Australian software developers complain the R&D Tax Incentive is too risky and tricky to access for their style of innovation. But there may be a quick-fire method of ensuring a software company’s RDTI claim is valid and successful.
Melbourne-based tech company Evado Clinical stopped claiming RDTI in recent years after deciding it was too burdensome and risky.
Evado sells software for clinical trials to life science companies, universities and government organisations. The company currently has two Australian patents and one US patent for software architecture and had previously accessed the RDTI for its research work on new software architectures and information technologies.
The company had been comfortable with accessing RDTI until online outsourcing firm Airtasker was hit by the ATO with a multi-million-dollar RDTI payback bill in 2018.
“After Airtasker hit the news the consultant we were using at the time said there had been some re-examination of the definitions. At the same time one of our colleagues at another company got a tax audit by an auditor with no understanding of R&D and was excluding a lot of what they had passed through,” said Evado chief technologist Ross Anderson, during a Commercial Disco podcast dealing with the intricacies of successfully claiming RDTI.
Following a board meeting, Evado decided accessing RDTI was too risky and gave up on the incentive scheme. This has led to some job losses and potentially Evado losing some of its competitive edge.
However, RDTI advisor Marty Gauvin told the Commercial Disco podcast that a small change in how software development projects are structured could result in large gains around RDTI claims.
Besides being a serial entrepreneur and founding companies such as Fertilis, Virtual Voices and Virtual Ark Mr Gauvin is the Principal Advisor at RDTI specialist advice firm R&D Certainty. He was also on the RDTI sub-committee of Innovation and Science Australia that had oversight of the scheme’s ongoing operation.
Mr Gauvin said that successfully accessing the current RDTI regime requires a shift in attitude from software developers who need to realise that Australia just does not have a general, tax-based innovation support program.
What Australia has is a program forged by scientists, lawyers and economists that supports a strict definition of R&D that does not necessarily support software development, which is often the art of automating an already established process. New knowledge is not necessarily generated in that process.
The trick is to link the software development project to an experiment that brings new knowledge,
“The definition of R&D in the legislation is rarely done in the development of software,” said Mr Gauvin.
“But it absolutely can be. What the definition needs is that you need some activity, what the legislation calls the core activity that needs to be conducted for the purpose of generating new knowledge, and it needs to be experimental and you need to use the scientific method.
“If you don’t have both of those two things then it doesn’t matter whatever else you have, it is not eligible. But if you do have those two things, however small, then everything that supports that becomes eligible for RDTI,” he said.
“If you can conduct a small experiment and generate some new knowledge in the process of your projects, then you’ve got the opportunity to scope out quite a large claim, depending upon the way in which you conduct your project.
“That tiny project, which could be done in an afternoon, can get you where you need to be.
In even better news, the experiment does not need to be successful, because new knowledge can be generated from failed experiments as well as successful ones.
“I’m a big fan of the RDTI,” said Mr Gauvin in the podcast.
“Having used it myself, in my own software companies, I really like the way that it gets you to think. The problem from the point of view of someone who’s run a software company is that your initial response is we don’t do things in white lab coat ways.
“We don’t do things with experiments, we don’t need to, we should just be recognized for innovation,” said Mr Garvin
But if you move on from that and recognize we don’t have a general purpose program to support innovation in Australia, we have one that supports R&D, you can change your company operation just slightly, so that it does R&D.
“Then it turns out you can take advantage of the government’s program and that it makes sense to do that, rather than criticize the program.”
Mr Gauvin points out the experimental approach to gearing for a RDTI claim needs to be baked into the development process early, not just before submitting a claim.
If you talk to your tax consultant at the end of the year and they say what R&D have you done, that assumes you know what that is and that it has been documented.
“Whereas if somebody’s talking to you at the beginning of the year and saying could we do an experiment around that – that’s more the kind of approach that I like to be taken,”
Mr Anderson emphasises the need to look at what new thing could come from a software project at its outset.
“What in this is something we haven’t done? What is something we need to learn about? What is something we need to research, asking those questions at step one is going to initiate people thinking about it. Because my experience is if people are encouraged to think about something, they will inevitably do it,” said Mr Anderson.