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Success of Australian Software Companies Linked to Investment in R&D

June 10th, 2019 Software investment R&D

A recent article published by AFR weekend has highlighted how investment in R&D has played a crucial role in the success of two growing local companies: Atlassian and Xero.

Despite significantly growing revenues, both Atlassian and Xero have maintained a significant investment in R&D and product developments (figures quoted in the AFR article are R&D Spending of 36% and 31% of revenue respectively). Both companies have enjoyed continued success and significant rises in the value of their shares over recent years.

The article highlighted Atlassian spent comparatively more on R&D in its first year as a $US1 billion revenue than other successful peers. Atlassian made a proportionally larger investment into R&D as traditionally in the enterprise market, 35 percent of revenue is spent on sales and marketing and only 15 percent on R&D.

The AFR article also included research from Morgan Stanley which found a compounding effect on success when a company’s R&D expenditure is maintained at 30 to 35 percent of revenue when top-line sales are growing at 30 to 40 percent. This indicates that if a culture of investment in innovation and product development is maintained beyond the phase when a business is considered a “start up”, it can have a profound effect on company success.

Atlassian and Xero are not alone in their success as software companies operating in Australia, and several other Australian software companies have had significant share price rises recently including Appen Ltd, Bravura Solutions Ltd, and Nearmap Ltd.

Companies should however note that the definition of R&D or Product Development for internal reporting or accounting purposes may not necessarily correlate with the definition of eligible activity for the purposes for the R&D Tax Incentive. Companies registering software activities under the R&D Tax Incentive should pay close attention to guidance published by the ATO and AusIndustry, including recent guidance on software activities published in February 2019.

Swanson Reed are experienced in preparing R&D Tax Incentive Claims for companies undertaking Software Development R&D and seek to ensure applications made are in accordance with latest regulatory guidance. Contact us here today to see how we can help.

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