Topics: Custom software & SaaS
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Quick answer: Some software development qualifies for Australia's R&D Tax Incentive, but only the experimental part: work that tries to resolve a technical unknown a competent developer couldn't answer in advance, run as hypothesis, test and evaluation. Routine builds and software made mainly for your own internal administration don't count as core R&D, and only companies can claim.
Most guides to the R&D Tax Incentive are written by R&D advisers for R&D advisers. This one is written for the other side of the table: the Australian company paying for software, whether the team sits in-house, down the road or offshore. The decisions that make or break a claim are usually made before the first line of code, in how the project is scoped, contracted and documented.
We build software; we are not tax advisers. Treat this as a briefing to take to your registered tax agent or R&D adviser, who should confirm how the rules apply to you.
Can software development qualify for the R&D Tax Incentive?
Yes, when the work meets the same test as any other R&D. The program is run jointly by the Department of Industry, Science and Resources, which registers R&D activities through business.gov.au, and the ATO, which administers the tax offset. There is no special category for software. A project qualifies to the extent it contains core R&D activities, plus supporting activities directly related to them.
That "to the extent" matters. A typical app project might contain one genuinely experimental component inside months of ordinary design, coding and testing. Only the experimental component, and work directly supporting it, can be claimed. The ATO has specifically warned about claims for ordinary software development in Taxpayer Alert TA 2017/5.
What counts as a core R&D activity in software?
Experimental work whose outcome couldn't be known in advance, carried out systematically to generate new knowledge. Under the income tax law, core R&D activities are experimental activities where the outcome can't be determined from existing knowledge and can only be found by a systematic progression of work: hypothesis, experiment, observation and evaluation, and logical conclusions. They must be conducted to generate new knowledge.
In software terms:
| Likely to be core R&D | Usually not core R&D |
|---|---|
| A new algorithm or model where published approaches demonstrably fail on your data or constraints | Building screens, forms, dashboards and CRUD features |
| Achieving performance, accuracy or scale targets that existing techniques can't meet, with documented experiments | Integrating well-documented APIs and payment gateways |
| Novel approaches to synchronisation, security or data processing where the solution isn't known to experts | Configuring or customising off-the-shelf platforms |
| Testing competing technical hypotheses where the result is genuinely uncertain | UI and UX design, branding, copywriting |
| Routine bug fixing, refactoring and performance tuning |
The test is about technical uncertainty, not commercial risk. "We don't know whether customers will buy it" isn't R&D; "nobody knows whether this can be done within these constraints, and here's how we found out" might be. A search of existing solutions, papers and open-source projects, recorded at the time, is how you show the answer wasn't already available.
Which software work is excluded, including internal business systems?
Software developed mainly for your own internal administration is excluded from core R&D, along with several other categories. The law lists activities that can't be core R&D, including:
- Developing, modifying or customising software for the dominant purpose of internal administration of the company or connected entities, such as HR, payroll, accounting or an internal CRM
- Market research, market testing and sales promotion
- Management studies and efficiency surveys
- Complying with statutory requirements
- Reproducing an existing product from its plans or by examining it
Some excluded activities can still count as supporting R&D if their dominant purpose is to support core R&D, but that's a technical judgement for your adviser. The practical takeaway: a custom operations platform for your own staff is a poor candidate however clever it is, while software you sell or use to deliver services to customers is assessed on its technical merits.
What records should you keep while the software is being built?
Contemporaneous evidence, created as the work happens, not reconstructed at tax time. Agree the system with your adviser before development starts, then keep:
- [ ] A written statement of each technical uncertainty and why existing knowledge doesn't resolve it
- [ ] Records of the search for existing solutions: papers, libraries, vendor products and why they fell short
- [ ] Hypotheses for each experiment, with the expected result
- [ ] Experiment designs, test data and results, including failures
- [ ] Evaluation notes and the conclusions drawn
- [ ] Commits, branches and tickets linked to specific experiments
- [ ] Timesheets that separate experimental work from routine work
- [ ] Supplier invoices itemised by activity, not "development services, March"
Failed experiments are valuable evidence; they show the outcome wasn't known in advance. Ask developers to record them rather than quietly deleting the branch.
What if part of the development happens overseas?
