April 13th, 2022
In April 2022, AusIndustry released a new guidance document titled “Software-Related Activities and the Research and Development (R&D) Tax Incentive”.
The release of this document follows previous guidance in recent years, along with some controversies for software-development R&D activity that saw:
- A number of well publicised disputes;
- Reports of some disputes being settled;
- Calls by some in the industry for a ‘Software Specific’ R&D Tax Incentive, or a change in the criteria of the current incentive to be easier to apply to software related activity.
Swanson Reed called for stabability in the current incentive for software claimants (as opposed to a new ‘Software Specific’ R&D Tax Incentive) and it was hoped that the release of any new guidance may help achieve this objective.
Whilst nothing in the new guidance is particularly surprising, there are some new principles which do not seem to have been explored in other guidance documents published in recent years. Some notable extracts from the new guidance are outlined below:
- “For an activity to be a core R&D activity, a competent professional cannot know or determine the outcome of the activity in advance. A competent professional is a hypothetical person who has access to the knowledge, skills and qualifications needed to demonstrate expertise in an appropriate field. They have access to all of the current knowledge available in the relevant field from anywhere in the world, provided that the information or experience is publicly available or reasonably accessible.;
- Registrations that do run over multiple years should show a progression of work over that period, outlining how the R&D activities have changed and progressed over time. We expect you to record:
- the hypothesis that you are testing
- what the experiment, or set of related experiments, was and how it was conducted
- what the results of the experiments were, and
- what conclusions were drawn from the results.
- A hypothesis is:
- your idea or theory to achieve a particular result
- how you might achieve that result, and
- why that result may not be achievable ;
- If you terminate an activity or your project after completing a supporting R&D activity, but not the core R&D activity it supports, you must be able to clearly demonstrate with records that you had an intention to conduct the relevant core R&D activity;
- We recognise that some routine testing activities, such as debugging (identifying and fixing errors in codes) and beta testing, can be part of a core R&D activity where they constitute part of a systematic progression of work as required by the legislation;
- Here are things to consider when assessing whether there is a scientific or technological unknown:
- whether an objective is scientifically or technologically possible or how it can be achieved
- whether existing knowledge or capability can be adapted to solve a problem
- within the same field of science or technology, or
- from another field of science or technology
- where limitations in the current state of technology hinder the development of a new or improved capability
- a technological constraint that needs to be overcome, with unknowns arising in relation to:
- whether the output will meet the desired specifications such as response time, reliability or cost, or
- how the desired specifications can be achieved amongst possible alternative methodologies or solutions
- the use of known processes, technologies and methodologies where the result or outcome is unknown
- system unknowns, where the components of a system and their interactions are known, but the outcome/result of the system cannot be deduced from the outset
- where something has already been shown to be possible but needs further work to make the technology more cost-effective, reliable or reproducible “
Whilst the eligibility of software R&D activity was certainly scrutinised, particularly during the period from 2017 to 2019, a misconception occurred by some perceiving that software activities are not eligible under the R&D Tax Incentive. This is certainly not the case, and software development activities can indeed be eligible, however claimants must demonstrate how:
- they are generating new knowledge (from a computer software development or science perspective) and not merely applying existing knowledge to their commercial objectives;
- they are resolving unknown outcomes that a competent professional could not have known or determined in advance based on current publicly available knowledge;
- their activities are suitably documented.
Claimaints and advisors who are registerining software related activities should ensure they review the new guidance.