How the R&D Tax Incentive affects the cost of building software

Does the R&D Tax Incentive reduce software development costs?

It can reduce the net cost of the eligible experimental activities within a build, after the fact, but it doesn’t reduce the price of the build or what you pay upfront. The R&D Tax Incentive (R&DTI, or RDTI), sometimes called the R&D tax offset, is a legislated Australian Government program that offsets some of the cost of eligible research and development through the company tax system. It’s jointly administered by the Department of Industry, Science and Resources, which registers R&D activities, and the ATO, which processes the expenditure claims.

For budgeting, three facts matter most:

1. It applies to activities, not projects. business.gov.au is explicit that eligibility is determined at the activity level. A $300k software project doesn’t become a $300k R&D claim.
2. It’s self-assessed. You, with your adviser, decide whether activities qualify. Registration “does not confirm they are eligible”, and the department and ATO can review claims before or after registration.
3. It’s paid in arrears. Any benefit flows through the company tax return for the year the spend happened, so it helps cash flow next year, not this one.

We’re software engineers, not tax agents. This page explains how the program interacts with software budgets so you can ask the right questions. For whether it applies to you, speak to a registered R&D tax agent.

Which software development costs might count?

Only core R&D activities, and activities directly related to them, can count, and most of a typical software build is neither. Core R&D activities are experimental activities conducted to generate new knowledge, where the outcome can’t be known or determined in advance and can only be found through a systematic progression of work: hypothesis, experiment, observation, evaluation and logical conclusions.

The test for “can’t be known in advance” is demanding. business.gov.au says a competent professional must be unable to determine the outcome based on knowledge that is publicly available or reasonably accessible anywhere in the world, without an experiment. If an experienced engineer could look it up or would know how to build it, it isn’t core R&D. Our guide to technical uncertainty goes deeper.

Here’s how the work in a typical software budget tends to map, as a general illustration only. Your agent’s assessment of your specific activities is what counts.

Typical budget line	How it usually sits	Why
Discovery, requirements, UX research	Usually not core R&D	Business and user research; market research and social science research are excluded from core R&D
Interface design and standard front-end build	Usually not core R&D	Known techniques with predictable outcomes
Standard features: login, billing, admin, CRUD screens	Usually not core R&D	A competent professional knows how to build them
Integrations with documented APIs	Usually not core R&D	Outcome is knowable from documentation
A novel algorithm, model or technique whose outcome is genuinely unknown	May be core R&D	Needs a documented hypothesis and experiments
Test harnesses and data collection built to run those experiments	May be supporting R&D	Must be directly related to a core activity, and in some cases done for the dominant purpose of supporting it
Deployment, hosting, maintenance	Usually not	Operational, not experimental

In projects we’d expect to have eligible components, the experimental work is often a minority of the budget. Some projects contain none, and that’s normal: most valuable business software is built with known techniques.

What are the eligibility gates?

There are four gates, and a project has to clear all of them. From business.gov.au and the ATO:

1. The entity. The claimant must be a corporation incorporated under Australian law, or a foreign-incorporated company that’s an Australian tax resident or carries on business here through a permanent establishment under a double tax agreement. Sole traders, partnerships and trusts aren’t eligible R&D entities.
2. The activities. They must be core R&D activities, or supporting activities directly related to them, and not excluded.
3. The spend. Eligible R&D expenditure for the income year must be at least $20,000, unless you use a registered research service provider or contribute to the Cooperative Research Centres Program.
4. Registration. Activities must be registered with the department within 10 months of the end of the income year in which they took place. Only then can expenditure be claimed in the company’s tax return.

The software exclusion. business.gov.au lists developing, modifying or customising software for the dominant purpose of internal administration by the developer (or a connected or affiliated entity) as excluded from core R&D. That covers design, coding, testing and customising off-the-shelf packages for that purpose. The exclusion doesn’t apply where the dominant purpose is use by unconnected entities, such as a software product you sell to other businesses, or use for purposes other than internal administration. This single rule rules out many internal business systems. Read more in what qualifies for software development.

How is the benefit calculated, and why is it smaller than it looks?

The offset replaces the ordinary tax deduction you’d otherwise get on the same spend, so the extra benefit is the difference between the two, not the whole offset. The ATO describes two forms:

Company	Offset type	How the rate is set (ATO)
Aggregated turnover under $20 million (and not controlled by tax-exempt entities)	Refundable	Company tax rate plus an 18.5 percentage point premium
All other eligible entities	Non-refundable	Company tax rate plus a premium of 8.5 points on R&D spend up to 2% of total expenditure, and 16.5 points above that

Refundable means that if the offset exceeds the tax you owe, the excess can be paid to you. Non-refundable offsets reduce tax payable and may be carried forward. Rates and thresholds are set by legislation and change; check the ATO’s current rates page, linked in the sources.

