Overview of Using R&D Tax Incentives for Scale Up Activities
Scaling up a business often requires significant technical experimentation and financial investment. Manufacturers, software developers, biotech companies and other innovative Australia companies can potentially leverage the R&D Tax Incentive (RDTI) program to help fund initiatives to scale up new or improved technologies and processes.
This guide examines the key considerations that companies must address when assessing eligibility of scale-up activities under the RDTI program.
What is the R&D Tax Incentive Program?
The R&D Tax Incentive provides generous tax offsets and cash refunds to businesses undertaking experimental activities to create new knowledge and technologies.
The Activity-Based Approach to Determining R&D Eligibility
Eligibility under the R&D Tax Incentive is determined at the activity level rather than assessing a project as a whole. When scaling up, a company will likely undertake many different tasks, and often only some of which involve experimentation.
It’s critical to break down scale-up projects into individual activities and evaluate each activity independently. For instance, supporting activities like preliminary design work are only eligible if they directly related to one or more core R&D activities. On the other hand, the configuration of a processing plant or the construction of a larger build without any technical unknown generally would not qualify.
Technical Unknowns Must Drive Experimental Scale Up Activities
To qualify under the R&D Tax Incentive, companies need to demonstrate that the outcomes of scale-up activities are not already known or able to be readily determined using existing knowledge, experience or standard processes.
While scaling up often builds upon prototypes or smaller-scale pilots with some understanding of technical requirements, it is insufficient to merely claim that larger scale implementation has not been attempted previously.
Applicants must clearly identify the specific technical uncertainties, complexities and unknowns that remain to be resolved during scale-up. The experiments must intentionally focus on bridging these knowledge gaps rather than pursuing generic production goals.
The Importance of Contemporaneous Records
Contemporaneous records demonstrating what was initially unknown and how targeted activities systematically solved those problems are key to substantiating R&D claims.
Meeting the Dominant Purpose Test for Scale Up Activities
Contemporaneous records detailing the objectives and progress of activities provides critical evidence that their dominant purpose was to support R&D experimentation rather than production.
In practice, many activities serve multiple purposes, including commercial and R&D objectives. For R&D activities related to the production of goods or services, which often involve scaling up, the dominant purpose test comes into play.
This test assesses whether the dominant purpose behind the scale-up activity is to support core R&D activities.
What is Considered Under the Dominant Purpose Test
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- Whether there is also a commercial benefit from the activity
- Is the activity a routine activity normally undertaken for non-R&D purposes?
- Whether the activity would have occurred in the absence of a core R&D activity
Contemporaneous records detailing the objectives and progress of activities provides critical evidence that their dominant purpose was to support R&D experimentation rather than production.
Integrating the R&D Tax Incentive Into Scale Up Planning
To maximise benefits from the R&D Tax Incentive, strategic planning around meeting eligibility criteria should occur early when formulating scale-up initiatives:
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- Identify specific technical uncertainties and knowledge gaps needing resolution
- Design experimental methodologies focused on resolving unknowns
- Maintain detailed contemporaneous records of activities undertaken
- Quantify time and resources required for documenting R&D activities
- Consult experts to assist with identifying and evidencing eligible activities
- Isolate R&D activities from ineligible manufacturing and production work
With upfront consideration of the R&D Tax Incentive opportunity, companies can significantly reduce the costs associated with progressing technology through scale-up. A detailed, evidence-based approach to capturing eligible activities is crucial.
Why the R&D Tax Incentive is Relevant for Manufacturing Scale Ups
As any growing manufacturer knows, successfully scaling up production presents immense technical and financial challenges. In industries like food production, increasing output volumes while maintaining product quality, safety and consistency through an upscaled process is extremely difficult.
However, many manufacturers overlook Australia’s generous R&D Tax Incentive program as a mechanism that could offset some of the risks and costs involved.
Hypothetical Case Study: Jane’s Jam Co.
Let’s consider a hypothetical example of how one manufacturer was able to leverage the program:
Jane’s Jam had been producing award-winning jam from her commercial kitchen for five years, but growing demand strained her small-scale capabilities. She knew tripling weekly output meant redesigning equipment and processes from the ground up.
Some challenges she foresaw included:
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- Adapting recipes in larger batches while preserving texture and flavour
- Designing new sterilisation methods for increased volumes of filled jars
- Configuring conveying and packaging lines efficiently at high throughput
- Ramping up on such an experimental scale required significant investment with no guarantee of success. That’s where the R&D Tax Incentive program came into play.
Applying the R&D Tax Incentive
Jane realised that many of her scale up tasks, like batch cooking tests and prototype equipment trials, involved hypothesis driven experimentation to resolve technical unknowns and in turn creating new technical knowledge. She identified several potential core R&D activities:
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- Varying ingredient ratios and cooking conditions to for a new larger scale production process
- Benchtop trials of different sanitization chambers against biological contamination thresholds
- Prototyping and refining automated canning line modules through a series of production trials
By carefully documenting the hypotheses, testing methodologies and results, Jane was able to leverage the R&D Tax Incentive to help her de-risk scaling up her production.
Why Companies Overlook the Opportunity
Like many manufacturers in Jane’s position, the initial instinct for many companies were that scaling up projects primarily served a commercial purpose without much R&D involved. However, making changes to commercial processes in a systematic way to create new technical knowledge is precisely what the R&D Tax Incentive supports.
One common pitfall among companies is the tendency to view scaling up project in isolation, rather than recognising their potential being a core or supporting R&D activities, resulting in missed opportunities to leverage the R&D Tax Incentive program.
For Jane, the R&D Tax Incentive offset provided a total benefit of 43.5% on eligible R&D expenditure consisting of R&D hours, contractor costs and other such as R&D overheads, enabling her to optimise operations with immediate financial benefits. This case serves as an example of how the R&D Tax Incentive program can be leveraged by businesses to support their scale-up initiatives.
To read more examples about how different industries are supporting their R&D claims, check out our R&D Tax Incentive – Case Studies page!
Expert Guidance to help you Optimise for the R&D Tax Incentive
Determining eligible R&D activities requires both deep technical expertise and tax knowledge.
NOAH Connect partners with companies across Australia to build strong, evidence-based cases for R&D expenditure related to scaling up and other experimental activities.
Contact us today to discuss your expansion plans and discover how the R&D Tax Incentive could help fund your scale up initiatives.
