What is a Core Activity in R&D Tax Incentive? R&D Tax Incentive applications to AusIndustry are written in terms of Core Activities and Supporting Activities. These two types of activities describe the actual technical work done in the claimed R&D, and in a sense, are the ‘meat’ in the R&D Tax Incentive application.
The Core Activities describe the experimental work that the application is based on. Supporting Activities describe other (often non-experimental) work needed for the Core Activities to proceed.
Core Activities are notoriously difficult to pin down. A hard and fast definition just isn’t possible because they vary so much. This article will offer guidance on identifying (eligible) Core Activities in your R&D.
The draft ‘refreshed’ AusIndustry guide provides a definition for ‘Core Activity’, but doesn’t really help identify Core Activities.
A Core Activity is an activity:
(a) whose outcome cannot be known or determined in advance based on current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
- is based on principles of established science; and
- 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)
This definition basically mirrors the legislation and is useful in evaluating a potential Core Activity once you have identified potential candidates but doesn’t actually give you a good feel for what a Core Activity is.
The AusIndustry Guide describes a list of excluded activities that you cannot claim as part of a Core Activity in your R&DTI application. For example, market surveys are not eligible. Before drafting your application, you should review this list of exclusions. Some of these activities may be eligible as Supporting Activities.
This AusIndustry definition does suggest that a Core Activity is concerned with solving a technical problem through experimentation, which it is.
A more useful guide to what is a Core Activity in R&D Tax Incentive
Generally, a Core Activity will describe an experiment or a related series of experiments representing a logical progression of work, aiming to solve a particular technical problem or technical ‘gap’ by generating the knowledge needed to address that technical gap. For that reason, AusIndustry often talks about a ‘knowledge gap’.
The logical progression of work is often a connected series of experiments where you improve your knowledge bit by bit with each experiment.
The scope of a Core Activity is often a sub-part of a much larger body of work. In software terms, a Core Activity may relate to a single algorithm or software component. In other engineering disciplines, a Core Activity may relate to a component, sub-assembly or process step. In other words, a Core Activity must be small enough to have a common cohesive focus.
Any technical development of any size can be decomposed into a series of sub-areas, sub-components or activities. Each sub-area will typically contain a mixture of routine development activities and some more difficult ‘’problem’ solving activities.
Scoping Core Activities
For the R&D Tax Incentive, breaking your development down into sub-areas may help you identify those areas that contain the likely eligible R&D. This helps where the eligible R&D is concentrated in one or more areas.
In other cases, the technical gaps may be spread across several areas, in which case you may end up with several smaller Core Activities. It isn’t good practice to combine the explanation of unrelated technical problems in the same Core Activity as the explanation will lack a common focus. There is no problem with having several Core Activities. In fact, the space available to describe each Core Activity is limited, so splitting up the technical work into ‘bite-sized’ pieces can help tell a coherent story.
When examining each area in your development for suitable Core Activities, you are looking for problems (technical gaps) that were difficult to solve, and in fact, could only be solved via experimentation.
The other approach is to identify the technical gaps (problems) in your R&D (wherever they might be) that could form the basis of eligible R&D. Then draw a boundary around each one or each set of related technical gaps – they will be your Core Activities. See What is a technical gap in R&D Tax Incentive? for more information on identifying these.
This approach works particularly well if you are disciplined enough to assess each technical problem for eligibility for the R&D Tax Incentive when you encounter that problem in your development. You can also ensure that you document the activities related to solving that problem when you do the work – it is by far the most efficient approach.
There are two reasons why each Core Activity should be very focused on a common theme or problem. One reason is that it is much easier to describe a single, focused activity logically and coherently for AusIndustry. The other reason is also much easier to identify and document the related R&D expenses for your Tax Schedule application to the ATO, which is part of your R&D Tax Incentive application.