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New AAT Case Finds Software Activities NOT Eligible Under the R&D Tax Incentive

A recent AAT Decision handed down in July 2022 (Absolute Vision Technologies Pty Limited and Innovation and Science Australia (Taxation)) has found a company’s software development activities were not eligible under the R&D Tax Incentive.

Prior to this decision, there was only a limited number of previous decisions on Software R&D Eligibility heard by the courts and AAT.

The company had registered R&D Activities with AusIndustry for a number of years with the objective of the project being:

• …to evolve available cloud based management information software and advance it to a level capable of providing new products to the Australian wholesale, manufacturing professional services and industry…through leveraging the current Netsuite cloud technology platform and providing a more cost effective and real time multi-disciplined business solutions platform…

The AAT found that the claimed activities do not meet the conditions for eligible Core or Supporting R&D Activities, noting that “overall, there is such a dearth of relevant or probative evidence that it renders AVT’s activities incapable of assessment as to whether the activities engaged in by AVT are “core activities”.

Specifically, the AAT concluded:

• “Not only was there a lack of documentation and records, but there was also a lack of witness statements – and there was no oral evidence”; and that,
• “In order to qualify for the R&D tax incentive, the party must be seen to have engaged in research. That is, hypotheses need to have been identified, and tested through a set of experiments or evaluations. The results of such experiments/evaluations are required to advance knowledge in the particular discipline. Based on the evidence before us, none of these requirements have been met.”

Key points noted by the AAT include the following:

• It is difficult to discern the specific activities for each relevant year, as the R&D Applications describe the same activities in each year;
• Documentation to support that the outcome of experiments could not have been determined in advance by a competent professional was highlighted as being critical. It was noted that there was no evidence that AVT undertook a literature review in order to confirm there was in fact any knowledge gap to be investigated during the company’s experiments;
• Lack of clear hypotheses was noted as being a large impediment to establishing an eligible Core Activity;
• Evidence summaries outlining activities did not appear to be dated contemporaneously and succinctly to evidence the experimental process;

This case outlines several key points:

• It is important to identify clear and specific hypotheses that will be the subject of Core R&D Activities, and that will seek to generate new technical knowledge;
• It is important to investigate and document:
• The state of worldwide knowledge relevant to an activity BEFORE it commences;
• Why there is an unknown technical outcome that a competent professional could not have determined in advance and which can only be resolved by undertaking experiments;
• Where software is being developed on top of existing technology, it is important to describe the technological advancement being developed, which intends to fill a specific knowledge gap;
• Contemporaneous documentation should be kept, showing:
• The experimental process, including the hypothesis and measuring of results;
• The identified knowledge gap and how the company determined that the outcome of the hypothesis could not be determined in advance;

This case also highlights the importance of documenting and assessing activities in accordance with programme regulator guidance so as to minimise the likelihood of ending up in dispute with the regulators. AusIndustry released new Software R&D Activity guidance around April 2022.

Check out our website for more information regarding the R&D Tax Incentive, or get in touch with our office if you would like to speak to someone about a potential  R&D claim.