What is a technical gap in R&D Tax Incentive?

So, you have looked into the R&D Tax Incentive enough to know that you are an eligible entity, so you are eligible to submit an R&D Tax Incentive claim. The next issue is what can you claim – which part of your R&D is eligible?

If you did a bit more digging, you would then discover Core Activities and technical gaps – your claimed R&D activities must satisfy certain criteria published by AusIndustry, who try to explain what they mean by a ‘knowledge gap’. Whilst the AusIndustry guide does provide quite a deal of useful information, you do not get a good appreciation of what a knowledge gap really is. This guide attempts to provide a more practical explanation. The AusIndustry guide should still be consulted as there are many exclusions and exceptions that you need to be aware of.

Routine Problem solving

Most technical problems you will encounter in an R&D development can be solved using your experience and knowledge. Other problems can be solved through some analysis, consulting others in your field, or by referencing publicly available sources of information in your field. A large part (in fact the majority) of most R&D projects fall into this area. Such activities are not eligible for the R&D Tax Incentive, because there was no knowledge gap that needed an experiment to solve.

The need for this experimental step is what separates the R&D Tax Incentive from the widely understood meaning of ‘R&D’. This has led to much confusion (and disagreement), but that distinction is unlikely to go away any time soon as it is enshrined in legislation.

However, if after performing the searching described above, you still don’t have a solution for your problem, then you may well have a technical gap and a knowledge gap that could serve as the basis for an eligible R&D activity.

Key word is ‘Technical’

The key word is ‘technical’ which means that it is related to a technical aspect of your development work. You have a technical problem that you just don’t have an answer to.

A technical gap is not related to customer or business issues. It is not related to product concepts. The R&D Tax Incentive is about technical risk – not business or commercial risk.

Eligible R&D is also not related to product value or success. Eligible R&D can be associated with a product development that was a failure, or was technical success but was a commercial failure. As long as the (experimental) R&D generated new knowledge, you could have eligible R&D.

A technical problem is also not the same as innovation. Something can be innovative (as in no-one has thought to do that before) but may not involve an intractable problem or even new technology or new knowledge.

You may have an extremely innovative idea, but it may be a combination of components that are all known and can be combined in a way that is also known. This test also rules out a lot of prospective R&D activities.

Eligible R&D does not have to involve new technology (although it often will). The technology or the components may be known, but there may be a difficult problem to combine those components in a way that works. The way in which those components need to be combined isn’t known and isn’t obvious.

Technical gaps also need to be at the detail level. You cannot claim an entire system or development as an R&D activity – think of an algorithm, component, sub-assembly or process step.

Examples of technical gaps

Examples of technical gaps are:

  • A new algorithm, equation, architecture, protocol, translation engine.
  • Improvements to an existing system in terms of performance, security, reliability, scalability.
  • Redesigning existing systems using new technology – e.g. designing a modular system architecture to replace a monolithic system architecture to improve performance and scalability.
  • Integrating existing modules in a way not done before.

As may be obvious from this list, valid technical gaps can come in many forms, so it isn’t possible to define what a technical gap is or by where you may find one. Obviously developing an entirely new algorithm, process or device is highly likely to involve solving one or many technical gaps. However, valid technical gaps can occur in many situations, so the most useful way to approach this is to recognize when you have a valid technical gap.

How to recognise a technical gap

If you are faced with a technical problem that you just do not know how to solve, that is a good first step. If you have good experience and knowledge of that field, even better – you have more credibility about your knowledge gap.

Your next step is to consult others in your organization who may be able to help. Assuming that does not help, you need to undertake reasonable knowledge searching in any and all publicly accessible sources at your disposal. You need to look in any area where an expert in your field may reasonably be expected to look. Please refer to the article on knowledge searching for more information. You also need to document that searching to demonstrate to AusIndustry later that you really did have a knowledge gap at the time.

If this searching fails to identify a solution to your problem, you may well have a valid technical gap. You have ‘hit a brick wall’ so to speak. You are stuck. Notice that this description has been very generic – deliberately so.

Routine development versus eligible R&D

Perhaps there is something about your environment that means that a new piece of technology will simply not drop straight in. This is relatively common. There is ether something in your environment that needs to change or there is some configuration or modification of the new technology that may be needed. The key thing is that neither you nor the technology vendor have the knowledge to do that adaption upfront. You have searched the obvious industry forums and blogs and still no luck.

What you do have are some ideas or theories that might work or at least be part of a possible solution. The important thing is that there is significant technical risk and uncertainty involved.

If you did have some reasonable expectation that your theory should work, then your technical gap may not be valid – you did have the knowledge after all. This is what separates routine development from eligible R&D. There is always a risk that a new piece of technology will not work as expected. Mistakes can be made. Debugging is not valid experimentation.

Testing your new system or algorithm just to prove that it works is not an experiment in the context of the R&D Tax Incentive because there was no knowledge gap – you fully expected that the test would be successful. However, if you are very uncertain about your approach, your system or technology component is more of a prototype or proof of concept (high technical uncertainty and risk), then you may have eligible R&D.

Sometimes a technical development fails because a vital requirement was not identified. If it was not possible to foresee the need for that requirement upfront, then that could a valid knowledge gap.

The key thing is to think carefully about how confident you are that your new technology, algorithm, or process will work. If you have a reasonable level of doubt – identify what it is that created that doubt – it may be a knowledge gap.