Agrifood sector guide for the R&D Tax Incentive

This case study is designed to help you understand eligibility requirements for the R&D Tax Incentive.

With growing consumer demand for healthier eating, Melbourne based Baking Stuff decided to create a new, more nutritious bread.

They decided to add fish oil to their wholegrain bread.

But, not surprisingly, they didn’t want to add the fishy flavour.

The answer lay in a technology known as microencapsulation, that seals the oil in a coating.

That way, fish oil is only released once it enters the digestive system.

The problem was, although microencapsulation had already been developed by a similar company, it was a closely guarded secret.

As the knowledge wasn’t available publicly, Baking Stuff could only get it through their own experiments.

They knew that certain aspects of this activity would be eligible for the Australian Government’s R&D Tax Incentive.

Baking Stuff initially thought that adding the encapsulated fish oil might not affect the recipe or the production process.

But they soon discovered that wasn’t the case.

The abrasive nature of the grains meant the mixture formed clumps and the dough didn’t cook thoroughly.

Further testing found that mixing speed, baking times and temperatures needed to be adjusted to overcome this.

Baking Stuff then needed to progress this experiment from individual loaves to the stronger mechanical mixing action of their full-scale production line.

Baked bread loaves from full production runs were randomly sampled to test the consistency of the dispersion and stability of the additive.

Now Baking Stuff were satisfied the fish oil could be introduced without affecting the quality of the loaves or the integrity of the additive.

Next they tested the effects of the high temperatures cooked loaves can experience during transportation in the summer.

They transported the loaves over short, medium and long distances and used an electronic thermocouple array to record temperature variations.

The integrity of the additive was tested on arrival at each destination.

This experiment was repeated over a 5 day period, with a batch of test loaves making up 20% of the load being transported.

Once the fish oil additive was successfully introduced into their wholegrain bread, Baking Stuff decided to try it in other products.

As their white bread had no abrasive ingredients, they concluded that no further experiments were needed.

So they simply added the fish oil additive in the same way as their wholegrain loaf.

In the case of their fruit loaf, Baking Stuff were unsure about how the fruit enzymes would interact with the fish oil additive.

So they undertook further trials to ensure that the product would blend and bake successfully.

At the end if the financial year, Baking Stuff had 3 core and 2 supporting R&D activities for the R&D Tax Incentive.

They registered them with AusIndustry and claimed associated expenditure within their company tax return.

Core R&D activities:

1. Developing a commercial-scale fish oil recipe for wholegrain bread without the fishy taste.
2. Testing the effects of the high temperatures of transportation on the loaf.
3. Incorporating the new fish oil additive into their fruit loaf.

Supporting R&D activities:

1. Initial research into the introduction of microencapsulation technology to a wet mix.
2. Baking of the sample loaves for the transportation tests.

Both AusIndustry and ATO require you to document all eligible activities at the time they are done and record associated costs.

Baking Stuff added columns to their standard run sheets to record changes to ingredients, mixing time and speeds, baking conditions and taste.

Prior to conducting any R&D activities, Baking Stuff wrote an R&D plan to clearly outline the objectives of the project.

Baking Stuff contracted a commercial laboratory to test the level of dispersion of the fish oil in an individual loaf and across a full-scale production run.

The laboratory compiled the results in a series of reports that were provided to Baking Stuff.

Once the fish oil encapsulation testing had progressed from individual loaves to the production line, Baking Stuff used their automated baking machine, which also produces 4 other bread batches at the same time.

They were able to claim the production of the experimental batch as a supporting R&D activity, as it was directly related to the core R&D activity.

However, the additional 4 batches were not eligible, as they were produced for commercial purposes and were not related to the experimental activities.

When Baking Stuff wanted to test the bread during transportation, they had already completed their development of the wholegrain loaf.

However, Baking Stuff determined that 20% of a normal production run was needed to supply bread for the temperature tests.

So Baking Stuff self-assessed that 20% of the production run was a supporting activity, as it was produced and used purely for testing.

When Baking Stuff decided to apply their new knowledge to a white loaf, they self-assessed they had gained sufficient expertise by adding the fish oil to the wholegrain bread, so no new R&D was required.

However, in the case of the fruit loaf, they had to test how the fruit would react with the microencapsulated fish oil.

So further R&D experimentation was required on mixing and baking times.

These were eligible core R&D activities.

It’s a matter of judgement for companies to decide whether an activity closely connected to an experiment forms part of the core R&D activity or whether it would be more correctly classed as a supporting R&D activity.

When making these decisions, companies should consider how close the activity is to the experiment, its significance to the experiment and the record keeping requirements that can substantiate their decisions.

Registering activities correctly and keeping accurate records will put you on the road to success with the R&D Tax Incentive.

R&D Tax Incentive.

An Australian Government Initiative.

For more information, visit ausindustry.gov.au or call 13 28 46.