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

Business Scenario

Hunter Engineering is a family run business that is dedicated to producing custom, environmentally friendly hunting products with the use of professional machinery.

With lead fishing sinkers banned in the United Kingdom, Canada and various U.S. states due to the environmental concerns surrounding them, Hunter Engineering instigated a project with the main business objective being to design and develop an alternate and improved copper fishing sinker.

The key areas of investigation and experimentation due to specific technical objectives for Hunter Engineering were the following:

• Because copper is a much lighter metal than lead, a copper sinker must be shaped differently to enable it to sink properly and be cast over a distance.
• Because copper erodes much easier than lead, the development of a coating was required.

After experimentation, Hunter Engineering had to determine which of its project activities qualified as R&D.  Once it identified the specific activities that qualified as R&D, Hunter Engineering needed to assess whether each activity was a core or supporting  R&D activity. After self-assessing, Hunter Engineering decided that development of an efficient copper sinker was indeed possible with the conduction of two core R&D activities and two supporting R&D activities.

Hunter Engineering’s Core R&D Activities

Design and development of a series of prototypes to achieve the technical objectives (design of the copper sinker).

The hypothesis for this core activity was that  a lead-free, copper fishing sinker could be designed and developed to outperform existing lead fishing weights.

Hunter Engineering created a 3D model of the copper sinker in order to accurately predict the weight of the sinker and then sent it to an industry professional for recalculation. Based on the recalculations, the experts at Hunter Engineering  developed the design for the sinker.

Hunter Engineering concluded that a small increase in the diameter of the fishing weight produced a significant improvement in the sinking and flying characteristics.

Trials and Analysis of data to achieve results that can be reproduced to a satisfactory standard, and to test the hypothesis (testing of various coatings and methods to apply the lubricant onto the sinker).

Hunter Engineering’s hypothesis for this core activity was to investigate an optimum coating (or lubricant) that could be applied to the copper sinker to prevent it from eroding in water.

Each type of lubricant was tested on a round of fifteen  sinkers over a year. Hunter Engineering tried numerous off-the-shelf products by mixing them with other types of lubricants. However, they ended up developing a binder to help the lubricant stay on the copper sinker.

Hunter Engineering did find a successful coating that had to be mixed with the binder and then sprayed on the sinker before use.

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.

Hunter Engineering’s Supporting R&D Activities

Hunter Engineering conducted the following background research:

• Review  of  final  computer-generated  calculations  for  potential specifications  for  the  design  of  the  copper sinker
• Analysis of available competitors’ products and components
• 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 the core R&D activities because they assisted in identifying the key elements of the research project, therefore qualifying as supporting R&D activities.

Ongoing analysis of customer or user feedback to improve the prototype design (feedback R&D of the copper sinkers).

Hunter Engineering conducted the following supporting R&D activities:

• Ongoing analysis and testing to improve the efficiency and environmental 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.

This feedback was necessary to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design, thus directly relating it to the core activities of the project.

Commentary

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 Hunter Engineering keep?

To meet the R&D Tax Incentive requirements, Hunter Engineering 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.

The only documentation that Hunter Engineering saved were design drawings, leaving lots of room for improvement in the area of substantiation.

As a company claiming R&D, you always want to be ‘compliance ready’ — meaning if you were selected by the ATO for an  audit, you could present documentation to show the progression of your R&D work. Here are some types of documentation that would be beneficial to save:

• Project records/ lab notes
• 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
• Literature reviews

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