What is the Built enviroment?
The built environment consists of areas created by humans for living, working, and leisure, representing both physical structures and cultural expressions.
The built environment includes structures and spaces like buildings, parks, urban areas, and infrastructure – essentially, any physical space shaped by human activity for living, working, and leisure.
What is the issue?
The issue with the built environment and the R&D tax incentive primarily revolves around the challenge of determining what qualifies as ‘core R&D activities’.
Specifically, businesses in the built environment sector often struggle to assess whether their activities meet the eligibility criteria for the R&D tax incentive.
In the built environment, many projects involve applying existing technologies in new ways. This could mean using a known construction method in a different type of soil, adapting a standard design to extreme weather conditions, or implementing a traditional material in an innovative architectural design.
Examples of non- eligible core activities
Here are five examples of activities that would typically be considered ineligible as ‘core R&D activities’ under the R&D Tax Incentive program:
- Converting Gas Heating to Electric Heating: Simply replacing a building’s gas heating system with an electric one, without any experimental development or overcoming of scientific or technological uncertainties, would not qualify. This change, while practical, doesn’t inherently involve resolving any scientific or technological unknowns.
Routine Software Updates: Regular updates or maintenance of existing software systems, without engaging in new or experimental development, wouldn’t be eligible. These are considered standard business practices rather than R&D activities.
Standard Architectural Designing: The regular process of designing buildings or structures using established architectural principles and materials, without any innovative or experimental methodologies, is not viewed as a core R&D activity.
Basic Market Research: Conducting standard market research or consumer surveys to understand market trends or customer preferences does not involve the kind of experimental processes required for R&D eligibility.
Replication of Existing Products: The straightforward replication or minor modification of existing products, such as making a slightly altered version of an existing tool or piece of equipment, without engaging in any novel or scientifically challenging development, would not qualify as core R&D activities.
In the built environment sector, there are several common misconceptions about what constitutes core R&D activities under the R&D Tax Incentive program.
Here are five of the most common errors or misunderstandings:
Routine Engineering Work: Many assume that standard engineering tasks, such as regular construction, standard engineering design, or compliance testing, qualify as R&D. However, unless these tasks involve overcoming scientific or technological uncertainties, they are typically not considered core R&D activities.
Commercial Property Development: Common property development activities, such as residential or commercial building construction using established methods and materials, are often mistakenly thought to be eligible. These activities generally don’t qualify unless they include a significant element of innovation or technical experimentation.
Application of Standard Building Codes and Regulations: Adhering to or applying standard building codes, regulations, or industry standards in a construction project is usually seen as routine work. Such activities don’t qualify as core R&D unless they involve novel, experimental approaches to meet these standards.
Use of Off-the-Shelf Technologies: Integrating off-the-shelf technologies or materials into a project, even in a new or creative way, is often misconceived as R&D. However, unless the integration process itself involves resolving technological uncertainties or developing new applications, it is not considered a core R&D activity.
Aesthetic or Design Changes: Changes or improvements made primarily for aesthetic, ergonomic, or consumer preference reasons, such as interior design updates or facade enhancements, are often mistakenly classified as R&D. These activities are generally ineligible unless they involve overcoming specific scientific or technical challenges.
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But my Building is unique!
It’s a common belief that unique building conditions or designs automatically qualify as R&D under the Tax Incentive program. However, uniqueness alone does not suffice for R&D eligibility. The key factor is not just uniqueness, but the presence of scientific or technological experimentation or uncertainty. Here’s what to consider:
Scientific or Technological Uncertainty: The project must aim to resolve uncertainty in these fields. Unique architectural designs or construction challenges often involve creative or innovative solutions, but without a scientific or technological question being tested or resolved, they don’t meet the R&D criteria.
Experimental Development: The work should involve experimental activities. Even if a building design is unique, the methods or materials used need to involve an element of experimentation or development beyond standard practice.
Documentation and Evidence: It’s crucial to provide clear evidence that the project involved overcoming scientific or technological hurdles. Documentation should detail the experimental processes, the uncertainties involved, and how they were addressed.
