Latest software R&D Tax Guidance, is your outcome unknown?
Meeting the outcome cannot be determined in advance eligibility requirement for R&D Tax may appear to be more achievable now with the new insights we have gathered from the latest Software-related activities R&D Tax guidance published by Ausindustry. That the outcome cannot be known of the Core R&D activity is one of the key requirements for eligibility and has been known to be challenging to prove.
We think that based on this there could be an expansion in what is acceptable in some areas, especially around cost and resource constraints. However, these areas are still narrow and require careful consideration when using them as the basis for meeting the eligibility requirements. Moreover, if the core activity is designed the wrong way, it could still be difficult to prove that an outcome cannot be known in advance. Therefore, it is important for companies to carefully structure their core and supporting activities as well as the documentation that supports the claim.
To help determine whether your core R&D activity meets the “outcome unknown” requirements, in the latest software guide, AusIndustry has provided a helpful list of key things to think about:
1. whether the goal is scientifically or technologically possible or how it can be achieved
For this point, we advise companies to conduct research to find out whether a near-similar objective has been achieved before. The objective should be leading to experimental activities.
2. whether existing knowledge or capability can be adapted to solve a problem
Companies should be able to establish that there is no available solution to their core activity’s technical problem. AusIndustry expects that you have conducted a search on relevant sources such as scientific journals as well as seek advice from experts within your company or field of work or even from another field of science and technology.
3. whether the technological challenges that need to be overcome, with unknowns arose in connection to (1) the need for output to meet the desired specifications such as response time, reliability or cost, or (2) the need to achieve desired specifications using possible alternative approaches or solutions
In this new version of the guide, knowledge gaps created by cost or resource limitations may now meet the eligibility requirements of having an outcome that cannot be known or determined in advance.
4. whether you are using known processes, technologies and methodologies where the result or outcome is unknown
If a process, technology or approach has not been tested in a particular circumstance or domain, it could be the basis to meet the eligibility requirement of having an outcome that cannot be known or determined in advance. However, for this point, we advise our clients to be careful and that they should make sure the design of their core activities meets the other eligibility requirements of AusIndustry.
5. system unknowns, where the components of a system and their interactions are known, but the outcome/result of the system cannot be deduced from the outset
Similar to point no 3, this point is a new interpretation or take for the outcome cannot be known or determined in advance eligibility requirement. One example of this point is when an activity revolves around combining different methodologies in which there is no possible way to determine the outcome in advance.
6. where an approach, methodology, or technology has already been shown to be possible but needs further work to make it more cost-effective, reliable or reproducible.
For software development, one example could be the need to improve a data processing algorithm by making it more cost-effective, more reliable, or more robust. If an algorithm or technology is open-source, improving it may also be grounds for meeting the eligibility requirement; however, the company must own the intellectual property and results of the R&D conducted to gain the improvement.
We encourage all companies interested in AusIndustry’s R&D Tax Incentive program to read the Software-related activities and the Research and Development (R&D) Tax Incentive guide that can be found in AusIndustry’s website below:
We will continue to provide our insights on the new software sector guide.
If you have any questions, feel free to contact us.