Software and the R&D Tax Incentive
Updated R&D guidance material for companies considering the R&D tax incentive for software development.
Updated R&D guidance material has been released providing information for companies that are considering undertaking R&D involving software development. Also released is a guide to common errors made by software R&D claimants.
The Department of Industry, Innovation and Science have released guidance material to assist companies looking to claim R&D for software development.
Given the material increase in the number of claims being made for software development, as well as the quantum of expenditure being claimed, claims within the software and technology sector are being highly scrutinised.
On review the “new” guidance material does not add substantially to the existing materials, released in early 2017.
There are a number of salient points, however, worthy of re-emphasising, the first of which is that R&D applies to activities, not entire projects. An entire software upgrade or new development will not qualify. Discrete and individual activities undertaken as part of the broader project may qualify.
Activities that may be considered eligible core R&D activities include:
- Development of new operating systems or languages
- Resolution of conflicts within hardware or software based on the process of re-engineering a system or a network
- Creation of new or more efficient algorithms based on new techniques or approaches
- The creation of new and original encryption or security techniques
Examples of activities that do not qualify as core R&D activities include:
- Software development of a routine nature
- Developing solutions to technical problems that have been overcome previously where the technical characteristics are the same
- Using known methods and existing software tools to develop business application software
- Adding user functionality or customising existing application programs
- Creating a new website using existing tools
- Routine debugging and testing of systems
Some of these activities, however, can qualify as supporting activities if they are directly related to a core R&D activity and are undertaken for the dominant purpose of supporting that core R&D activity.
The guidance material states that “software development can often be very innovative, but that does not mean that these activities meet the definition of core R&D activities”. An innovative outcome using a well understood development cycle, for example waterfall or agile methods, is not eligible R&D.
Further, developing software for the dominant purpose of internal administration is specifically excluded
It is also critical that to claim software development as R&D a specific technical knowledge gap is identified. On this basis experimental activities are conducted that generates the new knowledge to bridge that knowledge gap.
Even if a company is undertaking eligible software R&D, the guidance materials make the point that records need to be maintained throughout the R&D process that evidences the R&D and addresses each of the eligibility criteria, for example, how did you establish that the outcomes could not be known or determined in advance. The guidance provides a detailed matrix on accepted examples of contemporaneous evidence that is required to support an R&D claim.
It's apparent that companies looking to claim R&D for software development must not only be able to address the individual eligibility criteria but also be able to support the activities and expenditure through documentation and “at the time” evidence.