If your tech company or startup works on innovative projects or developments, you could be eligible for a generous tax offset with the R&D Tax Incentive. Requirement for software and app development can be tricky – find out more about which activities qualify.
What you need to know about R&D in the technology industry
The technology industry is always evolving. Businesses and startups within the industry seek to innovate and take part in Research & Development projects (R&D) to stay ahead. If your tech company works on innovative projects, you may be eligible for a tax offset under the R&D Tax Incentive.
When it comes to R&D in the tech industry, there are some important factors to consider.
R&D for software and web/mobile applications
R&D in the technology industry often involves code development to improve or create new software that offers unique features. Unfortunately, it can be challenging to identify if code writing and development can qualify as eligible R&D. This is because most of the activities for code development are similar and not considered unique or ‘new knowledge’.
Approximately 20% of the code for web applications and platforms are original. The remaining 80% is considered to be conventional and easily accessible by other developers. To justify that your code is new and innovative, it must enable a software and/or application to complete a complex feature, which is either new to the market or a quantum leap ahead of current solutions which required bridging a significant technological gap. This feature could not be developed without first trialling because the step-by-step knowledge is not publicly known, nor could an expert in the field determine the required approach.
Examples of complex features or capabilities include (but are not limited to):
- Image and video processing to make judgements or decisions, or produce complex analytical data
- There is complexity in translating a specific format into another
- Predictive modelling and machine learning technologies
- Analytical capabilities to mimic human behaviors
- Reduction in computational or spatial requirements to achieve a comparable task
- VR technology which can overcome the limitations of human physiology.
- Adaption of current digital formats, such as PDF, for unintended uses which can not reference to current knowledge and are new to the market.
Determining core R&D activities in technology
When developing new tech, it’s also important that R&D activities have a customer-facing element.
Examples of customer-facing technology developments include:
- Developing an app that lets customers determine what light fittings are needed based on room dimensions
- Automating responses to customer reviews and product ratings across online channels
- Developing software for tracking people via 3D video and determining the probability of a crime link
- Developing Augmented Reality and Virtual Reality applications that incorporate continuously changing GPS coordinates
- Improving cloud computing in a manufacturing environment with erratic internet connection
The activities listed above would be considered ‘core R&D activities’. Other R&D activities that benefit your business internally may be ineligible or considered to be supporting activities that assist the core research and development process.
Determining supporting R&D activities
As outlined in our article on ‘R&D expenditure’, there may be some internal administration costs that can qualify as eligible R&D expenses. Internal administration generally covers things like HR, payroll, and billing administration.
R&D activities that involve developing, modifying or customising computer software for the purpose of internal administration of your business will not be regarded as a core R&D activity.
What this means is that even if your business conducted an experimental activity for developing the software/application that assists with your internal administration, it still can’t be regarded as your main R&D activity. Instead, it can only be registered as a supporting activity.
If you are developing this software/application for another company however, provided that the other company is not affiliated with your business, it can be registered as a core R&D activity.
Getting assistance with your application
Determining whether your innovation within the technology industry qualifies for tax offsets can be tricky. For assistance, please contact one of our helpful R&D Tax specialists, who will be more than happy to help navigate the complexities of the tech industry. We can also discuss any current initiatives that you have in mind to determine if they could be eligible.
The Nifty R&D team can review your eligibility at any time, with no upfront fees or obligation. If we find that your business is ineligible, we won’t charge you a cent.