Research And Development Starts With An Idea

Hi, a message from Peter Towers, Managing Director and Founder of ESS BIZTOOLS.

Research and development starts with an idea – it could be in a factory or a warehouse or in an office or on a farm or someone might think about it while sitting in an aircraft with their brain just flicking through ideas.

Some ideas lead to fantastic products or services and because of this the Australian Government offers significant incentives to companies that undertake Research and Development Activities.

We would like to invite you to join us as we explore what can happen with an idea and review the type of services that an accountant or a bookkeeper could supply to a client who makes an enquiry perhaps along the following lines:

I have heard that the government has some incentives for people undertaking research and development – can you tell me about them?

This is an interesting question and unfortunately my enquiries tell me that a significant number of accounting practitioners are unable to offer any in-depth response to this question but I think the response should be as follows:

Yes, you are correct the Australian Government does supply significant incentives for companies which undertake Research and Development Activities.

I know that you currently trade as a sole trader and if you wish to obtain the income tax benefits you will need to be conducting all of the research and development activities through a corporation.

We can handle the acquisition of a “shelf company” for you and from now on all of the business activities relating to research and development should be conducted through the company and I would suggest that in fact all of your business would be conducted through the company.

The next thing to do is to follow-up on the “idea” – normally a business would establish a small project team to undertake some basic research.  The team might only be two or three people who conduct preliminary investigations which would include an understanding of the research and development eligibility.  We can help you on that so basically the eligibility criteria are as follows:

• Research and development activities must be conducted through a company – we have talked about that and we are going to arrange the acquisition of a “shelf company” for you.
• To claim the Research and Development Tax Rebate it is necessary for the company to spend at least $20,000 in the financial year on Research and Development Activities. These activities can be on a number of projects – you are not restricted to only one project.
• Under the legislation, records need to be kept on the research and development planning and the actual Research and Development Activities which includes:
• Prior art/literature search – this is a technical term but means that you need to undertake some research to determine whether someone else has already registered a Patent for the project that you have in mind somewhere in the world. You can undertake some of this research on the Internet but make sure that you print out any material that you find that in your opinion indicates that no one has yet patented the idea that you have. The reason for this is that if you claim the research and development costs the Australian Taxation Office or AusIndustry, the other government office, involved with research and development may conduct an audit at any time over the next four years and you need to have kept records that support that you have kept records on the searches that you undertook to ascertain whether someone else had already patented a similar idea to yours.

You can also consult with specialist consultants and advisers for them to undertake research and you could talk to a Patent Attorney who are well-versed in the concept of searching the registers to determine whether a Patent has been lodged for a particular process.

• We have a explanatory paper on the research and development process – Paper 052–010 “Planning a Research and Development Project” which will give you more information on what happens after you have identified an “idea”.
• You will note in this paper that we have referred to the “Core Activities” that you need to identify. These are discussed in items 13 – 17 within the paper. You will need to identify at least one core activity for your research and development activities.
• We have some special forms which we have prepared which can assist you to identify all of your ideas. The first form is known as “BAS5514 - Planning The Systematic Progression Of Work”. You may have already read that terminology – “Planning the Systematic Progression of Work” – this is what the Taxation Rules require you to undertake.
• You are also required to identify what “New Knowledge” you think will be produced by these core activities. An important matter is that under the law the outcome of your research activities cannot be known or determined in advance on the basis of current knowledge, information or experience – new knowledge can only be determined by applying a “Systematic Progression of Work”.
• It is then necessary to think about the “hypothesis determination” or perhaps the “hypotheses determination” if you have more than one significant outcome.
  
  The hypothesis needs to be a “positive statement of a belief that experimentation sets out to prove or disprove”.
  
  The hypothesis should adequately describe technical or scientific ideas that can be tested through a systematic progression of work.
• If you talk to professional consultants or university academics about any aspect of your idea you need to bear in mind confidentiality and it is a good idea to record the names of the people that you have discussed your idea with and to record what their comments were.
• Whilst the law does not require that a small business has to prepare a Research and Development Plan (it does for large businesses) it is a good idea for everyone to prepare a Research and Development Plan. This makes you think about the process and how you are going to tackle it. We have a template of a Research and Development Plan which I have provided for you to look at.
• As part of the planning process it is a good idea to identify your team.
  
  First of all who is going to be involved in this project who are team members.
  
  Secondly do you intend to hire any consultants or other people to assist you on this project.
  
  It is a good idea to talk to your Solicitor about preparation of a Confidentiality Agreement for these people to sign – normally this does not apply to your team members but it might be worthwhile asking your Solicitor about this.
  
  However, engaging business consultants, universities, trades persons et cetera to assist in this type of project means that it is desirable that you have agreements relating to confidentiality and assignment of intellectual property rights to your company if you are paying for the services being provided.  This is something you should discuss with your Solicitor.
• As part of the Research and Development Plan we recommend that you also prepare a Research and Development Budget so you have a clear idea of what this project might cost.
  
  The laws relating to research and development in Australia were originally prepared based on what the Government understood was the process within universities and large businesses relating to research and development activities and this thinking still exists even though there are now thousands of SMEs undertaking research and development activities each year.
  
  There is an expectation by the Australian Taxation Office that the Leadership Team within a company will seek approval from the company’s Board of Directors (and in your new company this might only be you as the Sole Director) for approval for a research and development project to be undertaken.  We have a template of a Board of Directors’ meeting Minute relating to an approval for research and development activities to be undertaken which we would recommend that you complete if you intend to proceed with the Research and Development Project because this is all part of the record-keeping that a deliberate definite decision was made by the company to undertake Research and Development Activities.
  
  All of this information and work is not required to be immediately submitted to anyone but ultimately you could be requested to produce the documentation that led to a Research and Development Rebate Claim being made in the company’s Income Tax Return.

This is a summary of the introduction to Research and Development so that you have an understanding of what is involved and how we as Accountants/Bookkeepers can assist your clients on this journey.  However, it is important that your clients appreciate that they are primarily responsible for the documentation of all aspects of the Research and Development Activities and that your role is to assist the, with the sourcing of that documentation so that it is available to support the returns that have to be lodged annually with AusIndustry and the Australian Taxation Office if the company is undertaking Research and Development Activities and wishing to claim the Research and Development Rebate.

Why not visit www.essbiztools.com.au to find out more about the Research and Development Introduction Package.

If you would like to have a conversation about this service and others supplied by ESS BIZTOOLS please send us an email: and we will respond to your questions.

Thank you for your interest in the “BIZ AID by ESS BIZTOOLS” campaign wherein we are endeavouring to supply a component of our consolidated product packages to Accountants and Bookkeepers at a reduced subscription rate to assist you to offer an outstanding range of professional services to assist your SME clients to survive the current difficulties.

If you would like a one-on-one complimentary review Zoom meeting with our Founder and Managing Director, Peter Towers please send us an email: