Biopolis AU considered its activities against the definitions of core and supporting R&D activities.
It self-assessed that the development of a new biodegradable packaging material for use in a variety of industries based on a new bioactive compound met the requirements to be a core R&D activity because:
- There was no current knowledge that it could find in technical publications, existing off the shelf manufacturing processes and other publicly available sources that it could leverage to achieve the desired outcome.
- It could only determine the outcome through a systematic progression of work that was based on the principles of an established science, in this case the fields of biochemistry, chemical engineering, engineering design and materials science.
- It planned to generate new knowledge about the use of the new bioactive compound in biodegradable packaging. Further, the new learnings were gained about the development of a material that could biodegrade under specific circumstances (i.e. once disposed of and subject to environmental conditions such as rainfall) yet be versatile and strong enough to withstand several use cases.
Biopolis AU assessed eligibility on an activity level, rather than project level and determined that there would be two core activities. With NOAH’s assistance Biopolis AU self-assessed that the two core R&D activities were, ‘Active ingredient development and laboratory testing’ encompassing a range of experimental activities from hypothesising a new active ingredient formulation that could be used to impregnate different plant-based packaging materials, synthesising it in the laboratory, testing it against a range of performance criteria, analysing the results and then drawing logical conclusions. This was an iterative process as test results subsequently informed reformulation until stability, quality and performance criteria were met.
The second core activity ‘Batch Testing’ included multiple feasibility batches that were manufactured under a variety of production conditions (variables tested included temperature, pressure, active ingredient concentration and types). Tests were carried out to assess the performance and stability characteristics of the end product made under various manufacturing scenarios. At the end of the testing program, Biopolis AU failed to develop a formulation that met the specified performance criteria that was cost-effective in a commercial-scale environment.
Although the outcome of the second core activity was not successful, new learnings were made about the manufacturing process. These new learnings will inform future research.
Biopolis AU assessed that other aspects of the development including project management, background technical reviews, prototype manufacture and test equipment set-up could be registered as supporting R&D activities. These tasks were all within the skills and experience of the company, however, they were directly related to the core R&D activity and the experiments could not be carried out without them.
Biopolis AU incurred expenditure on R&D salaries, prototyping expenses, third party contractor costs (materials testing) and overheads. Though most of this expenditure was re-imbursed by its parent, Biopolis US, as the activities were undertaken pursuant to an exclusive and compliant agreement, Biopolis AU determined that the activities and expenditure were eligible as foreign owned R&D.
Biopolis AU is a wholly owned Australian subsidiary of a US registered parent, Biopolis US. Biopolis US frequently engages Biopolis AU to undertake R&D activities in order to access the wealth of technical skills and expertise in Biopolis AU. Further, the R&D Tax Incentive incentivises Biopolis US to use its Australian subsidiary to manage the risk of failure in undertaking R&D activities. Biopolis US formalises the R&D arrangement with Biopolis AU in a written agreement, exclusive between the two entities. IP is owned by Biopolis US and all R&D expenditure incurred by Biopolis AU is reimbursed by Biopolis US.
Biopolis AU is a Pty Ltd company incorporated in Australia that is not a tax-exempt entity. It is therefore an eligible R&D entity.
Further Biopolis US is incorporated in the USA. As the USA is a country with which Australia has a double tax agreement, any R&D activities undertaken by Biopolis AU would likely qualify as foreign owned R&D as the R&D is performed pursuant to a complying agreement between the US and AU entities.
On the technical side, Biopolis AU kept documentation usually generated as part of its research and development process including records of literature reviews, a project plan, testing procedures outlining the systematic progression of work and test reports (with results and descriptions of technical issues).
To differentiate the R&D project from a routine project, it also kept records that evidenced the experimental nature of the work, including:
- Presentations to the board setting out the need to conduct R&D and the results/new knowledge expected to be generated,
- White papers, journal articles, technology reviews and records of discussions with technical experts in the field (e.g., biochemists, material and process engineers) that were used to establish that the knowledge gap,
- An R&D database that summarised the technical problems, proposed a hypothesis or design solution to resolve them, described the testing method and the success metrics that were used to evaluate the results.
To demonstrate that its engineers spent time on R&D, Biopolis AU required its technical laboratory staff and material scientists to log time using time tracking software. Reports were exported to determine how many hours the development team spent on tasks that formed part of the core and supporting R&D activities vs routine development. Other employees involved in supporting R&D activities such as project management provided time based on other records such as meeting minutes and diary entries. Contractors were asked to provide sufficiently detailed invoices to ensure the work they were engaged to perform could be easily linked to the R&D activities. Prototype expenses were recorded and tracked separately in the accounting system along with descriptions of their use in test reports to highlight their nexus to the R&D Core and Supporting Activities.