R&D tax incentive - what's new
The recent 2020 federal budget provided a backstop (hopefully an enduring one) to the previously proposed significant scaling back of the R&D tax incentive. Most relevantly for eligible SMEs, with effect from 1 July 2021, there is now certainty that the refund rate will continue to be 43.5% of eligible expenditure.
We also now have refreshed guidance from AusIndustry in its recently updated ‘Guide to Interpretation’. While it’s written in plain English and user-friendly so worth a read, there is no change in the fundamental requirements of the incentive that any claimant needs to satisfy if a claim is to succeed. In summary, claimants need to:
Identify the technical or scientific challenges requiring experimental activities.
Research the current state of knowledge to prove that the knowledge they are trying to create is not available in the world.
Deploy a systemic progression of work based on established scientific principles: formulate the hypothesis the experimental activities seek to prove or disprove, conduct experiment activities, capture observations , evaluations and logical conclusions.
Document qualifications and/or industry experience of key personnel involved in the activities to demonstrate they meet the competent professional in their field requirement.
Break down the project into discrete activities called core, supporting, and ineligible activities.
Capture time of identified staff/contractors involved with each of the activities.
Budget the expected cost over the life of the project.
In my experience many of these are well rehearsed and understood requirements in startup land. In software development where innovative and cutting edge product development requires considerable smarts, is this enough to meet the requirements? The clear answer is no.
Claimants need to go further and step through and meet the requirements to succeed. A couple of recent cases (Royal Wins Pty Ltd and Camalic Pty Ltd) involved software development activities, with both claims being denied. The decisions make clear there is no shortcut nor different approach to software development claims. A claim stands or falls not only on meeting the above requirements, but requires contemporaneous documentation proving it. The importance of documentation – at the inception of the activity with a disciplined approach to maintenance through the development cycle - cannot be overstated.
AusIndustry and Innovation and Science Australia also now have access to more and specialist resources to help with assessing claims so it’s reasonable to expect increased scrutiny of all claims.
Reach out to scale.partners for help and advice on R&D tax incentive claims.