R&D for Civil Engineering: Are you missing out on credits?

Civil engineering is generally concerned with the application of physical and scientific principles to solve the challenges associated with the built environment. It is a broad profession that includes several specialized sub-disciplines, and involves knowledge about structures, materials science, geography, geology, soils, hydrology, environmental science, mechanics, and project management; therefore, there is wide scope for R&D in civil engineering. If your Civil Engineering firm doesn’t have a history of undertaking structured systematic R&D, there’s no reason why that can’t change, particularly with the federal government’s R&D Tax Incentive (RDTI) scheme offering generous incentives for eligible R&D activities. As part of the initiative, civil engineering businesses with eligible R&D expenditure from $20,000 up to a maximum of $100 million are entitled to: – a 43.5% refundable tax offset for the R&D when aggregated turnover is under $20 million; or – a 38.5% non-refundable tax offset when aggregated turnover is more than $20 million. In the 2020-21 Federal Budget, the government will set the refundable R&D tax offset at 18.5% above the claimant’s company tax rate, for companies with aggregated annual turnover of less than $20 million, and increase the net benefits available for large companies as well.

Expenditure associated with Core and Supporting R&D activities can be claimed as part of the RDTI. Core R&D activities are defined in the legislation as experimental activities, whose outcome can only be determined by applying a systematic progression of work that proceeds from a hypothesis/hypotheses to experiment, observations and evaluations, and leads to logical conclusions. The purpose of the R&D must be to generate new knowledge. With this in mind, for the specific case of R&D in the Civil Engineering industry, some examples of things that can be claimed as contributing to Core or Supporting R&D activities include: – Expenditure incurred in designing new experimental prototypes – Feedstock or other costs associated with producing these prototypes – Salaries/payments to staff or contractors who conduct the R&D – A proportion of overheads (e.g., rent/leasing of facilities used to conduct the R&D, energy, and software licences used in the core or supporting activities) incurred in the R&D activities – Depreciation of plant and machinery used in the conduct of eligible R&D activities – Other expenditure incurred on core and supporting R&D activities showing the link to the activities View more guidelines on the government website’s business sector.

In scientific research, the “publish or perish” paradigm is well known, but for the RDTI we could perhaps modify this to “record or regret”. Although the RDTI legislation does not prescribe the types of supporting evidence that should be recorded or maintained by an RDTI claimant, it is clear that such evidence or records must be gathered. Valid records for the purpose of claiming the RDTI are any records that verify or contribute to calculating your claim; however, it is imperative that you have records detailing the ‘unknown outcomes’, ‘new knowledge’ sought, and hypothesis/hypotheses for the experimental activities. Important artefacts that serve as proof of what was done in your civil engineering related R&D, and which could easily be used as solid contemporaneous evidence in the case of an audit, include the following: – contracts or research arrangements – photos – written or oral observations recorded – diary entries – reports from any Research Service Providers, which show the results of experiments, analysis and conclusions Something that is very important in showing that the outcomes of the experiments could not have been known beforehand is to keep state of the art searches and literature searches relating to your particular area of investigation, as well as other internal records that detail the specific uncertainties that could only have been resolved through an experimental progression of work.

It is important to note that when claiming expenditure on any registered activities, expenditure incurred on acquiring or constructing a building (or part of a building or an extension, alteration or improvement to a building) is specifically excluded. However, deductions may be possible in accordance with certain capital works provisions of the ITAA 1997.

Aussie Civil Engineering (ACE) is a civil engineering contractor responsible for delivering medium to large construction projects from initial design to final as-built surveys of the project works. Their latest project would normally require the excavation of a significant amount of earth that has been contaminated by heavy metals. Given that the presence of contaminated earth at construction sites is not a totally infrequent occurrence, ACE decided it would be worthwhile investigating possible improvements to current processes. ACE developed the following hypothesis, which would be systematically tested at the contaminated construction site:If a 1.5:1 ratio of water and a particular chemical are mixed together and then applied over ground material (i.e., with topsoil removed), this 1.5:1 mixture will convert a contaminant in the ground material into a liquid, thus enabling it to be collected safely in a drainage system and removed.After testing the initial ratio of 1.5:1 over a small area of the site and finding it was not totally effective, ACE modified this and repeated the process until determining the correct water to chemical ratio that led to the effective removal of the contaminants. ACE determined that the following R&D activities could be claimed under the RDTI legislation: – Trials of the new ground treatment method (Core R&D Activity); – Pre-experimental research and lead up preparations (Supporting R&D Activity). ACE’s senior management recognized how this foray into structured R&D benefitted the company (both financially, due to the assistance from the RDTI, and in terms of improvements to planning and processes), and they are now more alert to incorporating R&D more consistently into future projects, as well as making it part of their business strategy to be more innovative.