A Research project normally starts with an ‘idea’. Someone has a yarn to the manager and asks why something could not be done differently.
If management thinks that the idea might have some value, a small team may be formed to undertake some preliminary investigations to determine whether the concept appears to be feasible.
If this process indicates that there might be value in investing time in exploring the concept, the next step should be to check what the taxation consequences might be. You have probably heard that Research & Development can be undertaken with some taxation advantages. However, do you know that you have to be a company to claim the specific taxation benefits that can be achieved from a Research & Development activity?
You do not need to have a minimum turnover or to be trading at a profit. You just need to have a company which will be the entity that undertakes the Research & Development research activities.
The next step is to check “prior art and literature”, to see whether someone else also thought of this idea, have already finalised their research and registered a patent somewhere in the world. If this has occurred, the Australian government is not going to allow your company to claim Research & Development taxation benefits to replicate research activities someone else has already undertaken.
When conducting the “prior art and literature” searches, it is important that the results of those searches are printed, dated and retained. This will help you establish at a certain time that you cannot find any prior art or literature that relates to your project. Furthermore, you have retained that information which will act as an evidence if you are required to justify why your company is entitled to the Research & Development tax offset.
What knowledge are you seeking?
The first segment of the Research & Development project is to pursue an “idea”. Then, if it looks interesting, conduct “prior art and literature” searches to see whether someone else has already registered this idea.
Once this work is completed, and if you think that the idea might be beneficial, you then need to start assembling the key material that you are going to need to be able to claim the Research & Development tax offset.
This starts with the “core activities” that you are proposing for the project…
There must be at least one core Research & Development process in every Research & Development tax offset claim, where knowledge cannot be known or determined in advance on the basis of current knowledge, information or experience and can only be determined by applying a “systematic progression of work”.
The activity needs to be conducted for the purpose of “generating new knowledge or information” relating to new or improved materials, products, devices, processes or services.
You are then required to determine the “hypothesis or hypotheses” for this particular research project.
The hypothesis is a statement which can be proven right or wrong by conducting an experiment.
Full records are required to be maintained of the experiments conducted to prove or disprove the hypothesis statement.
The experiments might not prove a “hypothesis” and you might think that you will not be able to claim the R&D tax offset. This is incorrect. As long as the various steps of the Research & Development process have been documented, the experiments were conducted and full details of the results recorded, the company will be able to claim the expenditure as part of a Research & Development tax offset.
Research and Development documentation is important
When a company undertakes Research & Development, the focus should be on safeguarding the potentially valuable asset that is being created.
The protection of intellectual property starts with the team that are going to be involved in the research activities.
Management should check the employment agreements for the team assembled for the research project. Does the agreement adequately cover research activities in which the team member will be involved? If not, consideration should be given to drafting an updated employment agreement.
Contractors and consultants proposed to be engaged on the research activities should be invited to be involved so long as an appropriate intellectual property agreement and confidentiality agreement are signed.
In most situations, unless these agreements have been signed, the contractor/consultant retains ownership of the intellectual property relating to their services.
Companies undertaking research activities should obtain legal advice before engaging a contractor/consultant to work on a research project.
It is the company’s responsibility to maintain records that identify who performed the various components of the work on a research project.
This means that, for contractors and consultants, a written agreement has been prepared specifying the work to be undertaken and that tax invoices are received to substantiate each payment.
Being diligent on the documentation with employees, contractors and consultants relating to research projects could save the Company Directors considerable heartache relating to the intellectual property being developed.
Towers Business Development are familiar with the Research & Development process and can assist companies on the entire research and development journey. To find out more, contact Peter Towers on 1800 232 088.