Uncertain about R&D in Australia? Here’s all your questions answered
Wednesday, January 23, 2019/
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:
- Are you a company undertaking innovative, unique, non-trivial software or hardware development?
- 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)?
- 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!
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