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Conducting core R&D activities for the R&D Tax Incentive
Eligible core R&D activities
To be eligible for the R&DTI, core R&D activities must be conducted for the purpose of generating new knowledge.
Additionally, the outcome of your activity cannot be known or determined in advance and can only be determined by applying a systematic progression of work.
Some R&D activities are excluded from being conducted under the R&DTI program.
The legislative definition of core R&D activities is provided in section 355.25(1) of the Income Tax Assessment Act 1997.
Outcome cannot be known or determined in advance
You must ensure that the outcome of your core R&D activity cannot be known or determined in advance. To do this, you need to assess that a competent professional cannot know or determine the outcome of the core R&D:
- based on knowledge, information or experience that is publicly available or reasonably accessible, anywhere in the world at the time you start your activity
- without an experiment as part of a systematic progression of work.
Information or experience means the facts, information and skills acquired through experience or education, and the theoretical or practical understanding of a subject.
Information that is not reasonably accessible is not available. This may include information that is commercially sensitive and held by a competitor, for example a trade secret.
You need to check that knowledge of how to achieve your outcome does not exist worldwide. To do this, you may:
- review scientific, technical or professional literature
- carry out internet searches
- conduct patent searches
- seek advice from an expert.
If the technical or scientific idea you are testing is in your area of expertise, then you may be aware of whether relevant knowledge, information or experience is available. Even if you or someone in your organisation is an expert in the field, you will need to research other sources to check that knowledge of how to achieve your outcome does not exist worldwide.
Be sure to determine that your R&D has an unknown outcome before applying for the R&DTI and keep records of how you determined this. You will need these records if your application is examined.
A competent professional is a relevant person in their field who:
- has knowledge and experience
- has qualifications (if appropriate) or can otherwise act with a reasonable level of skill
- keeps up to date with developments
- has access to knowledge and resources around the world including the internet, relevant industry journals or other competent professionals in the field.
Scaling-up refers to increasing the scale of a product, device, process or technology that is known to function at a smaller scale.
Under the R&DTI, scale-up activities are subject to the same eligibility requirements as all other core R&D activities. These requirements include having an unknown outcome that:
- cannot be resolved using existing knowledge, and
- can only be resolved by conducting hypothesis-driven experiments as part of a systematic progression of work.
Scale-up activities that apply existing knowledge, including knowledge generated from smaller scale work, generally do not qualify as core R&D activities because their outcome could be reasonably determined in advance.
Some scale‑up activities may involve an unknown outcome in the form of a technical uncertainty. However, to qualify as core R&D, scale-up activities must include all elements of a systematic progression of work. Without experimentation, activities that rely on established problem‑solving approaches, standard engineering practices or optimisation methods will not meet the requirements of the R&DTI.
For example, identifying the best configuration or operating settings for a scale-up activity may involve a technical uncertainty. However, if this technical uncertainty is resolved by selecting from available options through trial and error (rather than testing a hypothesis through experimentation), the activity will not qualify as core R&D.
If you are registering a scale-up activity as a core R&D activity, you should:
- identify the specific technical uncertainty your activity is addressing
- explain why the technical uncertainty cannot be resolved using existing knowledge, including knowledge gained from smaller scale work, and
- describe all elements of your systematic progression of work.
Simply stating that a scale‑up is new or has not been done before is not sufficient to demonstrate eligibility for the R&DTI.
If a scale-up activity does not qualify as a core R&D activity, it may still be eligible as a supporting R&D activity.
Systematic progression of work
Under the R&DTI your core R&D activities must follow a systematic progression of work. Based on the principles of established science, a systematic progression of work includes all of the following elements:
You must carry out your systematic progression of work according to a scientific approach, logically designed to test a hypothesis.
This means that your hypothesis has a scientific basis and the experiments, observations, evaluations and drawing conclusions are conducted in a scientific way.
You are expected to keep records of each step of the systematic progression of work.
You may conduct one or more steps over several years. However, the parts of a core R&D activity you conducted in an income year need to be registered for that year.
Be aware that your R&D activities may still be eligible for the R&DTI even if you do not reach a positive outcome.
Hypothesis
A hypothesis is your idea or proposed explanation for how you can achieve a particular result, and why that result may or may not be achievable. You need to develop your hypothesis before you start your core R&D activities. You need to be able to test it through experiments to determine the outcome of your core R&D activities.
