What We Can Learn from the Denial of R&D Incentives for the Delly1

The Federal Court has denied a sports company’s appeal to claim research & development incentives for the creation of an Australian signature basketball shoe.

The Rise of Signature Basketball Shoes

Signature basketball shoes have long been a cornerstone of sports marketing success. The film Air spotlighted the transformative impact of Nike’s Air Jordan, a shoe expected to generate $3 million in revenue by its fourth year but instead achieving $126 million in its first year alone. Clever marketing, hinting that the colourful shoes violated NBA regulations, spurred initial sales of 1.5 million pairs in just six weeks.

Today, the Jordan brand continues to thrive, with Nike’s fourth-quarter results to 31 May 2024 reporting its value at $7 billion and a 6% sales increase, positioning it as a bright spot in the company’s portfolio.

Australia’s Delly1: A Local Effort

In Australia, Peak Australia introduced the Delly1, a signature shoe developed in collaboration with Olympian and NBA champion Matthew Dellavedova. Dellavedova had extensive input into the shoe’s design, stating, “I wanted a low-cut shoe that was light and close to the ground because I need to guard all these quick guards that are tough to defend over here [in the NBA].” The process involved rigorous testing and iterative adjustments to meet his specifications.

However, despite the deliberate development process, the creation of the Delly1 failed to meet the criteria required to access R&D tax incentives.

Understanding R&D Tax Incentives

Australia’s R&D tax incentive program aims to encourage innovative activities that companies might not pursue otherwise. The program offers tax offsets, calculated based on qualifying R&D expenditure, with rates and refundability dependent on the company’s situation.

To qualify, activities must fall under two categories:

• Core R&D Activities: Activities that involve systematic experimentation guided by scientific principles to generate new knowledge.
• Supporting R&D Activities: Activities directly related to and necessary for the core activities.

Active Sports Management Pty Ltd, the company behind the Delly1, applied to Industry Innovation and Science Australia (IISA) to register the development of the shoe as a “core R&D activity.” However, both the ATO and subsequent appeals, including those to the Administrative Appeals Tribunal and the Federal Court, denied the claim.

Why the R&D Claim Was Denied

The Federal Court determined that the development of the Delly1 did not involve the level of technical or scientific uncertainty required to qualify as core R&D. The court ruled that the process relied on subjective opinions rather than systematic experimentation to resolve unknowns. As a result, the claim for R&D tax incentives was disallowed.

Key Takeaways

The case of the Delly1 underscores the stringent criteria for accessing R&D tax incentives in Australia. While the creation of innovative products is valuable, businesses must ensure that their processes meet the legal definition of core or supporting R&D activities, with a clear focus on scientific principles and experimentation.

If you’re exploring whether your business activities qualify for R&D tax incentives, our team at Modoras is here to help you navigate the complexities of the application process.

Contact us today to ensure your innovation efforts meet the necessary standards for success.