Excluded R&D activities you cannot claim

If you are an Australian business owner, founder, or CFO trying to work out whether your company may be eligible for the R&D Tax Incentive, one of the first things to understand is what you cannot claim. Many businesses assume that any activity involving trial and error or technical uncertainty is automatically in scope, but the legislation draws a clear line around specific excluded core R&D activities. Getting this wrong can lead to a rejected claim, an ATO review, or worse, a finding of non-compliance.

This article steps through the excluded activities, how to identify them, and what to do about the grey areas. It is general information only and does not constitute tax, financial, or legal advice. You should always confirm your position with a registered tax agent, who will review the specifics of your situation and the current income year rules, because rates, thresholds, and even the list of excluded activities can change.

GrantsMAX prepares an evidence-backed pack that connects to your own accounting data (Xero, MYOB, QuickBooks, Microsoft 365, and Google Workspace, read-only) and organises the eligible spend you need. Then your registered accountant reviews, refines, and lodges the claim; the business owns the claim at every stage. But the first step is understanding what does not count, so you do not build a claim around work that was never going to qualify.

Prerequisites before you start

Before you work through the list of excluded activities, make sure you have these three things in order:

1. An AusIndustry registration for the relevant income year, if required. For the R&D Tax Incentive, most claimants must lodge an R&D application with AusIndustry within 10 months of the end of the income year. The registration describes the core and supporting R&D activities you intend to claim. Without it, you generally cannot access the tax offset. See business.gov.au for the current lodgement deadlines.
2. A clear structure for your R&D activities, separated into core and supporting buckets. The legislation distinguishes between experimental activities whose outcome cannot be known or determined in advance (core) and activities directly related to those core activities (supporting). Exclusions apply mainly to core activities, but you need the distinction to test each activity.
3. Access to your source accounting records. Eligible R&D expenditure must be substantiated with wages, contractor costs, materials, and overhead allocations that tie directly to the registered activities. If your books live in Xero, MYOB, or QuickBooks, you already have the raw data; the work is in mapping it to the activities. GrantsMAX reads that data securely via read-only connectors so your accountant has a clear trail.

Pro tip: Even before you register with AusIndustry, do a self-assessment against the excluded activities list. If you find that a big chunk of your planned claim sits in an excluded area, you can refine your scope early and avoid a costly restatement later. Your registered tax agent can guide you through this, and GrantsMAX can prepare the draft narrative from your actual data, so the review is based on fact, not assumption.

Step 1: locate the official list of excluded core activities

The definitive list sits in the legislation (Division 355 of the Income Tax Assessment Act 1997), and the ATO and AusIndustry both publish guidance that mirrors it. The ATO page on expenditure you cannot claim spells out classes of spending that are not eligible, while the business.gov.au eligibility checker lists excluded core R&D activities directly. Both are primary sources you should bookmark.

Do not rely on a third-party summary alone, because the list can be updated, and the ATO and AusIndustry sometimes issue rulings or guidance that clarify what sits inside, or outside, an exclusion. For example, certain activities that might look like market research could be part of a feedback loop for experimental development, but the default position is that market research is excluded. You need to confirm against the current published material for your income year.

Step 2: understand the rationale behind the exclusions

The policy reasons are twofold. First, many excluded activities are ordinary business functions that do not involve the systematic progression of scientific or technical knowledge, even if they involve problem solving. Second, some activities are explicitly carved out to prevent overlap with other government programs or to maintain the integrity of the incentive.

For a cut-through explanation of what constitutes eligible R&D versus excluded business-as-usual work, you might look at how other jurisdictions handle the same question. In the United States, for example, the IRS publishes instructions for Form 6765 that list ineligible activities, and the Bloomberg Tax practitioner guide offers a deep dive into Section 174 and Section 41 rules. While the Australian framework is distinct, the conceptual boundary between R&D and other technical work is similar: the activity must be experimental and aimed at generating new knowledge.

In Australia, the exclusion that trips up many claimants is market research. The ATO and AusIndustry both make it clear that market research, market testing, and consumer surveys are excluded core activities, even if they are undertaken to test a prototype with users. The key is the purpose: if the primary purpose is to gather market data rather than to resolve a technical uncertainty, it sits outside. That said, an activity that collects user feedback as inputs to an experimental iteration may still have parts that are supporting R&D. You need to dissect the activity carefully with your registered tax agent.

Step 3: walk through the excluded core activities one by one

Here is the list of excluded core activities as published by AusIndustry on business.gov.au. Go through each one against your own project. If an activity fits the description, you cannot claim it as core R&D, and in many cases, you cannot claim associated expenditure at all.

