AusIndustry releases guidance on software activities and R&D tax incentive

AusIndustry has released its much-anticipated updated guidance on software activities and the Research & Development (R&D) Tax Incentive, ‘only’ 12 months after a draft was released for consultation.

With software R&D projects comprising more than 40 per cent of program registrations in the 2018-19 financial year, some updated guidance on AusIndustry’s position on software R&D was much needed.

According to AusIndustry, the refreshed guidance was developed in consultation with stakeholders that have a deep understanding of the software development sector, including the Tech Council of Australia.

Some key updates to the guidance include:

  • Further clarification of a scientific or technological unknown
  • Updated guidance regarding the exclusion of software developed for internal administration
  • Further guidance on the type of evidence that can help substantiate the claim
  • An updated case study that includes ineligible activity and illustrates how to articulate the R&D activities in the registration form.

In BDO’s view, this latest iteration of software R&D guidance is much more aligned with how industry approaches and conducts software R&D, and provides much better clarity on the scope of activity eligibility than previous versions.

A key improvement in the guidance is the explicit recognition that software R&D can be comprised of existing methodologies like Agile, Waterfall, Rapid and similar. Another key improvement is the acknowledgement that various testing and debugging can form part of the systematic progression of work as part of a core activity. These improvements are in contrast to some views previously held by AusIndustry in the early years of the R&D Tax Incentive program.

However, there are still some elements of the guidance that may be confusing for claimants. The guide still refers to the ‘competent professional in the relevant field’ test to determine whether an outcome of an activity could be known in advance.

Despite this not being a legislative requirement in the R&D provisions, the guide refers to the requirement that a competent professional in the relevant field cannot know, or determine, the outcome before the activity starts. The test should be on the taxpayer, not a competent professional.

It is unreasonable to suggest claimants should be contacting or determining a ‘competent professional’ cannot know an outcome to their idea before undertaking the activity. In most cases, if there was existing knowledge readily accessible, companies would use it. 

Another confusing aspect of the guidance is the example R&D Application form based on the Far side case study, which suggests a change in approach by AusIndustry in terms of their expectations around the detail that should be provided in the form.

For example, whilst the hypothesis and conclusion sections of the form allow 4000 characters, the responses in the example are less than 300 characters and provide little detail around the design of the proposed solution, and the variables to be tested in the experiments.

In our opinion, the lack of detail could open the door to further questions from AusIndustry. We are also unsure why it discusses activities that will not be claimed. Whilst this example may have been approved for release in the guidance,

BDO recommends claimants ensure they provide sufficient detail in the form to make it clear the company is conducting activity that meets each of the eligibility criteria.

Finally, we would have liked to see more detailed examples of software R&D projects that would and would not qualify.

We note New Zealand has recently released software guidance for their R&D Tax Incentive program that provides more detailed examples of software R&D, including much clearer examples of both eligible and ineligible activities.    

To find out what R&D Tax Incentives are available to you, contact your local BDO office today.