What is an experiment in the R&D Tax Incentive?

The scientific experiment

The definition of R&D that AusIndustry uses to assess the eligibility of R&D Tax Incentive applications is based on the principles of scientific experimentation.

Many people who read that are put off because they think that their R&D may not measure up to the sort of rigour one normally associates with scientific experiments.

AusIndustry is not expecting an academic or scientific level of rigour in the experiments that claimants conduct as part of their claimed R&D. The key phrase is ‘principles of scientific experimentation’. AusIndustry expects you to follow the general principles of scientific experimentation.

Refer to the ‘refreshed’ AusIndustry guide for more information on how AusIndustry view the principles of scientific experimentation.

So, what is an experiment in the R&D Tax Incentive? Well, this article explores the principles that AusIndustry is expecting you to follow.

A practical guide to experimentation in the R&D Tax Incentive

What AusIndustry is getting at is that you have conducted your experiments in a planned and systematic manner. What does that mean?

It means that:

  • You have a theory or hypothesis that you want to confirm.
  • You design a (controlled) experiment that is capable of proving or disproving your hypothesis.
  • You conduct that experiment according to a plan you wrote down before experimenting.
  • You use the results from the experiment to prove or disprove your hypothesis.

The important thing is that you have a theory/proposition/hypothesis that can be confirmed (or not) by the experiment. An experiment which only aims to collect data which it is hoped may tell you something about your problem, is not valid in the eyes of AusIndustry. An experiment without a plan is not a valid experiment either.

What is an hypothesis?

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 technical gap – a problem that you can’t solve, 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 come up with an idea of at least a partial solution, often one with high technical risk. You may collect some data and analyse it, looking for a pattern.

Regardless, a hypothesis must be specific and measurable. AusIndustry is not actually interested in your hypothesis – just that you have one, and that it is capable of being proven or disproven by your experiment. In fact, the actual hypothesis is not often stated in the AusIndustry R&D Tax Incentive application, as they can be highly technical in nature.

However, you do need to write down the object of your experiment in your supporting documentation as AusIndustry may ask to see it in a subsequent review. You may not call it an ‘hypothesis’ but the object of the experiment must be documented and must be testable.

The hypothesis doesn’t need to be a complete answer to your technical gap. It is common for a technical gap to require a series of experiments – each experiment has a hypothesis for part of the overall solution. With each experiment, you build up your level of knowledge.

These hypotheses may come from your own experience, or you may find partial solutions on the Internet. This is partly what AusIndustry refers to as a ‘systematic progression’ of work.

The hypothesis is typically expressed in terms of the outcome of the experiment – I hypothesize that my new algorithm will achieve an accuracy of ‘X’, or achieve a response time of ‘Y’. Achieving that result may requires a series of experiments where the configuration or input variables of the experiment are adjusted to achieve the desired result.

Failures in Experiments

Unsuccessful experiments are not bad things. In fact, failed experiments can help show that the technical gap was a difficult one to address. AusIndustry does expect you to document what you learnt from the failed experiments – how did this learning help frame future experiments (which may have been successful).

Even if the series of experiments was never successful, if you gained new knowledge from those experiments and documented that knowledge – that could still be eligible R&D.

Documenting your experiments

The level of documentation only needs to be sufficient to back up what is claimed in the R&D Tax Incentive application. However, the supporting documentation (by definition) will be written before the R&D Tax Incentive application is drafted, so you do need to discuss what you plan to claim with your R&DTI consultant during your R&D so that you will have enough documentation to cover the claims that will be made in the application.

The level of documentation expected does also depend upon the size of the company (and the size of the R&D claim). Small companies are not expected to have detailed documentation although you still need to show that the claimed R&D did actually take place.

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