Software development can qualify for Australia's R&D Tax Incentive if it involves core R&D: experimental work, based on a hypothesis, whose outcome a competent professional couldn't know in advance from available knowledge. Companies with aggregated turnover under A$20 million get a refundable offset of their company tax rate plus 18.5%. Routine development and software for your own internal administration don't qualify.
Key takeaways
- Eligible companies under A$20 million aggregated turnover get a refundable offset: their company tax rate plus 18.5 percentage points.
- You need at least one core R&D activity with a genuinely unknown outcome, tested through a systematic progression of work.
- Software built mainly for your own internal administration, like payroll or invoicing, is excluded from core R&D.
- Register with the Department of Industry, Science and Resources within 10 months after your income year ends.
- Keep records as you go. Hypotheses, experiments and results written up later are much harder to defend.
Some of what we built at my previous software company had never been done before.
Some of it was ordinary software engineering. Logins. Billing. Dashboards. Admin screens. The same team wrote both, often in the same week, in the same codebase.
That's the reality of every software-as-a-service business I know. And it's exactly why the R&D Tax Incentive confuses so many founders.
The program can put serious cash back into an Australian software business. For a small company, it can feel like getting a chunk of your engineering payroll refunded. But it doesn't reward writing software. It rewards experiments. The trick is separating the two, honestly, before you claim.
This guide is part of my series on running a subscription business in Australia. It's general information as at October 2026, based on the ATO and business.gov.au guidance listed below. It isn't tax advice. R&D claims are self-assessed and can be reviewed, so get a registered tax agent or R&D adviser involved before you lodge.
What is the R&D Tax Incentive?
The R&D Tax Incentive (R&DTI) is the Australian Government's main program to encourage companies to do research and development. It's jointly run:
- The Department of Industry, Science and Resources registers your R&D activities, on behalf of Industry Innovation and Science Australia.
- The ATO processes the expenditure claim in your company tax return.
It's open to companies in every industry and of every size. You self-assess, register, then claim.
How much is the R&D tax incentive worth?
The ATO sets out two rates.
| Your company | Offset | How it's paid |
|---|---|---|
| Aggregated turnover under A$20 million (and not controlled by tax-exempt entities) | Your company tax rate plus an 18.5% premium | Refundable: if it's more than your tax bill, the excess can be paid to you |
| Aggregated turnover A$20 million or more | Your company tax rate plus 8.5% for R&D spend up to 2% of total expenses, and 16.5% above that | Non-refundable: reduces tax, with unused amounts generally carried forward |
R&D expenditure above A$150 million a year only gets your company tax rate. And you generally need to spend at least A$20,000 on R&D in the year to claim at all.
Here's what that looks like in practice.
A small SaaS company's claim (illustrative)
A Sydney SaaS company has A$3 million turnover and is a base rate entity with a 25% company tax rate. It's still loss-making. This year it spent A$400,000 on eligible R&D (mostly engineering salaries on registered core and supporting activities).
- Refundable offset rate: 25% + 18.5% = 43.5%
- Offset: A$400,000 × 43.5% = A$174,000
- Value of the same spend as a normal deduction: A$400,000 × 25% = A$100,000, but only once the company is profitable enough to use it
- Extra benefit from the R&DTI: about A$74,000, and because the company is in loss, the refundable offset can arrive as cash
For a company burning cash to grow its subscription base, that refund is the difference.
That last point is why the R&DTI matters so much to early-stage subscription businesses. It's one of the few tax benefits that turns into cash while you're still losing money. If you track your burn multiple, an R&D refund is a meaningful offset to burn. Just don't count it as recurring revenue (more on that below).
Does software development qualify for R&D?
It can. But "we built software" isn't the test.
To access the R&DTI you need at least one core R&D activity. Core R&D activities are experimental activities, conducted for the purpose of generating new knowledge, whose outcome can't be known or determined in advance. Business.gov.au's test is whether a competent professional could work out the outcome from publicly available or reasonably accessible information without running an experiment. The outcome can only be found by applying a systematic progression of work.
That systematic progression has five elements:
- Hypothesis: a testable idea, formed before the work starts.
- Experiment: a procedure to test it.
- Observation: recording what happened.
- Evaluation: comparing the results with the hypothesis.
