R&D Tax Incentive – What is a core activity?

Unsure if your project qualifies as a core R&D activity?

Call Bulletpoint on 1300 658 508

What is a core activity?

A core activity is experimental work aimed at creating new knowledge or information, where the outcome isn’t predictable based on existing knowledge or expertise.

This is a key requirement for R&D tax incentive eligibility

Key Components of a Core Activity

The key components of a core activity for the R&D tax incentive are:

1. Experimental Work – This involves conducting systematic investigations and trials to test hypotheses, distinct from routine testing or standard operations.
2. Generation of New Knowledge – The activity must aim to create new information or capabilities, moving beyond merely improving existing products or processes.
3. Technical Uncertainty – There must be genuine uncertainty about the outcome of the activity, where the solutions or results are not readily known or deducible by a skilled professional in the field.

What problem do I see?

The understanding of R&D often varies significantly between the business sector and the government, leading to a notable perception gap:

• Business Perspective – For many businesses, R&D is primarily viewed as the development of innovative products or processes aimed at boosting market competitiveness and revenue. This perspective focuses on practical outcomes and direct commercial benefits.
• Government Viewpoint – In contrast, the government’s definition of R&D emphasises the pursuit and creation of new knowledge with potential scientific or technological advancement. This approach is less about immediate commercial gains and more about contributing to the broader field of science and technology.

Understanding and reconciling these differing viewpoints is crucial for businesses seeking to navigate the R&D tax incentive effectively.

Claiming the Wrong Things?

Mistakes can be a one-way ticket to an audit.

Send us a message now to get an expert review of your current R&D claims.

Some Examples of Non-Core Activities

While many activities are integral to product development, they don’t automatically qualify as core R&D activities under the tax incentive scheme. It’s important to recognise these to accurately assess your R&D claim:

• Innovative Products – Simply creating a product that is first-of-its-kind does not qualify as a core activity.
• Developmental Errors – Encountering and resolving errors during the development process is a normal part of business operations and does not constitute R&D.
• Customer Feedback – Negative customer feedback or reception does not fall under R&D activities.
• Financial Losses – Incurring losses during development or sale of a product is not a criterion for R&D.
• Market Research – General market research or industry analysis is not considered R&D.
• Equipment Selection – The process of selecting or purchasing equipment for a project does not qualify as R&D.
• Novelty Alone – The uniqueness of a product or solution, either in Australia or globally, is not enough to classify it as R&D.
• Customer Dislike – Lack of customer acceptance or popularity does not make an activity R&D.
• Sales Performance – Poor sales or commercial performance of a product are not indicators of R&D.
• Learning and Preparation – Time spent understanding the market or choosing equipment is part of routine business planning, not R&D.

Understanding these distinctions is key to ensuring your business’s activities align with the government’s R&D tax incentive criteria.

How to think like an R&D consultant

At Bulletpoint, we adopt a unique approach to help our clients pinpoint core activities eligible for the R&D tax incentive.

The key is to shift focus from broader business perspectives to the intricate technological details:

1. Focus on Technology, Not Industry or Market – We encourage clients to set aside thoughts about their industry, market positioning, or even the overall function of their product. Instead, the emphasis is on the individual technology components.
2. Analyse Each Component Independently – We guide our clients to examine each technological aspect of their product in isolation. The goal is to identify how each component is innovative or unique on its own, without considering its role or contribution to the final product.
3. Detailing the Novelty of Components: Clients are assisted in articulating how each technology component represents new knowledge or capabilities. This involves dissecting the technological advancements or uncertainties inherent in each part, irrespective of the product’s overall market impact.
4. Comprehensive Assessment – This methodical breakdown ensures a thorough evaluation, helping to align the R&D activities more closely with the government’s criteria for core R&D activities.

By refocusing on the specific technological innovations within their products, our clients gain clarity on which aspects truly constitute core R&D activities, enhancing the precision and compliance of their R&D tax incentive claims.

Claiming the Wrong Things?

Mistakes can be a one-way ticket to an audit.

Send us a message now to get an expert review of your current R&D claims.

Example – Black Box Flight Recorder

What I am told

As a leading developer in aviation safety technology, we’ve created an advanced black box flight recorder that promises to revolutionise our understanding of aviation incidents.

With an average of 39 crashes per year in the aviation industry, the financial and human cost is significant, not just globally but also within Australia.

Our state-of-the-art flight recorder is designed to provide unparalleled insights into the events leading up to and during a crash.

This technology has the potential to greatly reduce investigation times, enhance safety measures, and ultimately save lives.

The recorder’s advanced data collection and analysis capabilities are expected to provide key benefits to airlines, safety regulators, and aircraft manufacturers by offering a more comprehensive understanding of each incident.

This innovation represents a significant step forward in our commitment to improving aviation safety and reducing the overall cost of crashes to the industry.”

What I look for

Here is how I break down each technology to analyse it further:

1. Data Collection Technology – Examining the methods and technologies used for data collection in the flight recorder. This includes how the recorder gathers, stores, and preserves flight data, such as cockpit voice recordings and aircraft performance metrics, especially in extreme conditions like a crash.
2. Data Analysis Algorithms – Assessing the algorithms and software used for analysing the collected data. This involves understanding the innovation in processing and interpreting vast amounts of flight data to provide meaningful insights into crash scenarios.
3. Durability and Resilience Features – Investigating the materials and design elements that contribute to the recorder’s durability and resilience, especially its ability to withstand crash impacts, fire, and extreme environmental conditions.
4. Communication Systems – Evaluating the technologies used for transmitting data from the recorder to external sources for analysis. This includes any innovative approaches to ensure real-time, secure, and reliable communication, even in challenging scenarios.
5. Data Security Measures – Analysing the security features implemented to protect the integrity and confidentiality of the flight data. This includes examining how the recorder safeguards sensitive information against unauthorised access or tampering.