1. Market research, market testing, or consumer surveys. Any activity whose main object is to assess market demand, customer preferences, or competitive positioning is excluded. Even if you run a beta with early adopters, the act of gathering that feedback may not be R&D unless it directly tests a hypothesis that resolves a technical unknown.
2. Management studies or efficiency surveys. Time and motion studies, workflow analysis, and management reviews are excluded, even if they result in a more efficient manufacturing process. The work must involve experimental development, not just analysis of existing processes.
3. Research in social sciences, arts, or humanities. The R&D Tax Incentive is for scientific and technical R&D. Research into human behaviour, economics, or artistic techniques falls outside, unless it is only a minor component of a larger technical project and is incidental.
4. Activities associated with complying with statutory requirements or standards. Testing to prove that a product meets a mandatory standard or regulatory requirement is generally excluded if the work is routine and does not involve resolving a technical uncertainty. However, if you develop a new testing method to meet a unique requirement, that development might qualify.
5. Developing, modifying, or customising software for internal use unless the software is developed for sale, lease, or licence. This is a tricky one. Internal-use software (IUS) can qualify under specific conditions, but many routine customization and configuration projects do not. The ATO has detailed guidance on the IUS rules, which are narrower than some claimants assume. You can find nuance in the IRS research credit guidance for a comparative view on how IUS exclusions work, but Australian rules are their own beast. Do not self-assess this area without a registered tax agent.
6. Reverse engineering. Taking apart a competitor's product to understand how it works is excluded because it does not aim to create new knowledge; it merely copies or understands existing knowledge. But if reverse engineering is a step in a larger experimental process, say, to identify a failure mode that then triggers a novel redesign, the redesign activity may still qualify.
7. Activities that do not involve a significant element of innovation or technical risk. Incremental product improvements or minor tweaks to an existing product that an experienced professional in the field could readily solve are not eligible. The bar is that the outcome must not be knowable or determinable in advance.
8. Pre-production activities, including tooling-up, trial runs, and troubleshooting. Once you have resolved the technical uncertainties and you are scaling up for commercial production, those activities are excluded. The line between experimental production and pre-production can be blurry; your records need to show where experimentation ended and routine production began.
9. Activities associated with the commercial, legal, or administrative aspects of patenting, licensing, or other activities intended to obtain or exploit intellectual property. The IP strategy and filing work is excluded, even if it relates directly to an R&D project.

Warning: Some of these exclusions can have a grey edge. For instance, if you conduct user trials that are structured as scientific experiments to test a specific technical hypothesis, the trials may not be market research. But you must document the hypothesis, the method, and the results. GrantsMAX helps you build that narrative from your accounting data and project records, but the final call belongs to your registered tax agent.

Step 4: separate excluded expenditure types

Even if an activity is eligible, not all spending linked to it automatically qualifies. The ATO lists expenditure you cannot claim in a separate guide. Common exclusions include:

• Interest on borrowings (unless the interest is directly incurred in carrying on the R&D activities, and even then, strict rules apply).
• Expenditure incurred to acquire or construct a building, or to acquire land. Core R&D does not usually include bricks and mortar.
• Expenditure on core technology purchased from an associate. The at-risk rules are complex.
• Expenditure that is not at risk, if you are reimbursed or insured against failure, the costs may not qualify.
• Costs that relate to excluded activities, even if you incurred them in a broader project. If a portion of an employee's time was spent on market research, you cannot claim that portion.

GrantsMAX pulls actual transactions from your connected ledgers, so you can tag eligible direct costs and map them to AusIndustry-registered activities, leaving excluded spend aside. The Accountant Review and Lodge Workflow then lets your registered tax agent inspect every line, refine the tagging, and ensure only qualifying expenditure flows into the claim.

Step 5: document the boundary between excluded and eligible

The ATO expects claimants to maintain contemporaneous records that show why an activity is eligible and how you separated it from excluded work. If your project included market research, reverse engineering, or internal-use software customisation, you need to be able to show where those activities stopped and the experimental development started.

Here is a practical approach:

• For each registered core activity, write a short description that states the technical uncertainty, the hypothesis, and the method. Then note any adjacent excluded activity and confirm it was not part of the claim. For example, "We analysed competitor teardowns to identify failure modes; that step was reverse engineering and is excluded. The subsequent design of a novel joint to address the failure mode, where we did not know if it could work, is the core R&D activity."
• Keep meeting minutes, lab notebooks, Jira tickets, or design reviews that show the timeline and decisions. If you can timestamp when a technical uncertainty was resolved, you have a clear endpoint for the R&D phase versus pre-production.
• Use your accounting system to separately cost the eligible and excluded portions. If you run Xero, MYOB, or QuickBooks, you can set up tracking categories or tags to flag eligible time and supplier invoices. GrantsMAX reads that data and prepares a draft allocation for your accountant, which saves hours of manual spreadsheet work.

Pro tip: When in doubt, err on the side of excluding borderline activities from your claim. The tax incentive is valuable, but building a claim around excluded work can trigger a full ATO review, and if the ATO disagrees, you may face penalties and interest. A conservative, well-documented claim is far better than an inflated one that collapses under scrutiny.

Step 6: review with a registered tax agent, not just a consultant

Many businesses engage a boutique R&D tax consultant or a grant-finder website to identify eligible activities. Those services can be helpful, but the claim ultimately must be lodged by a registered tax agent or the business itself. GrantsMAX takes a different approach: it prepares a complete, evidence-backed pack from your own data, and then hands it to your registered accountant or tax agent in a shared workspace. The accountant reviews, refines, and lodges; they hold the professional responsibility, and the business owns the claim.

