Gambling and tobacco-related RDTI exclusions to go ahead

Gambling-related RDTI exclusion 

The provisions to be enacted encompass an exceptionally broad set of exclusions and are likely to also affect businesses operating adjacent to, but not wholly within, the gambling industry. 

For example, the definition covers any type of activity carried out that “relates to” gambling and “gambling-like practices” (a term also used for the Digital Games Tax Offset (DGTO) legislation but not defined therein).

Since the exclusions are not appropriately qualified or limited, the exclusion is likely to apply in a manner not intended by the legislature. 

Claimant considerations

Claimants will need to consider both the purpose of the otherwise eligible R&D activities, as well as the potential use of the output of the R&D results. There will be risks that if a technology could be used in gambling, or could be used by a gambling entity, it may fall under the exclusion even if the R&D itself prima facie appears to have little to do with gambling or is not being undertaken by a gambling entity. 

Take particular care around activities involving digital products with mechanics that could be seen to resemble gambling, such as:

For example, the DGTO legislation excludes games with contain loot boxes, per the example in its Explanatory Memorandum. In practice, this has resulted in many fringe cases determining whether certain features in games meet the definition of a 'loot box'.

Only time will tell as to whether video game developers, digital engagement platforms, consumer apps and loyalty programs will be caught within the exclusions.

Given that the new RDTI legislation uses the DGTO definition as one of three limbs for the exclusion, this will likely lead to a large portion of digital gaming / video games businesses being excluded from the RDTI. 

Harm minimisation carveout

Notably, there is an important safeguard in the form of the carve out for those activities caught where they are “solely for harm minimisation.” However, the use of the explicit term 'solely,' means that in practice this carve out may only be construed and interpreted extremely narrowly. It is also unclear whether harm minimisation R&D conducted by the gambling operators themselves is eligible, or only when conducted by third parties.

Further regulatory guidance on the gambling exclusion in particular with useful examples would be welcomed, illustrating mixed-use and borderline exclusionary cases (e.g., payment systems, cybersecurity, fraud detection, generic platform infrastructure) as well as worked examples of eligible harm minimisation R&D (e.g., behavioural analytics, self-exclusion tools, real time risk detection). 

Overall observations

R&D tax concessions have existed in Australian since 1985 to encourage innovation and technological advancement in all industries on an agnostic or sector-neutral basis, supporting any activity that meets the scientific and experimental statutory criteria. 

This approach matches most other advanced economies, with many adopting the principles laid out in the Frascati manual. 

To date, these sector-neutral innovation principles have globally avoided selective industry exclusion and the singling out of tobacco and gambling, both being regulated and lawful industries, does prima facie appear to be prejudicial given that other industries with significant public health impacts such as social media, alcohol, fossil fuels and ultra-processed foods will all remain eligible for RDTI support.

Economic impact

From an economic perspective, with no other jurisdictions contemplating a similar approach, affected multinationals are likely to seek to relocate R&D activities to other favourable jurisdictions such as New Zealand or Singapore, with Australia’s reputation as a place of objective innovation being severely diluted, and further uncertainties arising in the recent Federal Budget announcements. 

RSM consider that affected companies will face significant immediate uncertainty, increased audit risks, and costly legal interpretation. Given the existing complexity of RDTI eligibility, it is to be hoped that there will be an available channel of communication as to whether activities may fall within the exclusions. This would assist in reducing extended disputes and unnecessary compliance costs. In practice borderline claimants may also consider obtaining an Advance finding to obtain certainty. 

RSM consider that affected companies will face significant uncertainty, increased audit risks, and costly legal interpretation, even in the absence of evidence that these exclusions will serve to improve public health outcomes.

We also note that the legislation applies retroactively and will apply to income years starting on or after 1 July 2025. Many companies may have multi-year R&D programs already underway, but there is no grandfathering provision for projects that commenced before the announcement date.

Given the existing complexity of RDTI eligibility, we hope to see updated RDTI guidance materials and an available channel of communication as to whether activities may fall within the exclusions. This would assist in reducing extended disputes and unnecessary compliance costs.

Finally, the enactment of these exclusions in an otherwise industry-agnostic incentive regime may in the future open the door to other exclusions based on the prevailing political sentiment at that time, rather than objective innovation criteria. 
 

FOR MORE INFORMATION ABOUT RDTI ELIGIBILITY

If you would like to learn more about RDTI exclusions or the claiming process, please contact your local RSM office.