The ATO has expressed a special interest in reviewing the R&D Tax Incentive claims around software development as demonstrated in some high profile cases.
Recently published articles about the ATO requiring Airtasker to repay years of R&D Tax Incentive rebates highlights essential responsibilities for claimants wanting to utilise this generous tax benefit.
Often a CFO is responsible for a large tax incentive claim, owing the claims being essentially ‘self-assessed’ in nature. As with Airtasker’s R&D Tax Incentive, a claimant should not rely entirely on their advisers (even if hailing from the Big 4). The old adage holds true that if an R&D claim seems too good, it probably is! Given the government’s stance on the tax incentive it is a good policy to question your advisor’s understanding of the legislation.
Ongoing record keeping requirements for R&D activities
Clearly AusIndustry are demanding claimants support their assertions about the eligibility of substantial activities with appropriate levels of evidence.
There are often insufficient records about the key steps planned and undertaken. If AusIndustry find no logical nexus between the activities at a detailed level and how each detailed activity satisfies the legislative criteria, the claimant is likely to fail some part of the audit.
For Airtasker or any claimant, to recreate decisions made and describe the activities that took place many years earlier, in the absence of good records, could be problematic in demonstrating the legislative requirements have been met. Ongoing proactive attention to record-keeping is the key.
So are software developers getting an unfair deal from AusIndustry about the activities asserted as eligible? We don’t think so. Does R&D legislation need updating? Perhaps, but until that happens, claimants must be prepared with contemporaneous, robust evidence to defend an audit.
If public money is to be fairly distributed, it seems reasonable under existing legislation that AusIndustry should demand substantial R&D claims are supported by substantial evidence.
Properly scoping your R&D activities
Many claims that fail an AusIndustry audit do so because their claimed R&D activities are described too broadly. With agile development there will be numerous, sometimes daily, steps in a project’s activities that involve the thinking of and testing of ideas. These ideas will be considered either technically uncertain or certain as to their outcomes. Resolution of an uncertainty by experimenting should aim to generate new knowledge.
AusIndustry are asking claimants to demonstrate an informed approach to deciding about such certainty. So every time an idea is to be tested in an agile environment, it would be wise for a project leader to make an informed decision about each idea’s certainty and document it.
Twenty ideas tested in a week should mean twenty documented informed decisions. Claimants would be best to prepare R&D documentation as if they were already for review. Another good practice is to establish template documents that record decisions in a way that address AusIndustry’s interpretation of the legislation.
A ‘whole-of-project’ claim is likely to raise a flag for a review by AusIndustry. Some project ideas will involve outcomes that are certain, such as business as usual activities. These are not usually eligible.
In an intense R&D project, it’s best identify every idea to be tested as a way that demonstrates to AusIndustry an informed approach to differentiating between eligible and non-eligible activities has been carried on.