A Recent History of Software R&D Tax Claims
It's fair to say that Australian software companies and the Research & Development Tax Incentive (R&DTI) program administrators have a complicated history.
After a slew of press from 2017 to 2019 about R&DTI compliance processes and their impact on software startups[i], the Australian Small Business and Family Enterprise Ombudsman carried out an investigation into the program’s compliance structures.
What did it find?
The investigation and the report that ensued had a particular focus on software claimants. It noted that “the eligibility of software activities in the R&DTI is considered to be one of the biggest issues facing the Technology Start-up and Fintech sectors” and that “the current AusIndustry software guidance, in particular, has an effect of narrowing their interpretation of the legislation.”
The report was consistent with some of the preceding media coverage in concluding that the state of the program guidance and compliance left many software companies uncertain about whether they were eligible for the R&DTI. Specifically, whether they were conducting activities that would be deemed eligible by AusIndustry, and whether their documentation and processes were sufficient to support their R&D claims.
Anecdotally, this uncertainty led some software businesses to bow out of the program or significantly back off their claims based on fear of having to pay the money back (potentially with interest and penalties).
Where are we now?
The review led to the introduction of several changes aimed at providing greater clarity and certainty for companies making software-related claims under the R&DTI. One such reform was the introduction of updated guidance materials in April 2022. The Guidance includes specific examples of eligible software R&D activities, types of documentation that can help to substantiate a software claim, and an example of a hypothetical company claiming the incentive.
The recent announcement of an Advance Findings pilot for software businesses is another step in the right direction, with AusIndustry consulting with software claimants regarding the use of this process.
While guidance and consultation don’t solve all the problems, it helps. Software businesses can now better assess whether their documentation is sufficient to substantiate R&D activities and get an indication of how activities undertaken in a software environment might be viewed in the context of an R&D tax claim. As with all industries, it is still important to assess eligibility on a case-by-case basis and delineate between eligible core R&D activities, eligible supporting R&D activities, and ineligible activities in accordance with the law and the guidance that informs it.
[i] See, for example, https://www.afr.com/technology/tech-firms-including-airtasker-hit-by-rd-incentive-crackdown-that-threatens-software-sector-20181129-h18j51