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

Business Scenario

Freeman Home Builders (Freeman) is a custom home construction company involved in designing, constructing and managing home builds from conception to delivery.

In 2012, Freeman identified that the inefficiencies that occurred during the building process were a result of poor industry practices, which were manual, resource-intensive and poorly organized.

Freeman saw a need for a new, all-encompassing software that could handle all aspects of its business instead of the existing market technology that focused strictly on design. Freeman formulated a hypothesis for its new R&D project:

“A management system can be designed and developed to manage all aspects of a building project by integrating the functions of design, customer relationship management (CRM) and accounting software.”

Freeman projected its R&D project would be ongoing for four years. The company believed its new management software (FMS) could be achieved by implementing four key R&D activities.

Freeman’s Core R&D Activities

This core activity focused on whether a management system could be designed and developed to manage all aspects of a building project by integrating the functions of design, CRM and accounting software.

After cycles of coding, testing and re-coding, Freeman was able to prove the theoretical feasibility of developing FMS.

The hypothesis for this core activity was to prove that theoretical conclusions from the design phase could be realised through development and testing of FMS, and conclude that a management system could be designed and developed to manage all aspects of a building project.

Commentary

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.

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

Freeman’s Supporting R&D Activities

Freeman engaged in background research for three years which included the following activities:

• Literature search and review
• Consultation with industry professionals and potential customers to determine the level of interest and commercial feasibility of such a project
• Preliminary equipment and resources review with respect to capacity, performance and suitability for the project
• Consultation with key component/part/assembly suppliers to determine the factors they considered important in the design and to gain an understanding of how the design needed to be structured accordingly

These specific background research activities were directly related to Freeman’s core R&D activities because they assisted in identifying the key elements of the research project, therefore qualifying as supporting R&D activities.

This supporting R&D work included activities such as ongoing analysis and testing and continuous development and modification to interpret the experimental results.

These activities were necessary to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design, thereby directly relating it to the core activities of the project.

Commentary

What records and specific documentation did Freeman keep?

To meet the R&D Tax Incentive requirements, Freeman 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. Freeman saved the following documentation:

• Error log and fixes
• Conceptual sketches
• Technical drawing revisions
• Screenshots of various build versions / final version
• Email correspondence regarding progress of project
• Email  correspondence  with  external  developers  regarding integration errors/issues
• Progress reports and meeting minutes
• Staff time sheets
• Tax invoices
• Patent application number
• Backup copies of the program and reports for each release
• Documentation of changes and source code in an online, private revision control system

This is an excellent example of how to be ‘compliance ready’ — meaning if you were selected for an audit by the ATO, you could present documentation to show the progression of your R&D activity.

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