By dissecting these components, I can identify where genuine innovation and technical uncertainty exist, thereby pinpointing the core R&D activities related to the development of the advanced black box flight recorder.

Claiming the Wrong Things?

Mistakes can be a one-way ticket to an audit.

Send us a message now to get an expert review of your current R&D claims.

What will I do?

As an experienced R&D tax consultant, I’m going to ask you a series of questions to uncover the core R&D activities in your project.

These questions are designed to delve into the specific technological innovations, challenges, and uncertainties you’ve encountered.

Your responses will help us identify the key elements that could qualify for the R&D tax incentive, ensuring that we accurately capture the essence of your innovative work.

What will I ask you?

Here are some typical questions I like to ask:

1. Technology and Innovation:

   • What unique or novel technologies have you developed or utilised in your project?
   • Can you describe the technical challenges you faced that required innovative solutions?

2. Experimentation and Testing:

   • What types of experiments or tests did you conduct to overcome technical uncertainties?
   • How did these tests contribute to developing new knowledge or capabilities?

3. Technical Uncertainties:

   • Were there specific aspects of your project where the outcome was uncertain or not easily deducible?
   • How did you address these uncertainties in your development process?

4. New Knowledge Creation:

   • In what ways does your project contribute to new knowledge or understanding in your field?
   • Can you describe any discoveries or insights that emerged during the project?

5. Development Processes:

   • How did your development process differ from standard practices in your industry?
   • Did you need to modify or create new methodologies to achieve your project goals?

6. Integration Challenges:

   • Did your project involve integrating new technologies with existing systems? What challenges did this present?
   • How did you address compatibility and functionality issues in this integration?

7. Documenting the Process:

   • How have you documented your experimental processes and findings?
   • Can you provide examples of how this documentation demonstrates the R&D nature of your work?

What will I not ask you?

These are some questions that sound like they are related to identifying core activites but are not really:

1. How does your product differentiate from existing solutions in the market?
2. Can you describe the unique features that make your product stand out?
3. What makes your product more user-friendly or efficient than competitors’ offerings?
4. How does the design of your product enhance its appeal to customers?
5. What are the main benefits your product offers to the end-user?
6. How does your product improve upon existing technologies in terms of user experience?
7. In what ways is your product more cost-effective compared to similar products?
8. What feedback have you received from customers about the uniqueness of your product?
9. How does the aesthetic design of your product contribute to its marketability?
10. What specific customer needs or market gaps does your product address?

These questions focus on the commercial and market aspects of a product, which are often mistaken for R&D elements but are not directly relevant to the technical or scientific innovation criteria of R&D tax incentives.

Didnt find a core activity?

If your analysis reveals no current core R&D activities, it’s important to consider potential “future core activities.“

Activities conducted presently might still be eligible as supporting activities if they are linked to future core R&D activities.

This approach aligns with the legislative framework, which states:

“To register eligible R&D activities, you need to conduct or plan to conduct at least one core R&D activity.”

If your company has plans for core R&D activities in the future, this can be factored into your registration process for the R&D Tax Incentive, potentially making your current activities eligible.

For more detailed information on this aspect, visit Bulletpoint’s guide on R&D Tax Incentive Future Core Activities.

What will get you audited!

Here are the top five factors that could lead to your R&D tax incentive application being flagged for review, particularly in relation to how you identify or describe your core activities:

1. Vague or General Descriptions – Providing vague or overly broad descriptions of your core activities can raise questions about their eligibility. Specific, detailed accounts of the experimental work and its purpose are crucial.
2. Focus on Commercial Objectives – Emphasising the commercial objectives or market potential of a project, rather than its scientific or technological uncertainties and advancements, can trigger a review.
3. Claiming Routine Business Activities – Including routine business, operational, or standard industry practices as core R&D activities is a common red flag. Core activities should be distinct from regular business operations.
4. Lack of Technical Uncertainty – Failing to demonstrate the technical uncertainty or the investigative process undertaken to overcome it can make your claim suspect. Core activities should address unknown outcomes in science or technology.
5. Insufficient Evidence of Experimentation – Not providing enough evidence of systematic experimentation or investigation to test hypotheses can lead to scrutiny. Documentation should clearly support the R&D nature of the activities.

These factors are key in determining the likelihood of an AusIndustry review, as they directly relate to the compliance of the identified core activities with the R&D tax incentive’s stringent criteria.

We Know Our Shit

Navigating the complexities of the R&D tax incentive can be challenging. At Bulletpoint, we bring a wealth of expertise and a proven track record to guide you through this intricate process.

• Decade of Experience: With over 10 years in the field, our depth of knowledge in R&D tax incentives is unparalleled.
• Successful Track Record: We have successfully lodged more than 500 R&D claims, demonstrating our capability and expertise.
• Strong Defense Record: Our experience extends to successfully defending our clients in reviews and audits by both the ATO and AusIndustry.
• Highly Rated by Clients: Our commitment to excellence is reflected in our average rating of 4.8 stars from over 250 Google reviews. Check out what our clients say about us on our Google Reviews.

At Bulletpoint, we don’t just offer services; we provide peace of mind and assurance that your R&D tax incentive claims are in expert hands. Reach out to us today to see how we can assist your business:

• Call Us: Don’t hesitate to call Bulletpoint on 1300 658 508 for a direct consultation.
• Send a Message: Have specific queries? Send us a message and we’ll get back to you promptly.
• Book a Meeting: Ready to discuss your R&D tax incentive needs? Book a meeting with us right now and take the first step towards maximising your R&D tax benefits.

Trust Bulletpoint to be your guide and partner in successfully navigating the R&D tax incentive landscape.