Tax deduction denied for signature basketball shoe R&D

The Federal Court has rejected a sports company’s appeal for research and development (R&D) incentives related to the creation of an Australian signature basketball shoe.

The movie Air highlighted the significance of the Air Jordan shoe to Nike. Initially expected to generate around $3 million in sales by its fourth year, the iconic signature shoe exceeded expectations, bringing in $126 million in its first year alone. 

Nike’s recent fourth-quarter results, for the period ending 31 May 2024, revealed the Jordan brand is now valued at $7 billion and showed a promising 6% sales increase.

In Australia, Peak Australia developed the Delly1 shoe in collaboration with Australian Olympian and NBA champion Matthew Dellavedova, who played a key role in the design process. Dellavedova has shared that he was heavily involved, explaining in interviews that he wanted a “low-cut shoe that was light and close to the ground,” as he needed it to provide agility for guarding quick NBA players. He praised Peak for their work, noting that the design was refined through a process of testing and making minor adjustments.

However, the question arose: did the development of the Delly1 meet the criteria for accessing R&D tax incentives?

R&D Tax Incentives: Eligibility and Requirements

The R&D tax incentive is designed to encourage companies to undertake research and development activities they might not otherwise pursue. The program offers a tax offset based on qualifying R&D expenditure. Whether the offset is refundable or non-refundable depends on the company’s circumstances.

To qualify, R&D activities must be classified as either “core” or “supporting.” Core R&D activities are those that involve scientific or technological uncertainty, and which cannot be determined in advance. These activities must be pursued with the goal of generating new knowledge through systematic experimentation and scientific principles.

Active Sports Management Pty Ltd, the company behind the Delly1, sought to register the shoe’s development as a “core R&D activity” with Industry Innovation and Science Australia (IISA). However, the Australian Taxation Office (ATO), the Administrative Appeals Tribunal, and ultimately the Federal Court ruled that the development of the Delly1 did not meet the criteria for core R&D.

The claim was denied because the court found no evidence of technical or scientific uncertainty in the process, ruling that the development was based more on subjective preferences rather than objective scientific experimentation.

Do you have any questions relating to R&D tax incentives? Feel free to discuss with us at Bates Cosgrave.