Claiming R&D for a Software Company

The best software companies are always innovating, always pushing the edge of their field. The software sector is synonymous with innovation, which may reflect the conduct of eligible R&D activities. Many technology companies believe that they should have a dedicated R&D team or laboratory to be able to claim that they have conducted R&D activities. However, it is now easier for companies, especially technology companies that deal with software, to undertake R&D activities without needing to invest in a laboratory or form an R&D team.

Growth in technology R&D can even occur during the most difficult of circumstances as we have seen with the COVID-19 pandemic. Technologies that make working from home possible or digitising business operations were very much in demand and required a significant amount of R&D to increase their accessibility and efficiency. As the importance of R&D in the technology sector grows, specifically in the software industry grows, eligible companies should take advantage of the R&D Tax Incentive program because it can provide up to a 43.5% refundable tax offset of your development expenditure. This can help to fund almost half of your development costs.    

The Australian government wants to encourage all companies (in the technology field or not) to conduct experimental R&D activities benefiting Australia that might not otherwise be undertaken for reasons such as funding or complexity. If your technology company is developing a new process of creating a product or undertaking steps to improve current state-of-the-art methodologies despite scientific and financial difficulties, then you may be eligible for an R&D tax incentive.e all companies (in the technology field or not) to conduct experimental R&D activities benefiting Australia that might not otherwise be undertaken for reasons such as budget or complexity. If your technology company is developing a new process of creating a product or undertaking steps to improve current state-of-the-art methodologies despite scientific and financial difficulties, then you may be eligible for an R&D tax incentive.

It is essential that software companies understand that the claim is based on the activities of a project rather than the project in its entirety. If a project is innovative and/or novel but the activities involved to realise it are not, then R&D tax incentive cannot be claimed. There are two types of R&D activities: Core R&D Activities which are experimental activities and Supporting Activities which directly support the Core Activity.

Below are some examples of core activities:

1. creating a new algorithm or significantly improving the existing ones

2. invent new approaches to image/video processing

3. developing new data structures or improving the existing method of capturing, storing, and manipulating data

4. developing state-of-the-art or novel approaches for building software or functionality of a system

However, core activities conducted primarily to improve internal business administration are excluded from being valid activities even if they are innovative or novel and are conducted for the purpose of generating new knowledge. Technical challenges must not be confused with “business challenges” or those issues that impact corporate or commercial decisions. The table below shows the distinction between technical and business challenges.

Business ChallengeTechnical Challenge
Will customers like the new product
availability dashboard we developed?
How can we implement data visualisation in
designing the dashboard to provide real-time
updates on the availability of premium products
ordered by customers?
We need to develop a different pricing
model for our add-on service feature.
In what way must we modify the current database
framework of the system to sustain the additional
data requirements of a two-tier pricing model?
We want our application to work with
all types of mobile devices.
How can we develop and implement our own
communication protocols to facilitate the accurate
transmission of payment details between our web
app and the customer’s mobile device, which can
be running either on an iOS or Android platform?
We want to integrate with Microsoft’s
latest Azure framework which is still on
preview.
We need to design a new machine learning
algorithm to compute and predict user
interactions based on data coming from
multiple frameworks.

Moreover, any activities that pertain to testing, data mapping, data manipulation, data migration, technology upgrade, digital transformation activities, automating reporting or recording system, and routine maintenance cannot be claimed as core activities. However, these activities may be eligible as supporting activities if they directly support a core activity.

Examples of supporting activities:
  1. Developing UI/UX
  2. Setting up a testing environment
  3. Data analysis and mapping
  4. Upgrading systems and technology
  5. Routine software maintenance
  6. Digital transformation tasks
  7. Data manipulation

We at Innercode can help you assess whether your software-related activities qualify as R&D activities and guide you to maximise your claim. Innercode is composed of dedicated government grants consultants specialising in the R&D Tax Incentive for the software and technology industry. We have many fruitful years of experience delivering R&D Tax incentives to many software and tech companies. Through our streamlined process of analysing claims, we are confident that we can help you determine your eligible projects and activities in just a few hours of your time.

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