The definition of what constitutes R&D is very different under the R&D Tax Incentive to what most people may think. This article provides an overview of what the R&D regulators define as Core R&D Activities.
R&D Legislation (Income Tax Assessment Act 1997)
Core R&D Activities are formally defined under Section 355-25 of the Income Tax Assessment Act (ITAA) 1997:
Core R&D activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that is based on principles of established science and proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions — and that are conducted for the purpose of generating new knowledge.
Outcome Cannot Be Known in Advance
For an activity to be a core R&D activity, a competent professional cannot know or determine the outcome of the activity based on current knowledge anywhere in the world. The R&D regulators expect you to search worldwide for an existing way to achieve your outcome before you start your R&D activity, and your records should show you did this.
A relevant competent professional is a person who in their field has knowledge and experience, has appropriate qualifications, keeps up to date with developments, and has access to knowledge and resources around the world including literature, industry journals and other professionals.
Systematic Progression of Work
Your systematic progression of work needs to be based on principles of established science and must include the following elements:
- Hypothesis — your proposed explanation for how you could achieve a particular result
- Experiment(s) — a scientific procedure undertaken to test your hypothesis
- Observation — measuring and recording information and results relating to your experiment
- Evaluation — assessing and analysing the results of your experiments
- Logical conclusions — drawing logical conclusions about your hypothesis based on results
Purpose to Generate New Knowledge
To be an eligible core R&D activity, one of your substantial purposes to conduct R&D needs to be to generate new knowledge. Generating new knowledge does not have to be the sole purpose — it must simply be one of your substantial purposes.
New knowledge can be in the form of new or improved materials, products, devices, processes or services.
Source: business.gov.au — R&D Tax Incentive
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