budget R&D Tax Incentive changes.
What records show which side of the line an activity sits on?
Whether an activity is core or supporting comes down to evidence. DISR says records should be created when the activity is conducted and kept for five years after claiming. Core-activity records show the unknown, the experiments and the conclusions. Supporting-activity records show the link to a core activity and, where needed, the dominant purpose.
Source: business.gov.au — Record keeping for the R&DTI.
| What needs showing | Examples of evidence in DISR's guidance |
|---|---|
| The outcome could not be known in advance | Literature reviews, communications with industry experts, questions posted on tech blogs, details of failed attempts to use existing technology |
| A systematic progression of work | Records of each experimental step (the hypothesis, how it was tested, the data, the analysis, whether it held), project plans, testing strategy documents, versioned code with comments |
| A new-knowledge purpose | Minutes of board, project or team meetings where the need to experiment was discussed |
| A supporting activity is directly related | Technical records showing how and why the activity relates to one or more core activities |
| Dominant purpose, where it applies | Records showing how the activity supports the core activity; for production, run sheets showing which units were used for experiments and which were sold |
Source: Software-related activities and R&D Tax Incentive (May 2024), Tables 1 and 2.
DISR also notes that it is the content of records, not their format, that matters (business.gov.au — Software development sector guide). Its software guide adds that less formal records, such as screenshots, instant messaging histories and exports from task-tracking tools, can be used (Software-related activities and R&D Tax Incentive). For why timing matters so much, see What "contemporaneous documentation" means for the R&D Tax Incentive. For a plain-English overview of the wider rules, see the guide to the R&D Tax Incentive rules, or put a question about a term to the R&D Tax Incentive chatbot.
Dossio is compliance infrastructure for the R&D Tax Incentive. It records each activity's core-or-supporting characterisation, and the evidence behind it, in structured and dated form as the work happens, with R&D tax experts providing oversight and governance.
Sources
- Federal Register of Legislation — Income Tax Assessment Act 1997, Division 355 (ss 355-20, 355-25, 355-30)
- business.gov.au — Assess if your R&D activities are eligible
- business.gov.au — Conducting core R&D activities
- business.gov.au — Conducting supporting R&D activities for the R&DTI
- business.gov.au — Excluded R&D activities under the R&DTI
- business.gov.au — Record keeping for the R&DTI
- business.gov.au — Software-related activities and R&D Tax Incentive (PDF, May 2024)
- Australian Government — Budget 2026–27: Tax reform
- ATO — Tax Reform: better targeting the Research and Development Tax Incentive
- Treasury — Better targeting the Research and Development Tax Incentive: exposure draft