Construction R&D Tax Incentive Case Study

Case Study – BuildIt AU

Construction R&D activities

Construction projects with eligible R&D activities can include:

  • Development of new or improved building and construction techniques, products or processes.
  • Application of existing technology in a different location or context that involves uncertain outcomes.
  • Development of new or improved equipment. For example, an innovative mobile toilet that can be used in remote areas lacking services connection; new scanning technologies (hardware and software) that can generate complex, accurate and intricate maps and models scanned from objects.

Companies claiming built environment R&D activities can range from startups to large multi-nationals, construction and engineering firms, manufacturers, mining companies, etc.

BuildIt AU

BuildIt AU is a civil construction company and has a range of projects that it undertakes including the design and construction of:

  • Public and private infrastructure, for example, roads, utilities, airports, bridges.
  • Commercial facilities such as shopping centres.
  • Small- and large-scale residential developments.

BuildIt AU entered into a contract to provide design and construction services. The terms of the contract were fixed price, with limited scope for price variances. Payment of the milestone targets was subject to successful delivery and acceptance by the client for defined milestones. During the prefeasibility phase, it was identified by BuildIt AU that the site was contaminated with PFAS (per- and poly-fluoroalkyl substances). 

Background research revealed that there were limited PFAS treatment options available and BuildIt AU was unable to identify any other existing solutions that could be utilised as a small scale, in situ PFAS treatment facility. BuildIt AU determined that it would have to undertake R&D activities to develop a new process that could treat low concentrations and low volumes of PFAS contaminated water. It was able to form this view given the qualifications, knowledge and experience of its environmental, civil, mechanical and chemical engineers, consultation with third party subject matter experts and reviewing publicly available information.

Eligibility must be assessed on an activity level, rather than project level. Within a built environment project, there are likely to be some activities that qualify as core R&D activities, some that qualify as supporting R&D activities, and some activities that are not eligible.

BuildIt AU considered its activities against the definitions of core and supporting R&D activities, guidance materials published by AusIndustry and ATO taxpayer alerts.

It self-assessed that the development of the modular, in situ PFAS contaminated water treatment facility, able to treat low volumes/throughput and low concentrations of PFAS contamination, met the requirements to be a core R&D activity because:

  • There was limited current knowledge in respect of treating PFAS contaminated groundwater, particularly where the contamination is low and the volume of water to be processed is also low. Existing knowledge is focused on the processing and treatment of high concentration levels and large volumes.
  • Knowledge regarding the chemistry of PFAS and how the long and short chain molecules react under various conditions impacting the methods for separation and extraction of PFAS molecules from contaminated water was limited.
  • At the time of undertaking the project, statutory guidelines were preliminary and focused only on levels of contamination rather than the treatment processes.
  • It can only determine the outcome through a systematic progression of work that is based on the principles of an established science, in this case the fields of mechanical, environmental and chemical engineering.
  • It planned to generate new knowledge about the design of a PFAS contaminated water treatment process that is able to remove PFAS contamination to undetectable levels from low volumes of contaminated water enabling the groundwater to be returned safely to the environment.

BuildIt AU assessed that other aspects of the project including project management, technology research, laboratory and small scale testing, groundwater sampling and analysis and the development of treatment prototypes to evaluate results could be registered as 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 experiment could not be carried out without them.

Additional activities carried out during the project such as full-scale treatment of all site contaminated ground water, construction activities that cause the contaminated ground water to be released, broader environmental survey and analysis, assessment of the full extent of contaminated groundwater to be treated did not meet the definitions of core or supporting R&D activities.

BuildIt AU engaged third party experts to assist with the development of the PFAS treatment technologies. BuildIt AU assessed that the activities were undertaken ‘for’ BuildIt AU, as it:

  • Bore the financial risk in the activities performed by the contractor,
  • Had beneficial ownership of any technology/knowhow generated by the contractor,
  • Strictly controlled the activities of the contractor including directing activities to alternative lines of research.

BuildIt AU incurred expenditure on R&D salaries, the decline in value of depreciating plant and equipment, materials, consumables, third party contractor costs and overheads. 

BuildIt AU was engaged by its client to deliver construction services. The contract did not require undertaking R&D activities as it was technically feasible to deliver on the contract (i.e. design and construction of facilities at the site) without undertaking R&D activities (e.g. contaminated materials could be extracted and stored at a third party facilities). However, BuildIt AU decided to undertake R&D beyond the scope of the contract to develop an improved, environmentally friendly PFAS treatment process.  Further, all milestone payments were subject to approval by the client and successful outcomes. BuildIt AU determined, that on balance, the R&D expenditure incurred by BuildIt AU was at its risk.

BuildIt AU is a Pty Ltd company incorporated in Australia that is not a tax-exempt entity. It is therefore an eligible entity.

On the technical side, BuildIt AU kept documentation usually generated as part of its design and construction activities including preparation of progress reports, detailed engineering documents, project management, etc.  

To differentiate the R&D project from routine design and construction activities, it also kept records that evidenced the experimental nature of the work, including: 

  • Contaminated water sample testing through the pilot plant including analysis of the output from the plant, close monitoring and adjustment of the treatment process including catalyst and filter trials, changing processing rates with variable speed drives, temperature and pressure modifications.
  • White papers, journal articles, technology reviews and searches that were used to establish the knowledge gap.
  • Confluence pages that summarise the technical problems, propose a hypothesis or design solution to resolve them, describe the testing method and the success metrics that will be used to evaluate the results. 

To demonstrate that its engineers spent time on R&D, BuildIt AU tracked all staff time and expenditure (e.g. contractor costs, chemicals, external analysis, etc.) using specific R&D job codes. Reports were exported to determine how many hours the development team spent on individual tasks and the costs tracked in the R&D job code that formed part of the core and supporting R&D activities vs routine development. Third parties invoices, including technical experts, were sufficiently detailed to distinguish between eligible R&D activities (core or support) and ineligible activities.

  • Conducted education sessions with key technical and financial personnel to help BuildIt AU assess activities against the legislation. The definitions of R&D under the program are not necessarily the same as the common understanding of R&D, or experimentation.
  • Ensured that none of the core R&D activities fell within the exclusion around complying with statutory requirements or standards.
  • Drafted the technical descriptions of the core and supporting activities conducted in the project with sufficient detail to allow AusIndustry to understand how those activities met the eligibility requirements.
  • Prepared the R&D expenditure calculations and information needed to submit the claim as part of the company tax return, ensuring no ineligible expenditure was claimed such as the cost of core technology or expenditure not “at risk”.
  • Worked with BuildIt AU to improve their record keeping systems and processes to contemporaneously identify, evaluate and record R&D activities.
  • Successfully assisted BuildIt AU with a technical review by AusIndustry.
  • Kept BuildIt AU informed of the latest case law, guidance and expectations from the regulators (AusIndustry and ATO) expressed through taxpayer alerts and industry reference group meetings.

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