Transportation

December 18th, 2014 iStock_000018867122Small

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

Business Scenario

Earhart Engineering is a widely renowned engineering company specialising in modern building of transportation methods,  systems and equipment.

Dedicated to being one step ahead of its competitors, Earhart Engineering proposed an R&D plan to create the ‘Self-e,’ an electric, self-operating vehicle/aircraft. Earhart’s main objective was to develop a legal transportation vehicle/aircraft using battery technology that would allow it to travel up to 600 kilometers without requiring a recharge, while being completely machine operated.

Earhart Engineering knew that ‘Self-e Transportation’ was going to be an ongoing research and development project, but it was still able to make claims for each fiscal year in which it conducted R&D work leading up to the final result. The company believed the ‘Self-e’ could be achieved by implementing four key R&D activities.

Earhart Engineering’s Core R&D Activities

Design and development of a series of prototypes to achieve the technical objectives (design of the Self-e vehicle/aircraft).

The hypothesis for this core R&D activity was that designing, testing and evaluating various concepts would contribute to a more efficient and effective prototype testing phase.

After two years of design and experimentation, Earhart Engineering concluded that its theoretical design experiments showed that such designs were feasible but needed to be  fully tested to prove the hypothesis.

Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard and to test the hypothesis (prototype development and testing of the Self-e vehicle/aircraft).

Earhart Engineering’s hypothesis for this phase of experimentation was that developing and implementing the various design components would allow refinement and tweaking of the final product to achieve the technical objectives.

After two years of trial and error, Earhart Engineering had created a vehicle capable of performing the main functions of the ‘Self-e’ but was below the company’s expectations overall. Earhart Engineering concluded that it was on the right track, and that it would continue to work on improving its design until it met its targeted performance criteria.

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.

Earhart Engineering’s Supporting R&D Activities

Background research to evaluate current knowledge gaps and determine feasibility (background research for the design of the Self-e).

Earhart Engineering engaged in background research for two years which included  activities such as literature search and review, consultation with industry professionals and potential customers, and preliminary equipment and resources review with respect to capacity, performance and suitability for the project.

These specific background research activities were directly related to Earhart Engineering’s 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 Self-e).

Feedback research and development work for the Self-e included ongoing analysis and testing to improve the efficiency and safety of the project, continuous development and modification, and commercial analysis and functionality of review.

Earhart Engineering believed these activities were necessary to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design, directly relating them to the core activities of the project.

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 Earhart Engineering keep?

To meet the R&D Tax Incentive requirements, Earhart Engineering had to save records 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. Earhart Engineering saved the following documentation:

  • Literature review
  • Background research
  • Meeting notes and progress reports
  • Project records / laboratory notes
  • Conceptual sketches
  • Design drawings
  • Photographs / videos of various parts or components

 By having these records on file, Earhart Engineering confirmed that it was ‘compliance ready’ — meaning if it was audited by the ATO, it could present documentation that illustrated the progression of its R&D activity, therefore proving its R&D eligibility.

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