Uncertain about R&D in Australia? Here’s all your questions answered

R&D

Standard Ledger founder Remco Marcelis. Source: supplied.

So, there’s been a bit of noise lately about Airtasker having to pay the ATO back millions of dollars in an R&D tax incentive ‘crackdown’.

And we’re fielding a lot of fear, uncertainty and doubt (otherwise known as FUD) queries about this from the startup community wondering if it will happen to them too.

After all, the R&D tax incentive is the single biggest government program supporting startups in Australia (as highlighted again in the StartupAus Crossroads report 2018) so the fear is this major startup funding source is at risk.

The reality is not so clear and there’s definitely no need to assume the worst.

Let’s break things down to understand the FUD factors that we’re hearing.

But first, your company and your R&D need to be eligible

For your startup to be eligible for the R&D tax incentive, ask yourself these questions:

  1. Are you a company undertaking innovative, unique, non-trivial software or hardware development?
  2. Can you describe this development as a series of experiments with unknown outcomes from which you have learnt as you’ve progressed (think agile software development)?
  3. Have you spent at least $20,000 on R&D during the year?

Still good to go?  Let’s move on.

The ATO’s review of software R&D claims

In February 2017, the ATO — which jointly administers the R&D tax incentive program along with AusIndustry — issued an alert saying it was reviewing software claims. It said: “In order to be eligible, there must be an experiment or experiments being carried out for the purpose of generating new knowledge.”

This doesn’t really change the eligibility definition at all.

But, it is worth exploring to address some of the uncertainty this has created. Remember the backdrop to this is about twice as much R&D has been claimed than was budgeted for, so it could be said the ATO has an incentive to ‘dis-encourage’ applications.

We work with PwC’s startup-friendly Nifty Grant platform for R&D tax incentive claims and they’ve provided two good examples here of what is and what isn’t R&D in the context of software.

The key point is you shouldn’t necessarily expect to claim that all of the software platform you’re developing is eligible for the R&D incentive.

Remember the overarching definition above about innovative, non-trivial and unknown outcomes? It’s likely the core of your software platform does have these aspects — after all, this is where the essence of your unique IP is.

But around this core, there’s the rest of your software platform — all challenging in its own way like any software development, but not necessarily ‘R&D-able’.

It would be great if the ATO was more explicit but, as in many areas of the tax law, it can still be somewhat open to interpretation. So it’s always good to come back to the principles behind the incentive and, yes, having an advisor with solid experience in the space is definitely useful in going through the process.

I’m worried about being audited

All of the tax system in Australia operates on the basis of ‘submit your tax return, but it’s always subject to audit’.  This is not unique to the R&D space. The ATO runs regular campaigns looking at different areas and, yes, they’ve flagged software R&D as one of those areas.

Apart from all the attention-grabbing headlines, most (if not all) companies claiming R&D are genuinely trying to make the right claim and one they’re entitled to.

So apart from better understanding core and non-core software development as explained above, my number one piece of advice is to be as clear as possible about how you’ve estimated the time and cost you’ve spent on the R&D you’re claiming. Think about how you’re using tools such Github and the Atlassian suite to track the evolution of your core software.

In most cases, an audit will start with and often be satisfied by asking for this type of supporting documentation.

FUD, what FUD?

The ATO — with its proposed changes to R&D (mostly affecting larger businesses, not startups) and active measures in managing its own budget — will always be tweaking things. That’s the reality with any government program.

So being aware is sensible, but doing a Chicken Little is not.

With a bit more understanding and some help if you need it, don’t let the headlines scare you from accessing the R&D tax incentive. It is designed to boost innovation, including for our smart Australian startups.

Oh and don’t forget, you’ve got until April 30, 2019 to claim your 2017-18 R&D if you haven’t done so yet!

NOW READ: R&D debacle: Will Aussie startups be dissuaded from taking advantage of tax incentive?

NOW READ: “It will essentially put them out of business”: Aussie AA Bill a threat to local startups

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Mark Dorado
Mark Dorado
1 year ago

What your article fails mentioning is that the overall scheme is sick!.

1. Projects/Applications are registered. Company has spent in R&D and advisers to complete application.
2. Money / benefit is delivered from the government to the company
3. Company re-invest money and moves on to the next project.
4. Years later, AusIndustry or ATO claim the money back!!! PLOP.!
5. Approved advisers run at 1000 miles/hr
6. Company needs to liquidate

It is not a scheme… it is a scam!

Tech companies are under particular prosecution… this Government just doesn’t like tech innovation.

Marcus Webb
Marcus Webb
1 year ago

Good article Remco, but I think as advisers we also have to talk more about hypotheses and documentation as key components of eligibility – and yes, even in the software domain 🙂

Hypothesis first. The definition of a core R&D activities requires, among other things, a hypothesis. An applicant who can’t outline their idea or theory (ie. hypothesis) and an experimental design to appropriately test it, is on some pretty shaky ground in my view.

Documentation plays into this too. If we’re genuinely doing R&D that seeks to address an unknown (when most others haven’t or can’t), it seems reasonable to expect some evidence of our prior investigations. It should be dated and show a clear path to the development of our hypothesis/proposition.

Both of these are perhaps challenging to some in the software industry, but the Incentive covers all industries, and I think it pays to check them off as part of any eligibility discussion.

Bruce Patten
Bruce Patten
1 year ago

Remco. You say you work with PwC’s Nifty Grants. But wasn’t PwC the adviser to AirTasker who was ordered to repay millions of dollars from what was determined to be ineligible R&D claims ? Sadly, according the Frascati Model, which is the AusIndustry Bible for determining eligible R&D activity, Airtasker was in fact conducting eligible R&D activities. Their claim failed from bad advice. They used accountants to claim their R&D Tax Incentive rather than Grants Specialists.

Where did the R&D Tax incentive review and crackdown on software claims originate. Again it has its roots an accounting firm. Deloitte lodged a failed R&D claim of $100 million for Commonwealth Bank for internal software. From there the formal review of R&D software commenced.

Accountants, patent attorneys, lawyers and even book keepers are trying to make a quick dollar from the R&D Tax Incentive. Grant applications are a completely different service requiring a diverse range of different and unique skills. I know from my 30 years experience claiming grants including 100% success in R&D claims.

Grants are critical for Australia’s future. As CFO of Cochlear I secured many grants that assisted its success. I can can make the bold statement that “Cochear would not exist today without the grants that funded its growth and success.” As well as an iconic Australian success, there are over 350,000 profoundly deaf people that can now hear. We need to encourage and support Australian innovation. We are a smart country.

The proposed amendments to the R&D Tax Incentive Scheme that were introduced into the lower house on 20 September 2018 as “Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018” will mainly impact SMEs with little to no impact on large multinationals.

Unfortunately greater damage will be caused by accountants who have lodged ineligible R&D claims which the client will now have to repay. Sadly the accounting firms will probably survive where the Startup may not.

The review should not be on the R&D claimants but on those who put themselves up as grant experts providing incorrect and costly “advice”.