Federal Court dismisses appeal but who actually understands software development?

The Federal Court has dismissed the appellants appeal in its recent decision in H20 Exchange Pty Ltd (H2O) v Innovation and Science Australia (ISA) [2021] FCA 11. H2O undertook a project to establish an online water exchange platform that would allow the sale and purchase of water rights in the Murray-Darling Basin within New South Wales, Victoria and South Australia.

The company appealed to the Federal Court that the AAT had erred on a question of law on three separate grounds, but the court quickly concluded that all three grounds of appeal must fail and ordered H20 to pay the costs of ISA.

While there seemed to be no error in law that would warrant a federal court appeal, concerns remain around the expert witness produced by Innovation and Science Australia (ISA) in the initial tribunal hearing. This witness admitted to having “not formally studied software design, had never been hired as a software engineer and had never written a line of code” yet was called upon to comment on the technical uncertainties pertaining to the development of a software platform.

The witness did have considerable experience in the sale and purchase of water rights in Australia and the wider water exchange industry, but a working knowledge of an end-product does not transpose to expert knowledge of how to design and build that product effectively.

When it comes to software development, “whether the outcome could be known in advance” often relates to how, and not if, a product can be developed and technical uncertainties associated with the how can significantly affect whether products meet commercial tests around latency, security and scalability. Companies will generally not undertake an R&D project in a commercial context without some degree of confidence that it can succeed. However, achieving this outcome in the most efficient, effective and robust way often drives the company’s research and development activities. Unfortunately for H2O, a lack of supportive documentation made it difficult to substantiate the technical unknowns in their registered R&D activities.

In light of the common misunderstanding around whether ‘the outcome cannot be known’ when making an R&D claim, software development companies must emphasise and provide evidence on what the underlying technical uncertainty driving their R&D activities is and why publicly available knowledge could not be directly applied to their project to solve these problems.

For more information on how you can access the latest government grants and tax incentives, contact your local R&D Tax expert.