Not Just Commercial Objectives: Projects driven primarily by commercial objectives, such as aesthetic appeal or cost-effectiveness, typically don’t qualify as R&D. The focus should be on advancing science or technology.
Review Criteria and Guidelines: Familiarize yourself with the specific criteria and guidelines provided by AusIndustry for R&D activities. Understanding these will help in accurately assessing whether your project qualifies.
Identifying Eligible R&D Activities
Companies in the built environment can better claim the R&D Tax Incentive by identifying and documenting eligible R&D activities:
- Assess Technical Uncertainty: To be considered R&D, activities must involve technical uncertainty. If the outcome of your project is not known from the outset and cannot be determined using standard industry practices or information, it may qualify as R&D.
- Maintain Documentation: Keep detailed and organized records of your activities, showing how they meet the criteria of Core R&D and Supporting R&D.
- Engage R&D Tax Experts: Engaging a tax consultant familiar with the R&D Tax Incentive and the built environment industry can help ensure that you correctly identify eligible activities and expenditures.
Tax Payer Alert
The Taxpayer Alert TA 2017/2 issued jointly by the Australian Taxation Office (ATO) and Department of Industry, Innovation and Science provides guidance on claiming the Research and Development (R&D) Tax Incentive for construction activities. The alert was specifically aimed at addressing the issues concerning the building and construction industry’s claims for the R&D Tax Incentive.
The alert focused on the following main issues:
Misunderstanding of Eligible R&D Activities: The alert expressed concern over the routine claim of building or construction activities as eligible R&D activities, whereas such activities are not truly exploratory and don’t involve a quest for new knowledge.
Contractual Issues: It pointed out that construction contracts often don’t specify any provision for R&D activities, yet claims for the tax incentive are often made in relation to these contracts.
Inaccurate Registration of R&D Activities: The alert highlighted instances where construction projects as a whole, rather than the specific R&D activities within them, were registered for the tax incentive.
Ineligible Expenditure Claims: The alert pointed out that some claims relate to expenditures that are not on eligible R&D activities or are expressly excluded from consideration in the calculation of the R&D Tax Incentive.
Insufficient Governance and Review Practices: There was concern that some companies are not applying appropriate levels of governance and review to the R&D activities they’ve registered and the subsequent claims made for the R&D Tax Incentive.
The ATO and AusIndustry urged businesses to ensure that they are correctly identifying and claiming only eligible R&D activities, reminding companies of the need to maintain detailed records to support their R&D claims, and warning of potential penalties and sanctions for fraudulent claims.
Worked Examples – Ineligible
Example 1: Efficient Application of Existing Technology
InsulTech Solutions develops an innovative system to apply a pre-existing insulation material in buildings. While the method has never been used in Australia, it has been applied in similar climates in other countries.
This activity simply adapts a known process to the local context. The problems encountered and solved during this project do not involve technical uncertainty and can be resolved using standard industry knowledge. Thus, this is an innovation, but not R&D under Australian law.
Example 2: Advanced Design Work
ArchiSculpt Designs is working on a complex architectural design for a high-rise building that pushes the boundaries of architectural design in Australia. The project involves using cutting-edge software and advanced engineering techniques.
While this work involves high levels of skill and creativity, it is fundamentally a design activity. There’s no scientific or technical uncertainty involved as the outcome can be determined using existing knowledge and software capabilities. Hence, it doesn’t qualify as R&D.
Example 3: Standard Industry Trials
EfficientBuild Constructions develops a new building layout aimed at improving energy efficiency. They construct a prototype and compare its energy use with that of traditional designs over several months.
The method used by the company to test the new layout is standard practice in the industry. While it may provide useful data, there’s no technical uncertainty being addressed. This type of trial is part of the normal product development process and doesn’t qualify as R&D.
Example 4: Adaptation of Established Construction Techniques
SkyHigh Constructions is developing a new process to improve the efficiency of constructing multi-level buildings. The process involves adapting techniques and materials that have been used successfully overseas.
Although the method and materials may be new to the local context, they have already been proven effective elsewhere. The challenge of applying these methods and materials in Australia doesn’t constitute technical uncertainty, rather it’s a matter of adapting to local regulations and conditions. Therefore, these activities do not qualify as R&D under Australian law.
