As technology continues to advance and we move towards more tech-focused lifestyles, software development is quickly becoming one of the most active areas of R&D Tax Incentive claiming in Australia. This also makes it one of the most scrutinised. There are real opportunities available for businesses genuinely involved in innovative software development projects, but it also creates risks for any businesses claiming activities that don’t meet the eligibility criteria.
This article is designed to help you understand eligibility criteria, what documentation you need, and how to ensure compliant R&D Tax Incentive claims for software development projects.
Does Software Development Qualify for the R&D Tax Incentive?
The simple answer is that it can be, but isn’t always. Software development can qualify for the R&D Tax Incentive if it meets strict eligibility criteria. This is the same criteria that applies across all industries looking to claim the RDTI. The software being developed must solve a genuine problem, that cannot otherwise be solved with existing knowledge, through systematic testing and experimentation.
The question is not whether you are capable of creating new software; the question is whether the software produced solves a problem that could have been solved in advance based on currently available knowledge.
What the ATO Actually Looks For in Software Claims
Every R&D claim — software or otherwise — is assessed against the same Core R&D criteria. The ATO will scrutinise it to ensure that the core R&D activities:
- Are experimental in nature, and conducted for the purpose of generating new knowledge
- Follow a systematic progression from hypothesis to conclusion
- Involve a technically uncertain outcome that couldn’t be determined in advance using existing knowledge or techniques
When checking R&D Tax Incentive eligibility for software development projects, the ATO with focus on two main questions:
- Was the outcome genuinely unknown?
- Did you take a genuine experimental approach?
This is where many software development claims fail. The ability to develop software doesn’t automatically mean that it is eligible for R&D. It must be correctly framed, documented, and create new knowledge that could not have been known without experimentation.
What Qualifies — Eligible Software Development Activities
Claiming activities or expenses that don’t meet the criteria is the fastest way to attract scrutiny from the ATO and risk having your claim rejected. That’s why it’s essential to know what is eligible and what is not prior to submitting your claim.
Software development projects can include a wide range of core and supporting R&D activities that are eligible, such as:
| Core R&D Activities: – Developing novel algorithms where no existing solution exists – Building new machine learning modelsSolving fundamental architecture problems with no known technical solution – Creating new compiler or language tools – Research into new protocols | Supporting R&D Activities: – Setting up and maintaining dedicated test environments – Developing internal tooling to enable experiments – Data preparation and pipeline work that feeds directly into eligible model development – Infrastructure provisioning specifically tied to core R&D activities |
Activities that are generally not eligible for R&D include:
- Routine software development and bug fixes
- Adapting or customising existing software or platforms
- UI/UX design and front-end development (unless tied to an eligible core activity)
- Applying existing frameworks, libraries, or APIs in standard ways
- Building to a known specification, even if complex
It is critical to ensure that every activity included in your claim meets all the criteria laid out in section 355-25 of the ITAA 1997. To learn more about the eligibility criteria for software development projects, you can read our previous article here.
What Expenses Can You Claim in a Software R&D Claim?
Understanding the full range of claimable expenses and how to attribute it correctly is one of the best ways to prevent leaving money on the table. Labour is typically the largest component of any R&D project, but in software development projects it’s far from the only eligible cost.
When submitting an R&D Tax Incentive claim for software development projects you can often claim:
- Employee salaries and wages: you can claim salary costs for any time that was spent on eligible R&D activities, however this will require keeping clear time records that link hours to specific activities.
- Contractor and consultant fees: you can claim payments made to contractors for work on eligible R&D activities, provided you keep documentation proving the link.
- Software licences and tools: software licenses and tools used directly in R&D activities can be claimed with accurate attributions, including development environments, testing platforms, and specialist tooling.
- Cloud computing and hosting costs: a portion of infrastructure costs incurred in the course of R&D can be claimed up to the extent they directly relate to R&D activities.
- Materials and consumables: physical or digital materials consumed in the direct process of R&D experimentation can be claimed.
Record-Keeping for Software R&D Claims
In addition to knowing the eligibility criteria, you also need to keep clear documentation of all work completed as part of the R&D process. The best way to ensure that you have all the records you need, and that all information is accurate, is to keep records as you go.
When claiming the R&D Tax Incentive for software development projects, it’s crucial to keep clear documentation of:
- Hypothesis and problem framing: keep written records of the technical problem being investigated, why existing solutions were insufficient, and what outcome was being tested.
- Experiment logs and iteration records: this can include sprint retrospectives, technical decision records, architecture documentation, and test results that show the experimental progression over time.
- Code repositories and version history: working logs and histories can support activity records, particularly when the historical records are directly tied to specific experimental branches or hypotheses.
- Failed approaches and pivot documentation: evidence of failed attempts is often the strongest indicator of genuine experimental uncertainty, so it’s important to document everything that failed, why, and how you pivoted to rectify the issue.
- Time attribution: keep records outlining how long specific team members spend on various R&D activities.
The aim of your documentation is to to prove your experimental journey and how each activity contributed to the end result. Read our previous article for further advice on record keeping for R&D Tax Incentive Applications.
Build a Strong R&D Claim for Your Software Development Project
In the current technological era, software development is more important than ever, and also more common than ever. The R&D Tax Incentive is designed to support innovation and technological advancements.
By knowing the eligibility criteria and keeping clear documentation, companies can benefit from the R&D Tax Incentive for software development activities, unlocking cashflow to support further innovation and development.
Contact us at Rimon Advisory today to discover how we can help provide tailored tax advice to support your R&D claims for your software development project.
