Nearly half of the registrations for research and development tax breaks in Australia are now for software, but the government will persist without a specialised scheme for the sector after its longstanding approach was “far improved” with administrative reforms.
It comes as the Tax Office also flags several integrity issues with the scheme and urges consultants and agents to double check mounting claims for software tax breaks.
Industry department officials last week said that in 2021-22 software accounted for 47 per cent of all registrations for the Research and Development Tax Incentive (RDTI).
The RDTI is an economy wide scheme that encourages industry to conduct R&D that may not otherwise have been conducted with refundable and non-refundable tax offsets. It now costs the government more than $3 billion annually.
While a welcome incentive for industry and cited by companies like Canva as a critical support in growing and staying onshore, the RDTI has been criticised as a bad fit for software development.
The Senate recommended consideration of a standalone scheme for software-related claims in 2021 after hearing evidence from the sector that it was unclear how the RDTI applied to software development, making claims risky and discouraging investment.
However, a review by the Board of Taxation released last year backed the continued sector agnostic approach and its unusual dual administration by the Industry department and Tax Office.
The Board of Taxation review recommended administrative changes to improve the scheme, including software sector specific guidance that was released last year, but was also quickly criticised.
In addition to total registrations, software also represents a growing share of the total registered RDTI expenditure in 2021-22 at 43 per cent ($6.6 billion of registered RDTI expenditure by firms). This is up from 36 per cent in 2020-21 and 30 per cent in 2019-20.
At Senate Estimates last week, Industry department R&D Tax Incentive Program general manager Tara Oliver said the scheme has been “far improved” after close collaboration with industry, including piloting changes with the Tech Council of Australia and advice from the CSIRO’s Data61 on complex software claims.
“There’ll always be room for improvement… but it’s something that we’re working on very hard and very closely with the sector,” Ms Oliver said.
“The Board of Taxation did review the R&D Tax Incentive and found that the provisions under the Income Tax Assessment Act were fit for purpose for software, and encouraged a focus on administrative reforms.
“And that is something that we’ve been doing in close consultation with the Tech Council of Australia and others.”
Forecasts for 2022-23 show the total expenditure under the RDTI scheme is expected to grow again.
On Friday, the Tax Office said it has identified issues with the application of some RDTI program integrity rules and urged tax agents and consultants to double check their clients’ claims.
The guidance flags possible breaches in areas like where expenditure is being attributed, who is conducting the R&D, and whether it is genuinely putting expenditure at risk.
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