Developing a Hypothesis for the R&D Tax Incentive

Harley Bell
Feb 26, 2021
Business
4
minute read

When looking at R&D Tax Incentive claims, one of the most challenging elements is capturing what's going on at ground level within your R&D company and presenting it clearly in a written format.

So, how can you best communicate what you are doing, where the idea came from, what are you trying to find out and why this hasn’t ever been done before? And sometimes, what is it about the R&D project that keeps you up at night?

Obviously, there are a lot of gears at work within an R&D project, it can be complex and, especially in the first years, you are juggling a few different balls.

In this article, I thought to cover one of the fundamental parts of the R&D Tax Incentive application with AusIndustry — the hypothesis.

What is the R&D Tax Incentive hypothesis and why is it so important?

The R&D legislation is founded on scientific method. The hypothesis is the driver of the experimental activities and testing you are completing in your R&D project.

I would think of it as the note plastered on your wall, the first thing you look at each day when beginning the R&D work or what is always at the front of your mind. “If this ‘thing’ is going to work and be successful, then it will be able to achieve ‘this’, in all scenarios.”

An R&D company will often have a series of hypotheses like these. These are the drivers for the experimental activities that are taking place. The hypothesis effectively justifies the new knowledge that you are trying to achieve.

Just explaining the hypothesis in a conceptual way like this is a little tricky to grasp, so let’s try thinking about it another way – with a practical example. With my apologies to those who don’t enjoy Australian Rules Football, I understand, but perhaps this could be a good way to consider it.

R&D Tax Incentive hypothesis example —

Using the Fremantle Dockers Football Club as an example, let’s say that our R&D project is to work out if a Fremantle based football club would perform in the AFL. Keep in mind that this isn’t the best example for R&D, but rather instruction on the formation of a hypothesis.

The hypothesis sets out your research aim—what you are trying to achieve? A hypothesis could be:

“if the Fremantle Football Club is successfully established in 1995, then by the year 2025 it will have 3 premierships and win 80.0% of home games.”

A hypothesis like this guides the overall project goal, it may not be achieved, but the R&D company is determined to find new ways to make this possible. A hypothesis such as this also guides the knowledge we are trying to find, like; will a South Australian full-forward be loyal to Western Australia and benefit the club? How can we develop a successful club culture? Does a handball-only style of play benefit high scoring? 

The scientific approach mandated by the R&D legislation is Newtonian method:

  1. develop a hypothesis;
  2. conduct experiments to determine its validity;
  3. record observations from the experiments; and
  4. evaluate the results and then draw your conclusions.

So, it can be seen that the hypothesis is at the centre of the R&D core activity and all the other elements are related to it. A poorly written hypothesis can jeopardise your R&D claim. Conversely, a well written hypothesis will help you to present a defensible R&D claim to the regulators.

Technical hypothesis example —

The Fremantle Dockers example is a bit ‘tongue–in–cheek’ (some may say far-fetched!), so let’s consider a more technical example in the engineering field.

Let’s say the R&D project is to develop a unique and innovative method and system of drilling in Western Australia that uses less energy to generate comparable output to standard drill rigs. To develop the prototype for this novel drilling method, our hypothesis could look like:

“If the unique and one-of-a-kind Smith & Co method of drilling system and prototype is successfully developed and tested in normal operating mining conditions, then it will achieve a rotation speed of 2,000 rpm, through any surface and without any heating issues.”

Or

“If the unique and one-of-a-kind Smith & Co method of drilling and system prototype is successfully developed and tested in normal operating mining conditions, then it will operate with 99.0% efficiency with only solar energy power with 10.0 hours of operation a day.”

There are a few different factors in developing the hypothesis, and the R&D Tax Incentive application overall, but hopefully these few hypothetical examples help.

AusIndustry has a mountain of resources available to assist and then there is always the legislation that is at the base of it. Though the first years of the R&D company’s operation can be daunting, there are resources that can help you along the way and make the process of writing up the R&D documentation more streamlined. The hypothesis is a good fundamental step to guiding the R&D project over the years.

About the Author: Harley Bell is a Specialist Advisor for the R&D Tax Incentive. Harley has a multidisciplinary background that reinforces his accomplished ability in providing technical support.

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Article by
Harley Bell
Harley is a Specialist Advisor in the R&D Tax Incentive / Innovation division. Harley has a multidiscipline background that reinforces his accomplished ability in providing technical support to R&D applications and grants.
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