With recent media attention on the R&D incentive, many claimants may be deterred by an increase in claim review by AusIndustry. However, the benefits of the Research and Development (R&D) tax incentive scheme shouldn’t be underestimated. It promotes and boosts innovation, research and development, and productivity by providing tax offsets to businesses that undertake R&D in Australia.
Eligibility for R&D tax incentives is self-assessed by the applicant so may be subject to a review by AusIndustry by way of:
- Pre-Registration Reviews
- Registration Reviews
- Desk Reviews
- Activity Reviews
- Large Business Innovation Reviews
Reviews can delay the process and increase the time spent on the claim, both of which can have a negative impact on a business.
In my 14 years as an R&D tax incentive consultant, I’ve been fortunate to have never had an R&D claim application reviewed. Furthermore, I have successfully led other clients through a claim review.
In this article, I share my top tips for avoiding an R&D claim review.
Tip 1 – Put yourself in the AusIndustry assessor’s shoes
Review your own application and ask yourself. Would someone who knows very little about my company and project understand to what these activities relate? For example:
- Have you used acronyms that don’t make sense to anybody external to the company?
- Is there enough background detail to set the scene and provide context?
- Have you included specific details and measurable parameters concerning intended outcomes?
- Are you adequately describing the knowledge gap?
- Did you adequately describe the scientific method?
The aim is to limit the number of questions that AusIndustry needs to ask you to understand the eligibility of the activities.
Tip 2 – Write a meaningful hypothesis
A hypothesis is a statement that can be validated or invalidated. Use your experience and knowledge on the topic to form an ‘educated’ likely answer to the scientific question that requires investigating.
The hypothesis should:
- Have an ‘experimental’ and ‘control’ comparison
- Demonstrate how success will be measured
- Give the reader a fair idea of what you plan to achieve, and an idea of the experiments that are required to test the hypothesis
The following is a fictional example of a poorly written hypothesis:
Implementing new RF scanners on Line A will enable defective goods to be removed from the production line.
Using the principles outlined above, the same hypothesis has been re-written below in a more acceptable format:
Designing and implementing new RF scanning systems (involving developing new software and algorithms to integrate off-the shelf scanning products) into Line A at Aust Co Pty Ltd’s Widget manufacturing facility will allow operators to identify, tag and remove faulty Widgets, to decrease packed defective goods incidents from x per cent to y percent.
Tip 3 – Provide specific, relevant experimental details that took place during the financial year
In providing details of occurrences throughout the year, don’t use the same generic experimental details that have been outlined in the experiment planning phase; they describe the various activities that will be undertaken, as opposed to what was done.
Draw up a list of all the steps that were undertaken to test the hypothesis during the financial year (in past tense). Set the scene by briefly describing the activities of the preceding financial year, as well as expectations for the following financial year.
For example, in a 2018 financial year application, you might write;
“During FY18, the machinery required for the experiment was installed.
“we expect to continue testing on X during FY19.”
Ensure the activities listed in the experimental section relate to the hypothesis; if they don’t, tweak the hypothesis. Include whether anything went wrong and how it was rectified. Did you need to go back and retest – or create new tests – to answer new questions? Some companies describe the first set of activities but do not adequately describe any reiterations or changes in direction, etc.
Tip 4 – Include a conclusion that validates or invalidates the hypothesis
Your conclusion should be consistent with the hypothesis and indicate if further investigations will be required or if the product/process/service is ready for implementation/commercialisation. Do not leave the reader guessing.
Below is an example of an acceptable conclusion:
It was found that designing and implementing new RF scanning systems (involving new software and algorithms to integrate off-the shelf scanning products) into Line A at Aust Co Pty Ltd’s Widget manufacturing facility did not allow operators to identify, tag and remove faulty Widgets during the manufacturing process to decrease packed defective goods incidents from x per cent to y per cent. Further investigations are required to determine the causes for not achieving the intended outcome.
Tip 5 – Include at least one supporting activity
Describe the preliminary research and activities undertaken before the commencement of the experiments (e.g. literature research, planning, purchasing of equipment, set-up of experiment, etc.) and include them as supporting activities – if they are relevant to that claim year.
Summarise any supporting activities that took place after the new knowledge was achieved (e.g. monitoring activities and why they are relevant).
In summary, as you prepare the project descriptions, ask yourself – does the reader have enough detail to make an assessment on the eligibility of the activities? Make sure you don’t leave holes that may potentially instigate a question.
Put simply, if AusIndustry doesn’t understand what you are doing, why you are doing it and how you are doing it, then you can expect a review.
For more information about AusIndustry’s R&D reviews and how to avoid them, ask your William Buck advisor.