You can express your hypothesis in a single statement or in several statements that set out what you plan to do and why. Your hypothesis should explain:
- what result you aim to achieve
- how you intend to achieve the result
- why that result may or may not be achievable.
Your records should show evidence of how background research was used to develop your hypothesis.
Experiment
An experiment is a scientific procedure that you undertake to test your hypothesis.
Your records should explain how you conduct or plan to conduct your experiment. For example, you might describe the parameters you vary, those you hold constant, and those you observe or measure.
Experiments can take many different forms and take place in many different environments. The details and design of experiments may vary between industries and organisations. However, they must aim to test a hypothesis as part of a systematic progression of work.
You may group a series of related experiments in one core R&D activity if each experiment aims to test the same technical or scientific idea.
Narrator: To apply for the R&D Tax Incentive you need to conduct research in a scientific way with a hypothesis driven experiment.
Narrator: This is George, he has an idea to test.
George: These stick to everything. Hmm… I wonder if I can make something useful with that.
Narrator: That’s the start of an idea George, but just exploring by trial and error isn’t science. To test it scientifically you need a statement you can test to see if it’s supported or not proven: a hypothesis.
George: The burrs stick because they have these small flexible hooks. If I can make a fabric with the right length and flexibility of hook, it’ll stick to a fluffy surface.
Narrator: That’s it, that’s your hypothesis! The next step is to test it with an experiment.
Narrator: In a good experiment you need to be able to compare outcomes; what happens compared to a control?
George: Does it stick?
Narrator: Compare one variable at a time in an experiment.
George: This time I’m varying the length of the hooks on the fabric. They’re all made of the same stuff and I’m testing them all sticking to the same surface. How many times should I do my experiment?
Narrator: Do it enough times to tell a real effect from chance. Design it in a way to avoid bias.
George: That feels stronger.
Narrator: No matter how hard you try, bias can sneak into observations. But you can try to reduce this as much as possible. You can then analyse your results to decide if your idea is supported, or does it give you a way to change your idea and test it again?
George: Right, now I’ve got an idea on what size hooks I need. My next experiment will test which fabric is strongest.
Narrator: Experiments are the key to the scientific method and allow us to better understand our world and solve problems.
Narrator: Want to know more abut the R&D Tax Incentive program and how it can help your business? Go to business.gov.au or call 13 28 46.
Observation
Observation is where you observe, measure and record information and results (data) that relate to your experiment.
Observations can be:
- quantitative – measuring data with numbers
- qualitative – describing the qualities or characteristics of something non-numerically.
Your observation records should include when your observations were made.
Evaluation
Evaluation is where you analyse the results of your experiments and assess what they mean.
Your evaluation records should show that you:
- evaluated the results of your experiment to understand why and how you achieve or do not achieve your desired outcome
- analysed what occurred and when, how or why it occurred using established data analysis techniques
- evaluated causal relationships between the parameters you varied, held constant, tested or measured in your experiment.
Logical conclusions
The final part step of the systematic progression of work is to draw logical conclusions about your hypothesis based on the evaluation of your experimental data.
Your conclusion may or may not support your hypothesis. You may also conclude that you need to investigate different solutions and test a new hypothesis.
You can then test this new hypothesis through new experiments. Your new experiments may be similar enough to include as part of the same core R&D activity. Or they may be different and need to be part of a new core R&D activity.
New knowledge
New knowledge is the theoretical or practical understanding you are trying to discover from your experiments.
New knowledge can be either general or applied. It may be a new theoretical or practical understanding of a subject. It also may be in the form of a new or improved material, product, device, process or service.
What makes this new is that the knowledge does not already exist and it adds to the current knowledge.
The purpose for conducting each of your claimed core R&D activities should be apparent from your records.
Further information
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Find sector specific guidance to help you self-assess whether your R&D activities are eligible for the R&DTI.
Sector guides for R&D Tax Incentive applicants -
Register for live information sessions to help you better understand the R&DTI.
Information sessions
The ‘Guide to interpretation’ provides further guidance on eligibility and includes details and examples of core R&D activities. The Department of Industry, Science and Resources recommends reading the guide before self-assessing the eligibility of your R&D activities or registering for the program.