“The majority of software businesses are trying to do the right thing, but some are claiming the incentive incorrectly … [The guidance] provides more clarity to companies around what are considered eligible software research and development activities under the program and what are not, helping them to self-assess their claims more effectively.”
The guidelines say companies must ensure their work meets the definition of R&D that exists in the Income Tax Assessment Act of 1987. That says work must be experimental and seek answers to problems that cannot be known or determined in advance on the basis of current knowledge, information or experience.
They say companies have fallen foul of audits for being too broad in their assumptions of what counts as R&D work, assuming that anything they deem as “innovative” will count as R&D.
The reclaiming of R&D incentives dates back to an Australian Taxation Office alert from February 2017, which said it planned to review R&D claims from software companies amid concerns that advisory firms were encouraging companies to claim for work, which didn’t count as pure R&D.
The government then announced changes to the R&D tax incentive in the May budget designed to save $2.9 billion over 2018-19 to 2020-21 by reducing grant levels for many claimants and beefing up compliance and enforcement measures.
“When conducting R&D, companies tend to think in terms of projects and project outcomes rather than in terms of the specific activities that the company conducts within a project,” the new guidelines say.
“However, the eligibility criteria under the R&D Tax Incentive require eligibility to be assessed at the level of specific activities … Software developers tend to use the term ‘R&D’ to refer to a broad range of activities, many of which may not meet the definition of core R&D activities as they are routine in nature. This different use of terminology can cause confusion and potentially expensive errors in claiming.”
Among work the guidelines say do not count as R&D are the development of business application software and information systems using known methods and existing software tools; adding user functionality to existing application programs or the customisation of a product for a particular use, unless during this process knowledge is added that significantly improves the base program.
The issue of keeping detailed timesheets is a controversial one in the tech industry, as many software development methods are less formally structured than traditional scientific experiments.
However the guidelines say that, without evidence generated at the time of conducting the R&D, to show what was done and why, it is likely that an audit of a claim will find against the company.