Absolute Vision Technologies Pty Limited (AVT) developed a real-time freight and manufacturing scheduling system based on work undertaken by its founder as part of his PhD.  AVT identified the project objective that underpinned its ‘experimental’ activities as to evolve available cloud based management information software and advance it to a level capable of providing new products to the Australian wholesale, manufacturing professional services and industry…through leveraging the current Netsuite cloud technology platform and providing a more cost effective and real time multi-disciplined business solutions platform.

AVT registered R&D activities for 3 years, each year described as a further improvement on prior year activities.  In each of the 3 years the nature of the Core Activity hypothesis did not change even though some of the specific activities undertaken did change.  Industry Science Australia (the R&D Registering body) (ISA) in rejecting the registered activities on review determined that –

AVT had not demonstrated it had undertaken eligible experimental activities related to hypotheses and undertaken for the purpose of generating technical new knowledge;
AVT’s descriptions of Claimed Activities lacked sufficient detail;
AVT had not demonstrated or identified the knowledge gaps it sought to resolve;
There was insufficient detail of the state of the art at the time of the Claimed Activities;
AVT had not provided “specific technical hypotheses that inform the design and conduct of claimed experiments”;
AVT had not demonstrated how any new knowledge generated differed from the state of existing knowledge;
AVT had not demonstrated that the outcome could not be known or determined in advance by a skilled professional;
There was no evidence of a systematic progression of work – the activities in each Relevant Year claimed the same activities;
There was no evidence that new knowledge was generated;
There was no detail of the experiments undertaken, how they were performed;
There was no substantiating evidence that any experiments were performed.

AVT described its core activity from 2014-2016 as –

“.. designed to evolve available clouds based management information software and advance it to a level capable of providing new products to the Australian wholesale, manufacturing professional services and industry. This will be achieved through leveraging the current Netsuite cloud technology platform and providing a more cost effective and real time multi-disciplined business solutions platform to support these Australian business communities. There is a clearly identifiable and measurable knowledge gap between what is currently available in the market and the products that the firm is developing. The products will enable wholesale, manufacturing professional services and industry increase their efficiency and profitability through the provision of advanced management information systems and the overall increase in resource allocation effectiveness.”

AVT further described its 2016 hypothesis as “APM Tool help analyse the requests more efficiently and in detail”. The AAT commented “What does “more efficiently” mean? What does “in detail” mean? How can this hypothesis be tested? We agree with ISA’s submission that this “hypothesis” is a hypothesis in name only and is in fact merely a vague commercial objective. There is also a distinct lack of detail in the experiment overview. Another hypothesis was to develop potential solutions to test software developments at critical milestones along the project’s development schedule. The AAT found that this hypothesis did not demonstrate a proposition to be tested.

Poor description of potentially eligible activities is always to be avoided but it is not necessarily fatal.  However, the AAT also found that there was a complete lack of substantiating evidence to support AVT’s claims that what it was doing satisfied the definition of R&D. More importantly, none of the documentation supplied by AVT and its advisors to the ISA on review was created at the time the R&D activities were conducted in 2014-2016 or could be supported by source material that was created at that time.  As a result, the AAT place little probative weight on the documentation as evidence of AVT’s claims.

A single sentence encapsulates the AAT’s findings in relation to AVT: “It is impossible for us, given the state of the evidence, to conclude AVT was engaged in eligible R & D core activities.”

There are several insights for R&D applicants:
1.  Although any eligible company can apply for the R&D tax incentive, anyone can also be audited at any time by the ISA.  Applicants need to register their R&D activities with sufficient detail to comply with the R&D legislation.
2.  The Core Activities must be fronted by an experimental hypothesis that is capable of a yes/no answer and experimental activities that prove or disprove the hypothesis
3.  The baseline of existing knowledge must be documented in a way that shows what holes exist in the current knowledge and therefore what new knowledge is being sought (the reason why the experiment(s) must be conducted)
4.  Contemporaneous documentation and source data is needed to show that claimed R&D activities were in fact undertaken.

 

 

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