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  • R&D activities conducted by a permanent establishment

    R&D activities can be conducted for a foreign corporation by a permanent establishment it has in Australia, if certain conditions are met.

    If you are an R&D entity that is a foreign body corporate carrying on business through a permanent establishment in Australia, and R&D activities are conducted for you but not for the purposes of that permanent establishment, you must first consider whether you meet the further conditions for R&D activities conducted by a permanent establishment for other parts of the body corporate. These further conditions are that:

    • the R&D activity must be conducted solely within Australia or an external territory
    • if the R&D activity is a supporting R&D activity, each corresponding core activity (that you, the body corporate has registered for an income year) must be an activity conducted solely within Australia or an external Territory
    • there must be written evidence that the R&D activity is conducted for you (the body corporate) and not for the purposes of the permanent establishment.

    These conditions are in addition to other requirements that must be satisfied in order to claim the R&D tax incentive (for example, those about notional deductions for expenditure, registration and having eligible R&D activities).

    When working out whether the R&D activity is conducted for you (the foreign body corporate), you must also consider the extent to which the R&D activity is conducted for the benefit of any other entity to whom the conditions in subsection 355-210(1) do not apply. If the R&D activity is also conducted to a significant extent for such another entity, the R&D tax incentive cannot be claimed (refer to subsection 355-210(2)).

    You can assess if the R&D activity is conducted to a significant extent for the benefit of another entity by considering the extent to which that other entity:

    • has effective ownership of the results from the R&D activities
    • has a degree of control over the R&D activities
    • bears the financial burden or risk arising from the R&D activities.

    See also:

    • Section 355-210 of the ITAA 1997 for information about who R&D activities can be conducted for.
    • Section 355-215 of the ITAA 1997 for information about conditions that must be satisfied for a permanent establishment carrying out R&D activities for other parts of the body corporate.

    CRC program

    If you are claiming the R&D tax incentive for a monetary contribution you have made under the CRC program, it is not necessary to work out who R&D activities are conducted for in order to work out eligibility for the R&D tax incentive for that expenditure.

    See also:

    • Section 355-580 of the ITAA 1997 for more information on notional deductions for CRC contributions

    Example: R&D activities conducted by a permanent establishment

    Company H is a company incorporated in the United Kingdom (UK). It is an R&D entity to the extent it carries on business in Sydney through a permanent establishment. In a particular income year, Company H conducts R&D activities solely in its Sydney office. The company holds written records to show that the R&D activity is conducted for Company H, but not for the purposes of the permanent establishment.

    The R&D activities are being conducted solely for Company H. Therefore, Company H may be able to claim the R&D tax incentive provided all other requirements for claiming the R&D tax incentive are also satisfied.

    End of example
      Last modified: 28 Feb 2017QC 26121