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Manufacturing

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

Business Scenario

Wino Incorporated (Wino) is a specialist in the field of wine cellar refrigeration. In 2012, Wino was approached by a vineyard to create a solution that would allow them to reduce their operating cellar temperatures from 15℃ to 12℃.

A  solution was devised to use the cold liquid CO2  from a CO2 recovery plant by vaporizing  the  liquid  and  processing  it  through  the cooling units in the cellar to lower cellar temperatures  to 12℃.

Wino 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, Wino decided to register two core activities and two supporting activities with AusIndustry.

Wino’s Core R&D Activities

The hypothesis for this core activity questioned whether cellar temperatures could be reduced by 3℃ through the use of C02.

At an attempt to prove its hypothesis, Wino conducted the following R&D activities:

• Practical design by in-depth analysis of possible issues
• Constant refinement of system design over a period of months to improve system  performance
• Updating of technical drawings and design calculations
• Implementation of solution onsite for testing and further development

Wino proved that the system was a failure as too many variables which were beyond its control did not allow the system to operate in a consistent manner. With all these factors influencing performance, the system was too complicated for stable operation of the cellars.

Although Wino was unsuccessful in finding a solution to lower the overall temperature in the wine cellar,  it was still able to claim the following tests and assessment activities as R&D:

• A complete change in design was necessary using CO2 as a conventional refrigerant to reduce the cellar temperature.
• Redesign  of  the  system  as  a  standalone  plant  using  two  new compressors  and  pump  recirculation  of  liquid  CO2  to  larger evaporators in the cellars.
• A new evaporator  in each cellar was  added  to the existing evaporators.

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.

Wino’s Supporting R&D Activities

Design development included:

• Client  meetings, submission  of  typical  designs and  the undertaking to provide refined designs.
• Internal design  development and the development of sketches and calculations.
• Discussions with the site operators on system practicality.
• Design submission to the client for their review and acceptance.

These background research activities were necessary to support the core activities because they assisted in identifying the key elements of the research project.

Wino conducted the following activities during its analysis:

• Development and modification to interpret the experimental results/observations and draw conclusions that served as starting points for the development of new hypotheses; i.e. solutions to observed inefficiencies or problems
• Assessment of client feedback to improve on design of system
• Client inspection on completion of construction stage
• Validation of dimensions at installation stage
• Validation of the design inputs on operation and testing of the new system

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

Commentary

What records and specific documentation did Wino keep?

To meet the R&D Tax Incentive requirements, Wino 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.

Wino saved the following documentation:

• Progress of project (e.g. meeting notes, minutes, emails, reports)
• Conceptual sketches and technical drawings
• Photographs of completed models
• Testing protocols
• Results or records of analysis from testing / trial runs
• Tax invoices

By having these records on file, Wino 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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