A new guidance from the federal government regarding software claims made under the research and development tax incentive is “another kick in the teeth” for the local tech industry, according to AirTree Ventures partner James Cameron.
After dropping the announcement to the Australian Financial Review, industry minister Karen Andrews on Thursday morning released new guidelines to provide “more confidence in claiming support for software activities under the research and development tax incentive (RDTI)”.
The 16-page guidance outlines how companies will have to be more specific with making sure that activities meet the government’s definition of research and development, and keep better records of the activities.
The government said current claims by tech companies for software-related R&D activities are often too broad.
“While software development is often innovative, it does not always meet the definition of eligible R&D activities for the purpose of the RDTI. Software developers tend to use the term R&D to refer to a broad range of activities, many of which may not meet the definition of core R&D activities as they are routine in nature. This different use of terminology can cause confusion and potentially expensive errors in claiming,” the guidance said.
The government has clarified that the definition for research and development used for the tax break scheme comes from the Income Tax Assessment legislation, which states that the activities “must be experimental and seek answers to problems that cannot be known or determined in advance on the basis of current knowledge, information or experience”.
Importantly for tech companies, the guidance outlines that activities like bug testing, beta testing, data mapping, development of business application software and information systems using known methods, the customisation of a product and software-related development activities of a routine nature are not eligible for the RDTI.
Ms Andrews has stressed that the guidance does not change the current legislation or mark a new policy direction for the RDTI.
“The guidance does not change the eligibility of software under the RDTI, but provides more clarity to companies around what are considered eligible software research and development activities under the program and what are not, helping them to self-assess their claims more effectively,” Ms Andrews said in a statement.
“The majority of software businesses are trying to do the right thing, but some are claiming the incentive incorrectly.”
But the statement has been slammed by AirTree Ventures partner James Cameron, who said it does signpost a change in approach to the crucial scheme.
“Let’s be clear: these guidelines are a change to established policy. By applying the strict black letter law and explicitly excluding things like developing business application software from the scheme, they are changing a long-established practice of including software development in the RDTI,” Mr Cameron told InnovationAus.com.
“This is a practice that startups have relied on for years, and one in which the government was overtly complicit in. So for Karen Andrews to claim that this is part of the ‘Liberal National government’s commitment to fostering the innovation ecosystem’ is completely ridiculous. As it relates to technology startups, this could not be further from the truth.”
The guidance will result in less startups and tech companies being able to access the RDTI scheme, and is a “cash grab made at the expense of Australian startups”, Mr Cameron said.
“It’s the government’s prerogative to do this, of course, but they should at least call it what it is. To try to dress it up as an innovation policy is completely disingenuous. This is a time where we need to be doubling down on our tech sector to ensure our economy stays competitive,” he said.
“The Liberal government can’t simply remove up to $1 billion worth of financial support via the RDTI scheme without having some plan for directing it into other means of supporting the industry and still claim that they give a damn about supporting Australian innovation”.
In an accompanying document outlining common errors made when trying to access the RDTI, the government said that not all “innovative” activities are eligible for the popular scheme.
“Innovation is not part of the test for eligible R&D activities under the RDTI and innovation tends to encompass a broader range of activities that extend beyond experimental R&D activities and what is eligible under the program. An innovative activity does not necessarily involve eligible R&D activities for the RDTI,” the document said.
It’s also an error to assume that an activity is automatically eligible if it follows a software development lifecycle, or if it has been submitted by an expert consultant, it said.
The guidance also explains that a company must be able to provide “detailed documentation that substantiates the activity took place and establishes that it meets the definition”.
“If you do not have evidence that was generated at the time you conducted the R&D activities to show you have met all of the eligibility requirements below, it will be difficult for you to show the activities are eligible. If there is not contemporaneous evidence that an activity was conducted that meets all the eligibility criteria, then the Department…may find that activity is not eligible,” it said.
“Software developers may not be used to keeping extensive records, particularly if they adopt agile methodologies. However, if you want to access the RDTI it is highly recommended that you prepare and keep records documenting the activities you have carried out so you can demonstrate your activities meet the definition of R&D activities if required.”
This documentation can include screenshots, messages and exported content from task-tracking or project management tools.
Concerns surrounding software claims under the RDTI stem from an Australian Taxation Office alert in early 2017 that sparked fears of a crackdown. The 2018 federal budget included $4.4 million over four years for the Department of Industry to “undertaken greater enforcement activities and provide improved program guidance to participants”.
At least some of these audits will be conducted by an outside contractor, with the department recently calling for expressions of interest for a supplier to “assist with program integrity functions for the RDTI”.
The successful supplier will be helping to assess whether companies receiving the RDTI are eligible and if the claims they are making meet the working definitions of research and development.
The new guidance also comes just after the government put its legislation encompassing a $2.4 billion cut to the RDTI on hold after its own senate committee called for a number of changes.
The proposed changes to the scheme, which have been slammed by a wide range of organisations and companies, will now not be reintroduced until after the May election, if at all.