ATO warning over software R&D claims

The Australian Taxation Office (ATO) has issued a warning over businesses claiming the R&D tax incentive for ineligible software development work.

The incentive — which in 2011 replaced the R&D tax concession and which is jointly administered by the ATO and AusIndustry — provides tax offsets in order to encourage R&D activities in Australia.

The ATO has warned that some companies are claiming the incentive for software projects that don’t meet key criteria for the program.

“In order to be eligible, there must be an experiment or experiments being carried out for the purpose of generating new knowledge,” states tax office guidance issued yesterday.

“The outcome of the experiments cannot be able to be known or determined in advance by a competent professional in the field. The experiments being carried out must be based on principles of established science and must seek to prove whether specific technical hypotheses are right or wrong to resolve specific technical issues or risks.”

Supporting activities may be eligible if they are directly related to eligible experimental activities, the ATO said.

“While most do the right thing, we are seeing some businesses in these industries and their advisors improperly applying for the tax incentive where the activities and expenditure claimed don’t match with legislative requirements,” said ATO deputy commissioner Michael Cranston.

The ATO says that some companies assume that an entire software project may meet the criteria for the incentive, when only a portion does.

In other cases, a company’s work is not undertaken to test a hypothesis through experimentation or does not have a “significant purpose” of generating new knowledge.

Although the complexity software development means it involves risks, the complexity does not always constitute a specific technical knowledge gap or challenge that requires the formulation of a hypothesis and the undertaking of experimental activities to test that hypothesis,” the ATO said.