What is the issue?
Problems with many R&DTI applications start with the hypothesis used. It is difficult for many claimants to get this right. Many are vague and non-specific, making them impossible to prove in an experiment, making them eligible for the R&DTI.
Anyone who has investigated the R&D Tax Incentive to a reasonable degree will have come up with a conundrum. If AusIndustry expects you to have a knowledge gap – knowledge that you need to solve a technical gap (problem), how are you supposed to come up with a hypothesis that you can prove in an experiment?
Well, how would you normally tackle your problem? You do enough investigation to develop an idea or at least a partial solution, often one with high technical risk, and you try it out (experiment). This is one reason you would start any R&D activity with literature research and searching in the public domain.
There are usually two reasons why you need to do background research:
- To establish that the knowledge you need is not already available.
- To find clues or partial answers that will allow you to develop a hypothesis.
AusIndustry is interested in both. In an AusIndustry review, you will be expected the prove the first point of course – you are justifying the need for the R&D.
The second reason, in particular, seems to elude many claimants, who are often unable to explain where their hypothesis came from.
From the ‘refreshed’ AusIndustry guide:
Your hypothesis is your idea or proposed explanation for how you could achieve a particular result and why that result may be or may not be achievable.
You may express your hypothesis in a single statement or in several statements that set out what you plan to do and why.
We expect you to explain:
- what result you aim to achieve
- how and why you think you can achieve it, informed by your background research
We expect to see evidence that shows how your background research helped you develop your hypothesis.
Your hypothesis will guide your investigation. You need to develop it before you start your eligible core R&D activities.
You need to be able to test it through experiments you conduct to determine the outcome of your core R&D activities.
AusIndustry published the following video which goes a good way towards explain what a good hypothesis is and how it might be derived:
What are a hypothesis and an experiment?
What AusIndustry are getting at
Let us dissect this AusIndustry guidance.
When you do background research into your knowledge gap, you may not find the complete answer, but you may come across information that provides a clue, or a partial answer. Sometimes this information is combined with prior knowledge or experience you or someone else has in a related area.
By combining knowledge or experience from different sources, you come up with a theory or a hypothesis. May only be a partial answer, but it should get you a step closer to the complete answer.
You cannot design an experiment until you know what that experiment is intended to achieve. Your first task is to articulate the hypothesis. The second task is to determine how you will prove your hypothesis in an experiment – the experimental design. AusIndustry will want to see how you approached both tasks – how you came up with your hypothesis and how your experimental design was developed to test this hypothesis.
This pre-work needs to be done before you undertake the experiment obviously. Hypotheses do not just ‘pop out of thin air’ – you arrive at a hypothesis via a combination of background research, experience and logical reasoning. The work you do to develop your hypothesis may well be a Supporting Activity that you can claim since it is directly related to the Core Activity.