Is your hard work R&D?
The Most Common Misconception
Many Australian founders mistakenly believe that building a new or improved product automatically qualifies them for the R&D Tax Incentive (R&DTI).
The R&DTI is designed to encourage genuine research and development that advances Australia's technological capabilities and global competitiveness, rather than to subsidise routine product development or business-as-usual activities.
Eligibility under the R&DTI is based on specific R&D activities, rather than on an entire project. A project may contain both eligible and non-eligible activities. Under the current legislation, there are two types of activities that may be eligible for the R&DTI: core R&D activity and supporting R&D activity.
To qualify as a core R&D activity, there must be one or more experimental activities conducted for the purpose of generating new knowledge. The outcome of the activities cannot be known or determined in advance by a competent professional in the relevant field. The activities must be conducted through a systematic progression of work, based on principles of established science, and proceed from forming a specific technical hypothesis, testing the hypothesis through series of experiments to prove/disprove the hypothesis, observing and evaluating the results, and drawing a logical conclusion.
A supporting R&D activity is an activity that is directly related to a core R&D activity. In certain circumstances, supporting activities must also satisfy the dominant purpose requirement to be eligible under the R&DTI.
This article explains R&D activities under the R&DTI, with a particular focus on core R&D activities. Let’s breakdown each component of a core R&D activity:
Outcome cannot be known or determined in advance
The "unknown outcome" is the important factor for R&DTI eligibility. To determine if your work qualifies, you must move beyond thinking about your final product and start reflecting on the technical hurdles you face. This involves identifying a specific knowledge gap where the outcome cannot be determined in advance from publicly available information, experience, or existing knowledge, and therefore requires the formulation and testing of a hypothesis in an experiment.
You are expected to make reasonable and thorough enquiries into current knowledge, information, and experience to achieve your outcome before commencing the R&D activity. This may involve literature reviews, consultations with competent professionals in the field, or other investigations. Records must be maintained to demonstrate that the enquiries have been undertaken and the basis on which the unknown outcome was identified.
Ask your team this core question:
"Can our technical challenge be solved using existing, publicly available knowledge, or is there a fundamental gap that prevents us from knowing the outcome in advance?"
If the answer is, "no, we don't know if this will work based on what's currently known," you may have a strong indicator of eligible R&D. This answer is the gateway to documenting a claim because it points toward a hypothesis-driven process rather than a known implementation plan.
Systematic Progression of Work
The process you follow to solve the unknown outcome is what we look for in an R&DTI claim. This process is defined as systematic progression of work based on principles of established science. It's a structured approach starting where you form a specific technical hypothesis, design and run series of experimental activities to prove or disprove your hypothesis, observe and evaluate the results, use those learnings to inform your next steps and generate a logical conclusion. Your conclusion may indicate that alternative approaches need to be investigated, leading to the development and testing of a new hypothesis.
New Knowledge
Another important element for R&DTI eligibility is that the purpose of conducting core R&D activities is to generate a "new knowledge" that does not already exist. The program is designed to reward the process of discovery through R&D activities.
Don't Let Your R&D Go Unrewarded
Eligibility for the R&D Tax Incentive hinges on the unknown outcome and the experimental process you use to solve it. With background in science and engineering, our team helps businesses translate complex technical work into clear and well-supported R&D Tax Incentive claims that align with the program's legislative requirements.
If you are developing new products, processes, or technologies, it may be worthwhile assessing your eligibility early and ensure appropriate records and evidence are maintained throughout the project. Contact our team to discuss your project and explore whether the R&D Tax Incentive may be relevant to your activities.
