R&D Tax Incentive Eligibility

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Only eligible R&D entities can claim the Research and Development Tax Incentive (R&D Tax Incentive). An R&D eligible entity is a corporation that is either:

Ineligible entities include:

You have to be performing eligible R&D activities to receive the R&D Tax Incentive. The eligibility criteria is explained in detail below. 

Core 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 (including new knowledge in the form of new or improved materials, products, devices, processes, or services)

Let's break this down a little bit. To have an eligible core R&D activity, you need to have:

• A technical uncertainty that cannot be resolved without experimentation.
  • Non Eligible Uncertainty | You might not know the melting point of steel, but you can discover it through a quick google search.
     
  • Eligible Uncertainty | You have created a new composite material never before used.  You have to know its melting point to determine if it is safe to use in a specific application. The only way to determine its melting point is by subjecting the material to different temperatures and observing its reaction.
     
• A process of experimentation that is undertaken to resolve your technical uncertainty. A process of experimentation is an iterative, repeatable process, typically with controls and variables.  Similar to a high school science report, you should have a formalised hypothesis with measurable metrics that are evaluated and tested through your experiment.
  
  Process of experimentation examples include:
  • Physically testing a prototype car to determine which combination of engine and body designs produces the most fuel-efficient vehicle.
  • Breeding different plant hybrids together to determine which combinations produces an offspring that is resistant to a common pest.
  • Testing different database architecture designs in a development environment to determine which database is fastest under predicted production loads.
     
• The end goal of resolving your technical uncertainty is the generation of new knowledge.  Meaning, a new product, process, material, etc. or improvements to an existing product, process, material, etc. New knowledge can be general or applied. 
  
  Examples of new knowledge can include:
  • New drugs and medical treatments
  • Plant hybrids that are disease and/or drought resistant
  • Alternative manufacturing process that reduces scrap by a measurable margin

Competent Professional Test

• Has knowledge and experience
• Has qualifications (if appropriate) or a reasonable level of skill within the industry
• Is up to date with recent industry developments
• Has access to global knowledge and resources (industry journals, internet, etc.)

Hypothesis

• The end result you want to achieve
• How you expect to achieve your result
• Measurable metrics

• An electric car with a 80 kWh battery and a body made of aluminium and AI matrix composites will have an operational range 20% higher than the average electric car available on the market.
• Crossbreeding plant parent 1 with plant parent 2 will produce an offspring that has the same production yield and requires 25% less water than either parent 1 or 2.
• A new machine learning model will predict traffic patterns of Sydney commutes with 95% accuracy based on historical traffic patterns from 2019 through to present.

• Moving from a monolithic architecture to a microservice architecture will improve platform performance.
• Changing sensor vendors will not negatively impact the effectiveness of a commercial insulin pump.
• We can produce a cheaper engine than our competitor by reverse engineering their engine.

Excluded Core Activities

• Market research, market testing, market development, sales promotion, including consumer surveys
   
• Prospecting, exploring or drilling for mineral or petroleum for the purpose of one or more of the following:
  • Discovering deposits
  • Determining more precisely the location of deposits
  • Determining the size or quality of deposits
     
• Management studies or efficiency studies
   
• Research in social sciences, arts or humanities
   
• Commercial, legal and administrative aspects of patenting, licensing or other activities
   
• Activities associated with complying with statutory requirements or standards, including one or more of the following:
  • Maintaining national standards
  • Calibrating secondary standards
  • Routine testing and analysis of materials, components, products, processes, soils, atmospheres and other things
     
• Any activity related to the reproduction of a commercial product or process:
  • By a physical examination of an existing system; or
  • From plans, blueprints, detailed specifications, or publicly available information
     
• Developing, modifying or customising computer software for the dominant purpose of use by any of the following entities for their internal administration (including the internal administration of their business functions):
  • The entity (the developer) for which the software is developed, modified or customised;
  • An entity connected with the developer;
  • An affiliate of the developer, or an entity of which the developer is an affiliate.

Supporting Activity

• Supporting R&D activities are activities directly related to core R&D activities.
• However, if an activity:
  • Is an activity referred to in subsection 355-25(2); or
  • Produces goods or services; or
  • Is directly related to producing goods or services

• Literature review to refine your hypothesis before you begin conducting your experiments
• Assembling and physically testing a prototype that will undergo testing to prove or disprove your hypothesis
• Cleaning and maintaining equipment used in your experiments

• Identify each reason for undertaking the activity
• Weighting each reason
• If the highest weighted reason is to support your core R&D activity, than it is an eligible supporting activity

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