- Logical conclusions: what you learned, and what you'll try next.
Read that again with your product roadmap open.
Most of a typical roadmap is building things competent engineers already know how to build. That's valuable work. It's just not R&D.
Core vs supporting activities
Supporting R&D activities are activities directly related to a core activity. Some can only count if their dominant purpose is to support the core R&D. Building the test rig for an experiment, gathering data for it or deploying an experimental build to measure results can be supporting activities.
Supporting activities let you claim more of the real cost of R&D. But without a genuine core activity, there's nothing to support.
What software work doesn't qualify?
Business.gov.au lists activities that can't be core R&D. Four matter most to software and subscription businesses.
1. Software for your own internal administration. Developing, modifying or customizing software for the dominant purpose of use by you (or a connected entity or affiliate) for internal administration is excluded. The examples given include payroll, accounting, invoicing, ordering, quality control reports, management information systems and ERP. Software you sell to other businesses for their internal administration isn't caught by this exclusion.
2. Market research and sales promotion. Customer surveys, A/B testing your pricing page and testing demand aren't core R&D. (A consumer survey used to design an experiment can sometimes be a supporting activity.)
3. Complying with standards or statutory requirements. Building your new compliance flow for Australia's subscription trap laws is necessary work. It isn't R&D.
4. Reproducing a commercial product. Rebuilding a competitor's feature from its public documentation is excluded. Developing a genuinely new or improved process isn't.
Which side of the line? Some illustrative examples
These are my illustrations of how the guidance tends to apply, not rulings. The facts of each case decide.
| Work | Likely core R&D? | Why |
|---|---|---|
| Building login, billing and user management | Unlikely | Known solutions exist |
| Integrating Stripe or Xero using their published APIs | Unlikely | Outcome knowable from documentation |
| Customizing your own internal CRM | No | Internal administration exclusion |
| Developing a new algorithm to automatically assess documents against rules, where no known method met your accuracy target | Possibly | Unknown outcome, testable hypothesis |
| Getting an AI feature to hit a cost-per-task target using a technique you had to invent and test | Possibly | Hypothesis, experiments, new knowledge |
| Prompting a large language model to summarize text | Unlikely | The capability is known and publicly documented |
| A/B testing three pricing tiers | No | Market research |
My take on R&D in the AI era
AI coding tools make known solutions faster to find. If a competent developer can get to the answer by searching, reading documentation or asking a coding assistant, I'd be very cautious about calling it R&D. The genuinely uncertain work hasn't gone away, though. It has moved to places like model evaluation, cost and accuracy trade-offs, and novel ways of combining data. If your AI gross margin depends on solving a problem nobody has published an answer to, that's where to look. It's also where your moat in the AI era is likely to come from.
How do you claim the R&D tax incentive?
The steps, in order:
- Check you're an R&D entity. Broadly, a company incorporated in Australia or an Australian-resident company. Sole traders, partnerships and trusts can't claim directly.
- Identify your core activities and the supporting activities linked to them.
- Keep records as you go (see below).
- Register your activities with the department within 10 months after the end of your income year. For a 30 June year-end, that's 30 April.
- Calculate your eligible expenditure and claim the offset in your company tax return with the R&D schedule.
- Consider an advance finding if you want more certainty about planned or current activities before you claim.
If a large chunk of your claim depends on one judgment call, that's a good reason to seek an advance finding or independent review.
Find out if your software work qualifies
Get a BPAG adviser to look at your development work, R&D records and cash flow, and tell you whether an R&D Tax Incentive claim is worth pursuing.
What records do you need for software R&D?
The department expects you to keep records of each step of your systematic progression of work. For software teams, the good news is that most of the evidence already exists. It's just scattered.
Useful records include:
- a short written hypothesis for each experiment, dated before work started;
- tickets and pull requests linked to that hypothesis;
- test results, benchmarks and evaluation logs;
- notes on what failed and why (failures are often the best evidence of genuine uncertainty);
- timesheets or time allocation showing who worked on which activity;
- a literature or prior-art check showing why the answer wasn't already known.
Build this into your sprint routine. A ten-minute note when an experiment starts is worth hours of reconstruction a year later.
How does the R&DTI affect a subscription business's numbers?
Three things to watch.
