Navigating AusIndustry's Software Sector Guidance
In May 2024, AusIndustry released an updated version of their software sector guidance for the R&D Tax Incentive (R&DTI). The first iteration of this guidance was issued in 2022.
Updates to the software R&D guidance are particularly noteworthy given the checkered history and persisting uncertainty around what types of software development activities meet the R&D tax eligibility threshold. Guidance material issued by AusIndustry provides taxpayers with practical and more-detailed explanations of how to assess and describe their R&D activities when submitting an R&DTI claim.
It’s important to be aware of any changes to guidance materials as this provides an insight into how the program will be administered and the key considerations of the regulators. To assist you, we’ve summarised our key observations from the updated software guidance.
Clearly defining the ‘unknown outcome’ of your R&D activity is critical and continues to be emphasised in the updated guidance. The guidance recommends a detailed analysis of existing knowledge at the outset of your R&D, which can be challenging given how fast software development is progressing globally.
The updated guidance also includes two new sections within the ‘unknown outcome’ criteria:
(1) a new example of how to describe the assessment of existing knowledge and to detail the challenge (or knowledge gap) that is being addressed, and
(2) a section that elaborates on AusIndustry’s expectation of the thorough inquiries that should be conducted as part of establishing that an activity has an unknown outcome.
A new example is provided to help claimants adequately describe the hypothesis for their R&D activity. The example breaks down the statement of the R&D hypothesis into four key components as set out below:
What outcome are you aiming to achieve?
How will you achieve this outcome?
Why you think this outcome is achievable?
Relevant background research undertaken.
This recommended hypothesis structure should be considered when compiling information about your annual R&D activities.
Throughout the guidance, AusIndustry continues to convey the importance of maintaining adequate documentation to support all aspects of an R&DTI claim. As per the prior version, the guidance concludes with a comprehensive list of practical examples for the types of documentation that might be relevant to software development R&D activities.
In summary, in light of the revised software guidance, we have the following suggestions to help when you begin planning your next R&DTI claim.
Ensure that the statement of the hypothesis for each R&D activity accords with the new recommended structure. Also ensure that your hypothesis statement clearly identifies the innovative steps proposed and explains why the approach you are taking goes beyond standard or routine software development activities.
Don’t underestimate the importance of explaining the ‘unknown outcome’ component of your R&D activity. Whilst this section is relatively small in the R&D Application Form, AusIndustry continues to emphasise its importance and has articulated their expectations regarding the thorough assessment of existing knowledge that is necessary at the outset of your R&D.
Ensure you prepare and retain a range of supporting records to adequately demonstrate the eligibility of your registered software development activities, as well as the eligibility and methods of allocating costs to these activities.
We strongly recommend that companies that are considering registering software related R&D activities in their upcoming R&DTI claims review this latest software R&DTI guidance.
Feel free to reach out to our team of experts if you need any help or advice with ensuring your R&D claims remain compliant.
If you would like to talk more about how we can help you foster your ideas, please don’t hesitate to reach out.