A worked example: what it could mean for a build

The example below is purely illustrative, uses round numbers, and assumes eligibility that in real life has to be assessed. It shows the mechanism, not a likely outcome for your project.

Assumptions. A company with turnover under $20 million and a 25% company tax rate (the ATO’s base rate entity rate for 2025 to 26) commissions a $300,000 software platform. After review, its registered R&D tax agent considers that $80,000 of the spend relates to registered core and supporting R&D activities. The remaining $220,000 is ordinary development.

Step 1: the offset amount. Rate = 25% company tax rate + 18.5 points = 43.5%. Offset on the eligible spend: $80,000 × 43.5% = $34,800.

Step 2: what it replaces. Without the program, the company could deduct that $80,000 in the ordinary way. For a profitable company, that deduction is worth $80,000 × 25% = $20,000 in tax saved.

Step 3: the extra benefit. $34,800 − $20,000 = $14,800. That’s the additional benefit from the program on this spend for a profitable company, equal to the 18.5 point premium × $80,000.

Step 4: net cost. The $300,000 build still costs $300,000 upfront. After tax, the effect of the program in this example is roughly $14,800 on top of normal deductions, before the agent’s fees and the internal time spent preparing the claim.

For a loss-making startup, the picture differs: the refundable offset may produce a cash refund of up to $34,800 when the tax return is processed, but the $80,000 no longer adds to carried-forward tax losses. Whether that trade is worthwhile depends on the company’s prospects, which is a question for your agent.

Timing. If the work happens between October 2026 and March 2027, it falls in the income year ending 30 June 2027. Registration is due by 30 April 2028, and any refund would arrive only after the return is lodged and processed. The company must fund the full build in the meantime.

What does it cost to claim the R&D Tax Incentive?

Claiming has real costs, some of them hidden in staff time: an adviser’s fees, your team’s time, and the discipline of keeping records during the project. Budget for:

• R&D tax agent fees. Agents price in different ways, commonly fixed fees or a share of the benefit. Get the basis in writing and check who is responsible if the claim is reviewed.
• Contemporaneous records. The ATO says records should be made as soon as possible after transactions occur, that backdated or non-specific records aren’t appropriate, and that records must be kept for 5 years after the claim. For experiments, that means hypotheses, test plans, results and conclusions written at the time.
• Cost apportionment. Your records must show how costs split between eligible and ineligible activities. Invoices that separate experimental work from ordinary development make this far easier.
• Review risk. Claims can be examined. The cost of a weak claim includes repaying the benefit and potentially penalties, which is why honest, well-documented claims matter.

What changes are coming?

The Government announced reforms in the 2026 to 27 Budget that would apply from 1 July 2028; the ATO notes they are not yet law. As published by the ATO on 12 May 2026, the announced changes include:

Announced change (from 1 July 2028)	Current rule
Supporting R&D activities removed from the offset; core activity offset rate raised by 4.5 percentage points	Supporting activities can be claimed
Minimum eligible spend raised to $50,000	$20,000
Refundable offset limited to a company’s first 10 years of operation, with the turnover threshold raised to $50 million	Available to companies under $20 million turnover
Intensity premium threshold lowered from 2% to 1.5%	2%
Maximum expenditure threshold raised to $200 million	$150 million

If your build spans several years, these matter for planning, especially the removal of supporting activities, which in software projects can include test harnesses and data work. Until then, business.gov.au says the program continues under the current rules.

How should you plan a build around the incentive?

Budget and approve the project on its full cost, and treat any R&D benefit as a possible future reduction, never as funding. Then:

1. Talk to a registered R&D tax agent before work starts, when records can still be set up properly. You can confirm registration on the Tax Practitioners Board register.
2. Consider an advance finding from the department if you want certainty about eligibility before committing. business.gov.au explains how to apply.
3. Separate the experimental work in your plan and invoices, with its own hypotheses and success criteria. A good discovery phase identifies which parts carry genuine technical uncertainty.
4. Keep records as you go: design decisions, experiments, failures and results.
5. Don’t choose a technical approach to fit the incentive. Building something harder than necessary to create an “R&D” story costs more than the offset returns and invites review.

For build budgets in general, see our guides to MVP cost and custom software cost. AI projects raise their own questions, covered in R&D Tax Incentive for AI projects.

How All Webbed Labs fits in

We’re not a registered tax agent and we don’t prepare, lodge or advise on claims. What we do is run projects so the technical record exists if you or your agent need it: a documented hypothesis for experimental work, experiment logs and results kept in your repository as the work happens, and invoices that separate experimental work from routine development. When clients want advice on a claim, we refer them to our named R&D tax partner, Troy Schoenfisch of Crescendo Strategy, as described on our about page, who can come in early enough to set up documentation properly. You’re free to use any registered R&D tax agent. More on how we document projects is on our R&D page.