It isn't recurring revenue. An R&D refund is a tax benefit, not subscription income. Keep it out of MRR, ARR and growth rates. Buyers will strip it out anyway when they work out what your business is worth, as I explain in valuing an Australian SaaS business.
It arrives late. The refund comes after year-end, after registration and after your tax return. Plan your cash flow around the real timing, not the hopeful one. My guide to subscriptions and cash flow covers forecasting.
It can be reviewed. If a claim is later reduced, you may have to repay the benefit with interest and penalties. Don't spend a refund you aren't confident you can defend.
When is claiming the R&DTI the wrong choice?
Sometimes the honest answer is "not this year."
- If your work is mostly routine development, a claim built on stretched definitions is a liability, not an asset.
- If your eligible spend is small, adviser fees and your team's time can eat most of the benefit.
- If your records are thin, fix your record-keeping this year and claim properly next year.
- If you're not a company, sort out your structure first.
And beware of anyone who offers to "find" R&D in your business for a percentage of the refund without asking hard questions. If your claim is wrong, the consequences fall on your company, not theirs.
What to do next
- List every major piece of development work from the last 12 months.
- Mark each one: routine, possibly experimental, or excluded.
- For anything "possibly experimental," write down the hypothesis and what you didn't know at the start.
- Check your records. If they're thin, start keeping them properly this month.
- Talk to an adviser before the 10-month registration deadline, not the week before it.
If your product depends on AI, it's also worth checking your unit economics with the AI gross margin calculator. R&D that lowers your cost to serve can matter more to your long-term value than the refund itself.
Free Subscription Profit Review
Australian business owners can book a free 30-minute review with a BPAG Accountants adviser. An honest conversation about:
- whether a subscription model could work for your business
- how recurring revenue could cover your fixed costs each month
- how it could lift what your business is worth
No cost, no obligation. General information only until we understand your situation.
Frequently asked questions
Can a sole trader or trust claim the R&D Tax Incentive?
No. The R&D Tax Incentive is for R&D entities, which means a corporation incorporated under Australian law, or an Australian-resident company, plus certain foreign companies with a permanent establishment here. Sole traders, partnerships and trusts can't claim it directly. If you're about to start serious development work, talk to your adviser about structure before you begin, not after.
What's the minimum I need to spend?
Your R&D expenditure for the income year generally needs to be at least A$20,000 to claim the offset. That threshold doesn't apply if you engage a registered research service provider to do the R&D, or if you contribute to the Cooperative Research Centres Program. Below A$20,000, the cost of preparing a claim often outweighs the benefit anyway.
When do I get the money?
After the year ends. You register your activities with the Department of Industry, Science and Resources, then claim the offset in your company tax return. For a loss-making company under the A$20 million turnover threshold, the refundable offset is paid out after the return is processed. Some lenders offer finance against expected refunds, but price that cost into your decision.
Can I claim R&D for an AI product built on someone else's model?
Possibly, but using a third-party model isn't the R&D. The question is whether your own work had an outcome you couldn't know in advance, such as getting a new technique to reach an accuracy or cost target nobody had published a way to hit. Prompting a model to do something it already does well, or wiring up a known integration, is unlikely to qualify.
What happens if my claim is reviewed?
The department can review whether your activities are eligible, and the ATO can review your expenditure. If a claim is wrong you may have to repay the benefit with interest and penalties. That's why contemporaneous records matter. An advance finding from the department can give you more certainty before you claim, for activities you're planning or running.
General information only, current as at October 2026. It isn't legal, tax or financial advice and doesn't consider your circumstances. Speak to a qualified adviser before acting.
Talk it through with a BPAG adviser
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Robert Coorey, MBA
Robert is the author of The Subscription Playbook and Feed a Starving Crowd and a Director at BPAG Accountants in Sydney. More about Robert.
Sources
- ATO, Rates of R&D Tax Incentive offset (updated 13 May 2026)
- business.gov.au, Overview of the R&D Tax Incentive
- business.gov.au, Check if you're eligible for the R&D Tax Incentive
- business.gov.au, Conducting core R&D activities
- business.gov.au, Excluded R&D activities under the R&DTI
- business.gov.au, Record keeping for the R&D Tax Incentive
- business.gov.au, Apply for an advance finding
Facts and prices checked 27 October 2026. Spotted something out of date? Tell us.