Automotive

December 18th, 2014 Mechanic

This case study shows the application of key legislative requirements for qualifying R&D activities as they apply to relevant activities in the automotive industry.

Business Scenario

Raceway Engineering (Raceway) is an automotive company that specialises in building engines for off-road speedway sprint cars.

To stay at the top of the market, Raceway is always conducting R&D work to assist in the creation of innovative ideas and products. Raceway decided it wanted to come up with a modified version of its V8 super engine to use in its first futuristic car. The new engine would be based on the company’s previous engine, with updates and improvements.

Raceway launched an R&D project with the following hypothesis:

“The V8 super engine can be improved in terms of performance and fuel economy, while meeting safety regulations and outperforming competitors’ engines.”

Raceway 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 Raceway 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, Raceway decided to register two core activities and two supporting activities.

Raceway’s Core R&D Activities

Design and development of a series of prototypes to achieve the technical objectives and prove the hypothesis (design of the modifications to the V8 super engine).

The hypothesis for this core activity stated that it was feasible to design an improved and highly functioning V8 super engine that could outperform its competitors.

To try and prove the hypothesis, Raceway designed and redesigned multiple methods and engine parts during this phase.

 
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard (prototype development and testing of the V8 super engine).

Raceway’s hypothesis stated that the theoretical conclusions from the design phase could be realised through valid testing.

Raceway trialled the engine in a workshop environment and in the field to test for functionality, efficiency, accuracy and safety.

 

Commentary

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.

Raceway’s Supporting R&D Activities

Background research to evaluate current knowledge gaps and determine feasibility (background research for the modification of the V8 engine).
 
Raceway conducted the following experiments during its research phase:
  • Literature search and review, including maintaining awareness of changing legislation in the different states and zones
  • 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 experts 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 research activities were directly related to and supportive of  Raceway’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 design (feedback R&D of the modifications of the V8 engine).

The supporting R&D activities included:

  • Ongoing analysis and testing to improve the efficiency and safety of the project.
  • Ongoing development and modification to interpret the experimental results and draw conclusions that served as starting points for the development of new hypotheses.
  • Commercial analysis and functionality review.

These activities were directly related to the core activities because the feedback was imperative to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design.

 

Commentary

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 Raceway keep?

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

  • Literature review
  • Meeting notes
  • Sketches/drawings
  • Photos
  • Screen shots
  • Test protocols
  • Test results and analysis
  • Customer feedback
  • Field-test results

By having these records on file, Raceway confirmed that it was ‘compliance ready’ — meaning if it was audited by the ATO, it could present documentation to show the progression of its R&D work.

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