Accountancy firm TCF Services is an R&D tax specialist and lodges tax returns for over 50 software clients – less than half of its overall customer base spanning industries such as manufacturing, and medical science.
On July 1, 2011 the government redefined research and development by introducing a new R&D tax regime.
Previously, systematic investigative and experimental activities (SIE) simply had to be innovative or risky, but not both.
Experimentation is key, which has shifted the focus from projects to activities: not what you do, but how you do it.
It has forced entrepreneurs to re-open their high school textbooks to explain their R&D in the scientific method: hypothesis, experiments and outcome.
Andrew Flick, R&D business services manager at TCF, says: “It’s more micro detail. So the actual writing of the software is the project but within the project you have to find an element that is more challenging and difficult, that is experimental, to be able to have a project to base it on.”
“It’s a higher bar of R&D now to be able to qualify. But you’re getting more money for that qualification, which is not bad.”
“So those who are doing higher level R&D but are a bit more marginal, it’s knocked some of them out of the scheme.”
Flick says start start-ups won’t qualify if there’s no technical innovation. For example, a new business model or marketing strategy, or if an entrepreneur doesn’t pay themselves a wage (that is a business is built on sweaty equity).
“We don’t have any R&D getting knocked back but that usually happens when someone tries to do it themselves,” he says.
“We pick up a lot of clients that tried to do it themselves but ran into a lot of problems.”
PwC tax partner Sandra Mason described the innovation as “an experimental activity whose outcome cannot be known in advance,” citing section 355-20 of the R&D Tax Law Amendments, R&D Act 2011.
It’s crucial to document the R&D at the time of experimentation, which could test user acceptance on some new code, or an engineer or R&D manager overseeing production on a factory line.
It should answer a number of questions:
It’s difficult to claim without documentation, which is important because the ATO vigorously enforces the rules.
“They do scrutinise and have a process called the ‘compliance continuum’, where they have a protocol program that systematically reviews claimants of the incentive program,” Mason says.
“There’s teams of assessors in each state and federally that review claims.”
Mason stressed that companies should seek external advice. AusIndustry general manager David Wilson said the scheme was simplified for start-ups to self-assess their tax needs and his organisation also offers a number of resources.
Melbourne start-up Rome2Rio is a first-time applicant and aims to multiply the value of a recent $450,000 investment to fund the development of a B2B model for its multi-modal travel search engine.
The core Rome2Rio algorithm powers the “multi-modal” searches, which instructs customers how they can get from A to B using a range of transport options.
Rome2Rio co-founder Michael Cameron said they have developed the algorithm to return search results faster and with greater accuracy
He is confident of qualifying with the help of AusIndustry and their peers – Rome2Rio shares an accountant with Adioso.
“We have a source control system so every bit of code we write is checked-in – we have logs, comments and email records – and the advice we have is that it’s a pretty good set of evidence to make your submissions,” Cameron says.
“So I think from that point of view for the next year we’re pretty well set up.”
Andrew Sadauskas is a former journalist at SmartCompany and a former editor of TechCompany.