Example 5: Implementing New Building Standards – Green Build Solutions Pty Ltd
Green Build Solutions is working on a project to implement the new energy efficiency building standards into their construction practices. They are integrating existing technologies in novel ways to achieve these standards.
While implementing new standards can be challenging and require innovative thinking, it doesn’t necessarily involve scientific or technical uncertainty. If the outcome of the project can be determined by using existing knowledge and technology, then it doesn’t qualify as R&D. In this case, Green Build Solutions is using established technologies and methods, making their activities ineligible for the R&D Tax Incentive.
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Worked Examples – Potentially Eligible
Example 1: Innovative Material Development
FutureMaterials is developing a new type of concrete that has enhanced properties such as increased strength and improved thermal insulation. The project involves rigorous scientific testing and iterations based on the outcomes, as it’s uncertain whether the target properties can be achieved.
This project involves a high degree of technical uncertainty and requires systematic experimentation to achieve the desired outcome. The development of a new material with improved properties is an activity that goes beyond the application of existing knowledge, and as such, qualifies as R&D.
Example 2: Novel Structural System
InnoStructure is designing a new structural system that allows for significantly increased load-bearing capacity of buildings. The system is based on a novel combination of materials and engineering principles. The outcome is uncertain as it is unclear whether the system can withstand the theoretical load-bearing capacity in real-world conditions.
This activity involves substantial technical uncertainty and requires a scientific approach to evaluate the viability of the new structural system. The creation of a new system that significantly improves upon existing capabilities goes beyond routine design work and constitutes R&D.
Example 3: Cutting-Edge Energy Efficiency Solutions
GreenTech Innovations is developing a state-of-the-art smart grid system for buildings that optimises energy usage based on a variety of factors like occupancy, weather conditions, and energy prices. It’s uncertain whether the integration of such a wide range of factors can be achieved and whether the resulting system will provide the desired efficiency gains.
This project involves high levels of technical uncertainty. The system’s development involves experimentation and iterative testing to achieve the desired results, going beyond the application of standard industry knowledge and practices, making it eligible as R&D.
Example 4: Breakthrough Waste Reduction Techniques
EcoConserve is working on a new construction process that significantly reduces the amount of waste produced. This involves the development of a novel algorithm for optimal resource allocation and a new technique for repurposing waste materials. The project is technically uncertain as it’s not clear if the waste reduction targets can be met.
This activity involves high levels of technical uncertainty and requires a systematic investigation to develop and validate the new process. The project goes beyond known waste reduction methods, thus qualifying as R&D.
Example 5: Advanced Automation in Construction
BuildBot Innovations is researching and developing new robotics technology to automate a portion of the construction process that is currently done manually. The feasibility of achieving the desired level of automation and the reliability of the resulting system are uncertain.
This project involves technical uncertainty and requires systematic investigation to develop and validate the robotics technology. The development of this technology goes beyond existing capabilities and thus constitutes R&D.
Navigating the complexity of R&D tax incentives can be daunting. That’s why at Bulletpoint, we have dedicated ourselves to simplifying this process and ensuring businesses in the built environment sector don’t miss out on critical funding opportunities.
Whether your business is developing innovative materials, creating cutting-edge energy solutions, or revolutionising construction processes through automation, your activities could qualify as R&D.
We have provided examples of eligible and ineligible R&D activities to help guide you. But these examples merely scratch the surface. The reality of R&D tax incentives is far more intricate, and that’s where we come in.
Here’s what Bulletpoint can do for you:
- Identify your R&D activities: We dig deep into your business operations to uncover activities that could be classified as R&D.
- Prepare your claim: Our team of experts will assist you in preparing a robust R&D tax incentive claim.
- Improve your processes: We offer guidance on how to better track and record your R&D activities for future claims.
At Bulletpoint, we are experts in understanding and applying the intricacies of R&D tax law. We work hard to ensure our clients receive the maximum benefit from their innovative activities. But don’t take our word for it, with an average rating of 4.8 stars from over 250 Google reviews, our clients’ satisfaction speaks volumes.