The specific questions that AusIndustry will be expecting you to answer with documentary evidence are:
- How did you establish that you had a knowledge gap? What searching did you do in the public domain?
- How did you develop your hypothesis?
- How did you design your experiment?
- How did you observe and record the results of your experiment?
- How did you evaluate your results?
- How did you arrive at your conclusions concerning those results? Did they support
your hypothesis or generate other new knowledge?
AusIndustry is not prescriptive about what type of documentation they want to see, and quite rightly so – everyone’s circumstances are different. Their focus is on the result – what your documentation shows. As long as you answer the questions above and show that the answers were documented around the time of the experiments(s), the form of the documentation is irrelevant.
In their Guide to Interpretation, AusIndustry does suggest many forms of documentation that could be suitable support for your R&D Tax Incentive application, so you are encouraged to study this list.
Best R&D practice is to plan your R&D and plan your R&D Tax Incentive compliance strategy upfront, and put documentation systems and processes in place before you embark on the R&D activities. See Structure your R&D for the R&D Tax Inventive. In fact, just having systems in place will a good thing in a review.
We expect you to keep records so that you can provide them to us if we review your application for the R&DTI. Your systems and processes that identify, evaluate and record your eligible R&D activities and expenditure will be evidence to support your claim.
AusIndustry will consider non-contemporaneous documentation (documentation written later), but you are seriously undermining your case if you rely on non-contemporaneous documentation. Several recent cases before the Administrative Appeals Tribunal (AAT) have reaffirmed the importance of good (and contemporaneous) supporting documentation for your R&D Tax Incentive application.
For AusIndustry information on compliance and good record keeping, please see The R&D Tax Incentive – Compliance Readiness.
Establishing your knowledge gap
A knowledge gap is knowledge that you need to solve a problem (a technical gap), blocking progress in your R&D.
In your R&D Tax Incentive application, you will have claimed an experimental activity to resolve a technical gap by generating the knowledge you need to fill that knowledge gap.
AusIndustry will expect you to present contemporaneous documentary evidence which shows that you couldn’t obtain that knowledge without experimenting. The first requirement is showing that the knowledge was not accessible to you (see Prior art searching for the R&D Tax Incentive) so you must document the steps you took to establish this before you commenced the R&D activity.
A hypothesis is a theory or an idea for achieving a particular result – for example, to address a technical gap or part of a technical gap. AusIndustry expects that you will develop and document your hypothesis before designing your experiment. In particular, AusIndustry expect you to document:
- What result you aim to achieve.
- How and why you think you can achieve it.
AusIndustry expects to see evidence that shows how your background research helped you develop your hypothesis. This implies that you have done some pre-work, which could be a Supporting Activity.
AusIndustry assumes is that your hypothesis will guide your investigation, so there needs to be a clear connection between the hypothesis and the experiment’s design.
You need to test this hypothesis through experiments you conduct as part of your claimed R&D activity.
This is how AusIndustry sees an experiment:
An experiment is a scientific procedure that you undertake to test your hypothesis, observe what happens and compare this to what you expect.
By ‘scientific procedure’, AusIndustry means that it is a planned, designed and systematic activity. You need to think about how the experiment confirms or denies your hypothesis and design the experiment accordingly. See What is an R&D Tax Incentive experiment? for more information.
All this pre-work should be documented contemporaneously – you need to show when you did this pre-work (i.e. before the experiment). This includes the experimental procedure. An independent observer (say AusIndustry) must see how experiment generated the outcome you have documented.
Analysis and conclusion
The analysis of your experimental results and how you derived your conclusions from these results is paramount. Raw results are typically meaningless without some context, which AusIndustry will not have. The experiment’s conclusion is important, but you must also document how those conclusions were derived from the results.
These conclusions must be expressed in terms of the hypothesis that informed the experiment – was the hypothesis supported or not? Even if the hypothesis was not supported if you generated new knowledge, then that R&D activity could still be eligible for the R&D Tax Incentive. In particular, if the knowledge gained gave rise to a new hypothesis and a new experiment that is often a good thing as it shows a work progression.
Document each stage of the experimental process, starting with the knowledge gap. The amount of detail doesn’t need to be excessive – just enough to support the claims made in your R&D Tax Incentive application. Take care with the traceability of the documents – can you prove when the document(s) were generated?
As should be obvious, having the appropriate systems and processes in place upfront will make this task a lot easier, and will give AusIndustry good evidence that you have been systematic in your R&D.