On Thursday 21 February 2019 AusIndustry released new guidance to making R&D Tax Incentive claims that include software development activities and here’s our summary…
The guidance comprises two documents, the ‘Research and development tax incentive guidance software development and the R&D tax incentive’ and the ‘Research and development tax incentive guidance software development Guide to Common Errors’. The guidance re-align published guidelines to recent review experiences, making it easier for claimants to understand what to expect during a review and to refocus project descriptions for eligible activities to address the regulators concerns.
The new guidance generally covers the same main themes as the previously issued AusIndustry software guidance in early 2017. The general principles being applied are consistent with previous released guidance. For example that R&D activities and not projects should be considered for R&D registration; that only appropriate supporting activities and costs are included and that contemporaneous evidence exists to support each legislative criteria for each R&D activity claimed. The guidance includes an extended list of examples of activities that may not qualify as core R&D activities, the new ones being:
- digital transformation activities – transforming predominantly manual processes to digital
- upgrading of technology in any sector
- routine computer and software maintenance
- converting any existing computerised or manual record-keeping system to a new system (applicable to human resources records, billings, maintenance of records, etc.)
- any kind of data manipulation
- any automated reporting system
The new guidance also references the Frascati Manual to provide a practical guide in determining what activities involve R&D and those that do not. Some listed examples of activities that ‘will not involve R&D’ are:
- software-related development activities of a routine nature. Such activities include work on system-specific or program specific advances that were publicly available prior to the commencement of the work
- solutions to technical problems that have been overcome in previous projects that have the same technical characteristics, such as the same operating systems and computer architecture
- the development of business application software and information systems using known methods and existing software tools
- adding user functionality to existing application programs (including basic data entry functionalities)
- the creation of websites or software using existing tools
- the use of standard methods of encryption, security verification and data integrity testing
- the customisation of a product for a particular use, unless during this process knowledge is added that significantly improves the base program
- routine debugging of existing systems and programs, unless this is done prior to
There is a welcome and well laid out section on the types of documentation required for substantiating R&D activities. It is arranged by legislative requirement, which is a key message that each statement within the application must be supported, it is not sufficient to have one overall project planning document that is put forward as over-arching substantiation of all aspects of eligibility.
Summary – the messaging is consistent with prior guidance but presented in a more accessible format with the welcome addition of substantiation evidence examples.
A detailed review and discussion on this guidance will be held on March 20th at PwC in Melbourne. If you’d like to attend, please let us know. We will also add to this summary as your comments and queries are raised.
Response – R&D Tax Incentive claims that include software related activities will need to signpost the basis on which self-assessment of eligibility has been made and ensure that reliance is not made on simply stating complexity and novelty – activities must be described in terms of technical challenges and resolution steps, and those steps must be represented in contemporaneous records. This is consistent with guidance provided by Nifty team assessments and we’ll apply the implications of the additional exclusions as we assess and feedback on software activity descriptions so do set aside sufficient time to get these right.
Read the guidance materials in full here: