A QUICK RECAP:

The recently decided AAT case involving H2O Exchange Pty Ltd has highlighted particular details which software companies must take notice of should they wish to register defensible R&D claims under the Income Tax Assessment Act 1997 (Cth) & Industry Research and Development Act 1986 (Cth).

H2O Exchange Pty Ltd (‘The Claimant’) is a software company that attempted to build a software platform for trading water rights within New South Wales, Victoria, and South Australia. Soon after, they applied for the R&D Tax Incentive to try and recoup a portion the expenses incurred to develop this platform. They registered identical R&D activities for the 2014 and 2015 income years which were found invalid due to the lack of substance and evidence in key areas of the legislation, namely the Unknown Outcomes and New Knowledge sections.

The full case can be found <here>.

KEY OBSERVATIONS FROM TIM FLOREA, RSF CONSULTING DIRECTOR:

1.      New Knowledge, Unknown Outcomes, and Core Activities were poorly described, making use of generic technical terms and lacking specific details in support

2.      The claimant reused most of the previous year’s project description, impairing the claim’s legitimacy

3.      Inability to have the contracted third party and lack of supporting evidence of testing to prove complex technical work undertaken substantially weakened the claimant’s defence

4.      The expert engaged on behalf of the claimant could not support key R&D areas as detailed records were not kept, despite some merit of the work undertaken

5.      The expert engaged by the regulator held a flawed position against the claimant, but was found successful due to the claimant’s inability to substantiate its activities

OUR TAKE:

The case highlights the regulators’ recent shift in focus from a mere understanding and compliance with the Tax Incentive’s structure towards detailed record keeping and substantiation of the scope of activities conducted. The regulators have now taken the view that it’s not R&D if there are no records, regardless of how advanced or complex the capabilities being developed are.

As the regulators continue to shift to an activity scope focus, the likelihood of R&D claims being reviewed will undoubtedly increase. In order to successfully defend these reviews, you must:

·        Adequately describe the key legislative criteria in the R&D Registration Form

·        Maintain detailed evidence linked to those areas