R&D Tax Incentive Context
The R&D Tax Incentive is a self-entitlement, self-education and self-assessment program assessed for eligibility and compliance to enable the production of a successful application.

Introduction

R&D Tax Incentive context – it is important to understand how the R&D Tax incentive views the subject of R&D and how it is practised. Even the meaning of ‘R&D’ needs clarification.

The R&D Tax Incentive is focused on solving technical problems via the acquisition of new knowledge via a systematic, experimental process. Product, commercial or business innovations that are not technical will not be eligible.

Small (or even larger) companies are often disappointed to learn that the development of their innovative new product is not eligible because there was nothing new other than the concept itself.

Similarly, commercial or business risk is irrelevant – only technical risk matters. The eligibility of R&D activities is also not related to the commercial value or success of the product, process or service that the R&D is associated with. In fact, the product, process or service development can be a total failure and not even make it to market – the R&D can still be eligible.

Combining known technology in a known or straight-forward fashion is also not eligible – no new knowledge was needed. Either some of the technology or part of the integration method must be new.

There are six (6) stages for a project, from conceptualisation through to commercialization, as shown in the following diagram. Eligible R&D activities will come from the first three stages of a project.

The path to commercialisation of an innovative product, process or service

R&D Tax Incentive

1. Conceptualisation

R&D Tax Incentive

2. Research & Development

R&D Tax Incentive

3. Proof-of-Concept (Technical)

Eligible Activities

R&D Tax Incentive

4. Proof-of-Concept (Commercial)

R&D Tax Incentive

5. Pre-Production Development

R&D Tax Incentive

6. Early Stage Commercialisation

Ineligible Activities

R&D Tax Incentive view of R&D

Many newcomers to the R&D Tax Incentive (and indeed a lot of experienced participants) struggle with the definition of ‘R&D’ used in the R&D Tax Incentive programme. For better or worse, a scientific/experimental definition of R&D was chosen. Since this definition (see R&D Tax Incentive legislation) is enshrined in legislation, it will not be changing anytime soon, so we need to work with it.

The R&D Tax Incentive is concerned with the acquisition of new knowledge related to a technical problem via a scientific experimental process. That knowledge must be new – that is, not in the public domain. See Scientific experimental process for more information on this. Basically, you need an hypothesis (theory) than you can prove or disprove with your experiment.

The following diagram summarized the R&D Tax Incentive view of R&D.

The R&D process

The AusIndustry idea of R&D can be summed up in the diagram on the left from the previous AusIndustry guide. The current AusIndustry guide can be found here: R&D Tax Incentive – Guide to Interpretation).

Mapping the AusIndustry requirements onto engineering practice can be a challenge, as engineers don’t generally approach their work as scientific experiments.

To paraphrase the requirements:

  • There must be a technical gap (see  What is a technical gap in R&D Tax Incentive?).
  • The solution to the technical gap cannot be determinable without conducting an experiment.
  • A hypothesis is required – a possible solution to the technical gap
  • An experiment is required to gain the required knowledge needed to test the hypothesis (see What is an R&D Tax Incentive experiment?).
  • That experiment must have a structure – a logical progression of work that is decided upfront before the experiment is performed.
  • The results from the experiment must show that the hypothesis is confirmed or not

If a technical gap can be solved without an experiment, then it is not eligible R&D. For example, accessing in-house knowledge, publicly available information, asking industry experts or from logical reasoning.

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