If you are a founder or CFO, this workflow gives you visibility into what is being claimed and why, without the black box of a legacy consultancy. And if you are an accountant or bookkeeper, you get a ready-made pack that you can use to serve your clients efficiently, while staying firmly inside your lodgement obligations.

For first-time claimants, the excluded activities list can feel overwhelming. That is why GrantsMAX for first-time claimants walks you through the discovery process, showing what your business may be eligible for based on your actual spend, and flagging areas that look like common exclusions. The goal is not to promise a refund or a maximum offset; it is to give you and your accountant a solid, defensible starting point.

Step 7: watch for proposed reforms and check the current rules

The legislative landscape around the R&D Tax Incentive is not static. In 2026, a proposed reform would lift the refundable R&D-offset turnover threshold from $20 million to $50 million, which could change the calculus for growing companies. As we write this, the reform is announced but not enacted. Any change to the list of excluded activities, or to the treatment of supporting activities, would need to pass Parliament.

Always verify the current income year rules with the ATO and AusIndustry. The GrantsMAX platform is updated to reflect the latest guidance, and GrantsMAX for growing companies can help you scenario-plan as your turnover increases.

How GrantsMAX helps you navigate excluded activities

GrantsMAX does not give tax advice, and it does not lodge your claim. But it solves the two biggest headaches around excluded activities: data organisation and narrative drafting. Here is how it fits into the process:

• Connect your ledgers. The browser connector links Xero, MYOB, QuickBooks, Microsoft 365, and Google Workspace, all read-only. It reads what it needs to discover funding opportunities and draft packs; it never writes back or changes a thing.
• Discover what may be eligible. GrantsMAX maps your transactions against known grant and incentive programs, including the R&D Tax Incentive, and presents a draft eligibility assessment that flags possible excluded activities. This is not a guarantee; it is a prompt for your accountant to review.
• Prepare an evidence-backed pack. For R&D claims, the platform drafts a narrative that ties each activity to the relevant legislative criteria, cites the technical uncertainty, and links to supporting invoices and timesheets. Excluded activities are noted where relevant, so your accountant can see exactly where the boundary was drawn.
• Accountant review and lodgement. The pack moves into the Accountant Review and Lodge Workflow, where your registered tax agent can add notes, adjust allocations, and when satisfied, lodge directly from the workspace. The business owns the claim throughout.

This approach works for technology companies, where software engineering and product development often blend internal-use and experimental work. It works for manufacturers, where process improvement and automation on the floor can be tricky to separate from routine plant optimisation. And it works for exporters, who may be eligible for both the R&D Tax Incentive and the Export Market Development Grant, and need to ensure that overlapping expenditure is correctly allocated.

The broader context: R&D incentives elsewhere

While this article focuses on the Australian R&D Tax Incentive, many Australian businesses operate overseas or draw on R&D examples from other markets. The United States research credit, for example, has its own set of exclusions, documented in the Form 6765 instructions and analysed in resources like Tax Notes. Activities that qualify under Section 41 may not map perfectly to Australian core R&D, and the funding-to-R&D ratio rules here are different. The U.S. Small Business Administration's business plan guide even hints at the distinction between planning activities and executable R&D, a line that can blur in a startup setting.

If you claim incentives in multiple jurisdictions, you need a registered agent in each who understands the interplay. GrantsMAX's Australian pack can help your local accountant see where the Australian claim sits relative to your global R&D spend, while ensuring you do not double-count or claim excluded costs.

Summary and key takeaways

Excluded R&D activities are not a footnote; they are a core part of the eligibility test. Missing them can undermine an otherwise solid claim. Here are the main points to take away:

• The official list of excluded core activities is published by AusIndustry on business.gov.au. Always check the current list for your income year.
• Market research, market testing, consumer surveys, management studies, reverse engineering, and routine pre-production work are explicitly excluded.
• Even if an activity is eligible, certain expenditure types (interest, buildings, at-risk failures) may not qualify. Refer to the ATO's expenditure exclusions.
• Document the boundary between excluded and eligible activities contemporaneously. Timestamps, records of technical uncertainty resolution, and separate cost tracking are your best defence.
• Do not self-lodge unless you are absolutely certain; a registered tax agent is required to review and lodge the claim, and their professional judgement is what the ATO respects.
• GrantsMAX prepares an evidence-backed pack from your own accounting data, read-only, and hands it to your accountant to review and lodge. It does not lodge, guarantee outcomes, or provide tax advice.
• As rules can change, especially with proposed reforms like the 2026 turnover threshold lift, always verify the current law.

If you are still mapping your own R&D spend and you want a clearer view of what may be eligible and what is likely excluded, GrantsMAX for SMBs on cloud accounting can help you see the possibilities without committing to a claim. For accountants and bookkeepers looking to serve clients at scale, the white-label review workflow puts you in control while saving hours of data wrangling.

We invite you to join the GrantsMAX waitlist and be among the first to see how prepared grant and R&D packs can change the way you access government funding.