Overseas R&D can only be claimed with an overseas finding, and lower costs abroad are not a valid reason. Per business.gov.au, you need a positive overseas finding before claiming expenditure on R&D activities conducted outside Australia, and the application must be lodged before the end of the income year in which those activities are conducted. Broadly, the overseas activities must have a significant scientific link to core R&D in Australia, must be activities that can't be conducted in Australia (for example, because the expertise, facilities or population needed aren't available), and overseas spending must be less than the Australian spending on the related R&D.
What this means if your team is offshore:
- Routine development done offshore wasn't claimable anyway, so nothing is lost there.
- Experimental work done offshore needs a finding, applied for in time, with a reason other than cost.
- Keeping the experimental components with an Australian team, and the routine build offshore, is often the cleaner structure.
Our guide to working with an offshore development team covers the wider trade-offs of that split.
How do registration and the tax offset work?
Register the activities after the income year ends, then claim the offset in the company's tax return.
- Check eligibility. Generally only companies can claim; sole traders, partnerships and most trusts can't. Eligible R&D spending normally needs to be at least $20,000 in the year, unless the work is done through a registered research service provider.
- Register. Apply to register your R&D activities with the department through business.gov.au within 10 months of the end of your income year; for a 30 June year-end, that's 30 April the following year.
- Claim. Lodge the R&D tax incentive schedule with the company tax return.
Current offset rates, per the ATO:
| Aggregated turnover | Offset | Refundable? |
|---|---|---|
| Under $20 million | Company tax rate plus 18.5 percentage points (43.5% at a 25% tax rate) | Yes, unless controlled by income tax-exempt entities |
| $20 million or more | Company tax rate plus 8.5% or 16.5%, depending on R&D intensity | No |
A refundable offset matters to startups: a loss-making company can receive it as cash. Settings are under review. Treasury released draft legislation in September 2026 proposing changes from income years starting on or after 1 July 2028, including different offset rates and refundability rules and an end to claims for supporting R&D activities. It isn't law yet, so check current settings on business.gov.au before planning around them.
You can also apply for an advance finding, a binding decision on whether planned activities are eligible, which is worth considering for larger or less clear-cut projects.
What should you agree with your developer before the project starts?
Scope, tracking and ownership, in writing. If the project might include R&D, raise it at quote stage, not at tax time:
- Separate the scope. Ask for the experimental components to be quoted and tracked separately from the routine build, so costs can be apportioned cleanly. When you're comparing software development quotes, favour vendors who can itemise that way.
- Agree the evidence. Specify the records you'll need (hypotheses, experiment logs, timesheets) and who writes them.
- Own the results. The company claiming should own the code and know-how and bear the cost; make sure the contract says so.
- Start with discovery. Running a software discovery phase is how technical uncertainties get identified and written down, which helps both the build and the claim.
- Bring in your adviser early. Ideally they review the plan before development begins.
Founders building a SaaS product should treat the R&D question as part of their funding plan, but never let it distort what gets built. A feature engineered to look experimental is a cost, not a tax strategy.
Frequently asked questions
Is app development eligible for the R&D Tax Incentive?
Only the parts that involve genuine experimental work to resolve technical uncertainty. Building screens, integrating standard APIs and configuring platforms are generally not eligible. Most app projects contain little or no core R&D, though some contain a component that does qualify.
Can I claim R&D for software built by an offshore team?
Only with a positive overseas finding, applied for before the end of the income year in which the overseas work happens, and on grounds other than lower cost. Routine development done offshore isn't claimable either way. Talk to your adviser before the work starts.
Do I need to register before the project starts?
No. Registration happens after the income year ends, within 10 months. You do need records from the start, an overseas finding applied for in time if work happens abroad, and you can seek an advance finding beforehand if eligibility is unclear.
Can a sole trader claim the R&D Tax Incentive?
Generally no. The incentive is available to companies, so sole traders, partnerships and most trusts aren't eligible. Some founders incorporate a company before significant R&D begins; get tax advice before restructuring.
What records are expected for software R&D claims?
Contemporaneous records of the technical uncertainty, the search for existing solutions, hypotheses, experiments, results and conclusions, plus timesheets and invoices that separate experimental work from routine development. Commits and tickets linked to experiments help show the work happened as described.
Planning software that pushes the boundaries?
We'll scope your project so experimental and routine work are quoted and tracked separately, ready for your adviser to assess. Read more about our software development for Australian companies, or talk to us about your project and get a fixed quote, usually within one business day.