December 18th, 2014

This case study exemplifies the application of key legislative requirements for eligible R&D activities as they apply to relevant activities in the agriculture industry.

Business Scenario

AgriFarm provides affordable chemicals and other crop-protection methods to farmers within Australia. To continue providing its customers with low-cost farming solutions, AgriFarm regularly engages in  R&D activities.

While reviewing previous work, AgriFarm noted that liquid formulations of buster, a herbicide used to control grasses, broad-leaved weeds and clovers, were less effective than granulated forms. If liquid buster was sprayed onto the crops, it quickly became a layer of residue on the top of the plant and did not reach the soil. This made it ultimately unsuccessful in its duty as a herbicide. In contrast, dry granular formulations of buster fell off the plant and soaked into the soil.

This caused AgriFarm to launch  a new R&D project with the following hypothesis:

“To formulate, develop and test a unique spreadable herbicide, buster, that is effectively carried by an organic fertilizer.”

AgriFarm’s main business objective was to  enhance the current use of liquid buster in various applications.

First and foremost, AgriFarm needed to determine the eligibility of its proposed R&D activities  in order to know if it qualified for the R&D Tax Incentive. Once it identified the specific activities that qualified as R&D, it needed to assess whether each activity was a core or supporting  R&D activity. After self-assessing, AgriFarm decided to register two core activities and two supporting activities.

AgriFarm’s Core R&D Activities

Formulation and development of a series of prototypes to achieve the technical objectives (formulation of the buster-carrying compound).

AgriFarm conducted experiments to prove that it was feasible to create a buster-carrying compound that maximized efficiency.

AgriFarm was successful in formulating four types of buster-carrying compounds, therefore meeting the core R&D activity requirement of creating new knowledge or products.

Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard and to test the hypothesis (testing of the buster-carrying compounds).

The hypothesis for this activity was that the formulations could undergo testing to determine the formula and criterion that produces an optimal end product.

AgriFarm performed testing on the effectiveness of buster-treated crystals and granules for the control of grasses, broad-leaved weeds and clovers (compared to liquid-applied buster formula), therefore meeting the core R&D activity requirement of testing a new or improved product, device, process or service.



Identifying Core R&D Activities
There are two types of core R&D activities:
  1. Experimental activities whose outcome can not be determined in advance on the basis of current knowledge, information or experience, but can only be known by exercising a systematic progression of work that follows the principles of established science, proceeding from hypothesis to experiment, observation and evaluation, and lead to logical conclusions.
  2. Experimental activities that are conducted for the purpose of creating new knowledge.
Hypothesis Defined
AusIndustry recognises a hypothesis as a statement or proposition about what result is expected if certain conditions are put in place and certain actions are carried out in an experiment. It can range from an assumption or proposition to a theory, but it must establish the experimental activity and form part of a broader systematic progression of work undertaken by the company. It must be evident that the claimed experiment has been designed to test the hypothesis.

If the outcome of an activity can be obtained without a hypothesis, then the activity will not be considered R&D.

AgriFarm’s Supporting R&D Activities

Background research to evaluate current knowledge gaps and determine feasibility (background research for the buster-carrying compound).

The background research for AgriFarm’s project included literature search and review, consultation with industry professionals and potential customers, and preliminary equipment and resources review.

These specific research activities were directly related to and supportive of  AgriFarm’s core R&D activities because they assisted in determining the fundamental elements of the research project.

Ongoing analysis of customer or user feedback to improve the prototype formulation (feedback R&D of the buster-carrying compound).

AgriFarm conducted activities such as analysis and testing, and ongoing development and modification of the compound.These activities were directly related to AgriFarm’s core activities because the feedback was imperative to evaluate the performance capabilities of the new formulation in the field and to improve any flaws in the formulation.

The results and outcome of AgriFarm’s experimentation and testing were overall positive, and the findings were consistent  with previous work in the industry. AgriFarm also proved the project hypothesis (that it could formulate, develop and test a unique spreadable herbicide [buster] that is effectively carried by an organic fertilizer). The new knowledge generated was used for further research and development work.



Identifying Supporting R&D Activities
Activities that do not form part of the core experimental activities may still be eligible as supporting R&D activities. Supporting R&D activities are directly related to an eligible core R&D activity. They must have been performed for the primary purpose of supporting a qualified R&D activity.

What records and specific documentation did AgriFarm keep?

To meet the R&D Tax Incentive requirements, AgriFarm had to save documents that outlined what it did in its core R&D activities, including experimental activities and documents to prove that the work took place in a systematic manner. AgriFarm saved the following documentation:

  • Project records/ lab notes
  • Conceptual sketches
  • Design drawings
  • Photographs/ videos of various stages of build/ assembly/ testing
  • Prototypes
  • Testing protocols
  • Results or records of analysis from testing/ trial runs
  • Tax invoices
  • Patent application number

By having these records on file, AgriFarm confirmed that it was ‘compliance ready’ — meaning if it was selected for an audit by the ATO, it could present documentation that illustrated the progression of its R&D activity, thereby proving its R&D eligibility.

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