How to take advantage of R&D tax incentives in SaaS and technology industries

We have seen many of our clients in the start-up and technology space come up with inspirational ideas and brilliant concepts. Unfortunately, going from an idea to a finished product takes a lot more than hard work: You also need to invest in research and development (R&D), which doesn’t come cheap.

Fortunately, the Federal Government provides great incentives for companies that invest in R&D activities to boost competitiveness and improve productivity across the Australian economy.

R&D Overview

The R&D Incentive program is jointly administered by AusIndustry and the Australian Tax Office (ATO).

As of 1 July 2021, businesses conducting R&D may be eligible for:

• A refundable tax offset equal to the entity’s company tax rate plus an 18.5% premium for eligible entities with an aggregated turnover of less than $20 million per annum, provided they are not controlled by income tax-exempt entities
• A non-refundable tax offset for all other eligible entities equal to the entity’s company tax rate plus a two-tiered premium determined on the notional R&D expenditure as a proportion of total expenditure for the income year. The new rates will be the company tax rate plus
  • 8.5% for R&D expenditure up to 2% of total expenditure
  • 16.5% for R&D expenditure above 2% of total expenditure.

Importantly, core R&D activities must be conducted for the purpose of generating new knowledge (including the creation of improved materials, products, devices, processes or services).

Each year you must apply to register for the R&D Tax Incentive and the application must be lodged within 10 months of your company’s income year.

It is worth noting company is the only type of business structure which is eligible for R&D Tax Incentive. If you are running your R&D activities under a sole trader, trust or partnership, a restructure might be required.

It’s also critical that your company keeps adequate records to show it carried out eligible activities in incurring the claimed expenditure. Documenting your R&D should be a year-round activity. However, towards the end of the year, you should review your records and update if needed.

R&D claims for the software industry

R&D in the software industry is perhaps the trickiest to assess for eligibility, as developing any software can appear to be R&D, since software is developed iteratively, usually involves developing something new, and involves problem solving. However, this doesn’t necessarily make it eligible for the R&D Tax Incentive.

In assessing whether your company is undertaking R&D in its software development, ask yourself the following questions:

• Is the software genuinely new to the industry, or is it more an incremental improvement on a concept already developed?
• Were there genuine technical uncertainties? In other words, technical problems that had no established solutions and that might have caused failure of the project.
• Are there any learnings from the software development that could be considered new knowledge to the industry i.e. something you could publish on a technical forum, open source code library etc.? This doesn’t mean you necessarily need to do this (as often this IP is valuable to the company which should be protected), but the question is – could it be published if you wanted to?

Another common issue with software R&D is scope. Rarely does an entire software development project involve R&D. More commonly, R&D is a component of a project. For example: A company is developing an app that allows a user to scan barcodes from common food items in a supermarket, and then provide nutritional information and information about where the ingredients were sourced from. The R&D component of this could be in developing algorithms to recognize barcodes and cross reference to a library. However, the user interface, backed database etc. is not likely to be R&D. In this example, a company should register only the core algorithm development as R&D (with any directly supporting activity), but not the other development activities needed to build the final commercial app.

Conclusion

If you’re eligible for the R&D Tax Incentive but not applying for it, you’re leaving cash on the table.

We have a strong R&D specialist team who can help you make sure you tick all the relevant boxes and get the most out of your R&D Tax claims.

Contact us today if you would like to learn more about the R&D Tax Incentive, including eligibility.