Software Sector R&D Tax Incentive Case Study

Smarty Pants Pty Ltd (Smarty Pants) is a small application developer based out of Melbourne. Smarty Pants developed and launched a new web app in 2008 on the Apple iOS platform. The app found immediate success which was in no small measure a consequence of the way it presented lots of complex data in an easy to use format.

Despite its success, it was not long before other “me too” applications began to appear and threaten the market dominance of the Smarty Pants app. Further, and more generally, the rapid pace of technological change meant that the benchmark for industry best practice was continually being redefined – so much so that within 3 years Smarty Pants realised it would need to completely redevelop its product to improve its user-friendliness and enhance its functionality.

Smarty Pants could not rely on any publicly available information or design precedent to meet its new design ambitions. The new app development thus had to proceed from first principles with significant technical uncertainty as to how to build it so that that it still provided the same intuitive user experience but with enhanced functionality and back-end improvements. The challenge was heightened by the need to develop the app across multiple platforms to meet the new and growing demand from other iOS devices such as iPad as well as Android devices.

Smarty Pants believed that its development work would in all likelihood attract R&D tax benefits but, having never previously accessed any government Innovation Program, the company was unsure about the scope of its claim and how to write it up.

Core R&D Activities

Smarty Pants sought out Noah Connect to assist with determining how best to characterise its project activities and distinguish between “core” and “supporting” elements.

Noah Connect advised Smarty Pants that core R&D activities were now equated with “experimental” activities and that as a consequence some kind of “hypothesis” had to be articulated and subjected to testing. This language did not really resonate with Smarty Pants and so Noah Connect had to work to demystify it and explain how a “hypothesis” was really just a conjecture or proposition about something. In the context of app development, Noah Connect suggested that the hypothesis might be embodied in the proposition that if the app was re-architectured in a particular way and supported by algorithms that were correctly rendered mathematically then the desired enhancements in terms of speed of processing and enrichment of functionality could be delivered.

At a more granular level, there would have been similar hypotheses underpinning the design propositions for the business logic components, the user interface components and the presentation layer.

The hypotheses were tested by running the newly re-architectured app in a test environment for both iOS and Android devices. This exercise was to be regarded as the Proof-of-Concept (PoC).

The new knowledge generated from these activities included insights into how to configure and combine the structural elements of the application and its interfaces for a data rich mobile application, including new information on layered architecture designs and strategies for addressing device resource constraints such as memory size and processor speed.

The technical challenge was most acutely felt in the design and testing of the presentation layer which had to facilitate complex data entry and with huge volumes of complex data in a simplistic interactive user interface. As such, continual adjustment and iteration to the design of the presentation layer and logic was required. These changes informed further PoC testing on both iOS and Android platforms.

Supporting Activites

While the development of the interactive graphical user interface (GUI) was challenging, Smarty Pants did not believe it had acquired any new knowledge through this activity that would not have been transparent to an experienced app developer.   As a consequence, it was decided not to register the activity as a core R&D activity but rather to consider whether it might qualify as a directly related supporting activity, conducted for the dominant purpose of supporting the core R&D.

Through discussions with Noah Connect, Smarty Pants came to appreciate that there was indeed a direct, close and immediate nexus between the core R&D and the development of the new GUI because, without the GUI, the new architecture could not be fully validated through the course of the PoC.

What Documentation Did Smarty Pants Need To Keep?

Being a small app developer, Smarty Pants did not have any formal record keeping practises in place. Noah Connect advised Smarty Pants on the types of documentation and records that would need to be kept to substantiate its R&D tax claims. Specifically, Noah Connect was able to work with Smarty Pants to develop an Innovation Report template that:

  • Detailed the business objective of its proposed developments;
  • Articulated the hypothesis that was to be tested;
  • Detailed the design of the experiment to test the technical hypotheses; and
  • Recorded the test results, including ‘failed’ tests.

Noah Connect also helped Smarty Pants understand how other documents which were seemingly more business-as-usual (emails, management reports etc) could be modified or enriched to provide additional evidence of the experimental activity.

Other Areas of R&D Support

Noah Connect was also able to assist Smarty Pants in other areas, aside from R&D tax. This included providing advice on the extent to which the company might be able to obtain grant funding through a State or Federal Government Agency. In this respect, Smarty Pants was most interested to learn more about the new Commercialising Ideas steam of the Entrepreneurs Infrastructure Program.