Who R&D activities are conducted for
In most cases, you can only claim the R&D tax incentive for expenditure on R&D activities conducted for you (and not to a significant extent for some other entity), with some exceptions regarding foreign corporations as outlined below.
Working out for whom the R&D activities are conducted involves determining who receives the major benefit from carrying out the activities, for example, who effectively owns the results of the activities, controls the conduct of the R&D activities and bears the financial risk.
Usually, you won't be able to claim for expenditure on R&D activities you conducted to a significant extent for another entity. However, provided all other eligibility requirements are met, the entity receiving the major benefit from the R&D activities may be able to claim these amounts.
If you meet certain conditions, you may also qualify for the R&D tax incentive if either:
- your R&D activities are conducted for an associated foreign corporation that is a resident of a country with which Australia has a comprehensive double tax agreement
- you are a foreign corporation carrying on your business through a permanent establishment in Australia, and the R&D activities are conducted for you and not for the permanent establishment.
For more information, refer to section 355-210 of the ITAA 1997.
If you are claiming the R&D tax incentive for a monetary contribution you have made under the Cooperative Research Centres (CRC) programExternal Link, it is not necessary to determine for whom R&D activities are conducted in order to determine eligibility to the R&D tax incentive for that expenditure. Refer to section 355-580 of the ITAA 1997 for notional deductions for the CRC program.
When determining who activities are conducted for, special rules apply if you are a partner of an R&D partnership or are part of a consolidated or MEC group.
Assessing if R&D activities are conducted for you
To claim notional deductions the R&D activity must be conducted for you. In some cases, the activity can be conducted for a foreign entity that is connected or affiliated with you. This requirement prevents duplication of claims by different entities for the same R&D activities.
You can't claim the expenditure if the activity is conducted, to a significant extent, for another entity that wouldn't be eligible to claim expenditure on the activity. For example, where the R&D activity is conducted for you but is also conducted to a significant extent for a trust, you can't claim. Whether or not that other entity is entitled to claim the R&D tax incentive will depend on whether it satisfies the various eligibility and expenditure conditions.
An R&D activity is considered to be conducted for the entity that receives the major benefit of the activity. This is assessed by considering who:
- effectively owns the results, that is, the 'know how', intellectual property or other similar results arising from your company's expenditure on the R&D activities
- has appropriate control over the way the R&D activities are conducted
- bears the financial risk of carrying out the R&D activities.
Whether an R&D activity is conducted for your company is a question of fact. It is determined by whether the activity is conducted, in substance, to provide the majority of knowledge benefits resulting from the activity (such as access to intellectual property) to your company.
For more information about this requirement, see section 355-210 of the ITAA 1997.
Example: R&D activities conducted for an R&D entity
Company Z is an R&D entity undertaking its business and R&D activities solely in its factory in Adelaide, South Australia. It is conducting R&D activities for itself solely within Australia and may be entitled to the R&D tax incentive.
Due to commercial reasons, Company Z decides to outsource its R&D activities to Company B, an R&D entity based in Melbourne, Victoria. Under the terms of the agreement between Company Z and Company B, Company B agrees to carry out the R&D activities for Company Z. The agreement provides Company B with broad direction about the specifications Company Z wants achieved by the work.
Company Z is obliged to pay Company B for the cost of these services, irrespective of the results obtained. Company Z receives the major benefit of the R&D expenditure it has incurred through being the only entity which can access intellectual property arising from the R&D activities for its own commercial purposes. Company B does not benefit at all.
Although Company B is not an agent for Company Z, Company B conducts the R&D activities for Company Z and not to any extent for its own purposes.
Therefore, Company B can't claim the R&D tax incentive. If Company Z meets the other eligibility criteria, they will be able to claim a notional deduction under the R&D tax incentive.
End of exampleEffective ownership of results
To decide whether a company has effective ownership you must look at:
- the circumstances in which R&D activities are conducted
- what practical, as well as formal, rights the company has to the results (such as know-how and intellectual property) from those activities.
For more information, see Effective ownership of results.
Control of R&D activities
R&D activities may often be carried out under contract by experts in a particular field. A company may still have an appropriate degree of control over the conduct of the R&D activities in these circumstances. For more information, see Appropriate degree of control.
Who bears the financial risk
If R&D activities are carried out for a company, we would generally expect that the company would bear the financial risk of the R&D activities.
For more information, see Financial risk for more information.
Foreign corporations and permanent establishments
Under subsection 355-210(1) of the ITAA 1997, you may also qualify for the R&D tax incentive, if certain conditions are met, if:
- your R&D activities are conducted for an associated foreign corporation that is a resident of a country with which Australia has a comprehensive double-tax agreement
- you are a foreign corporation carrying on your business through a permanent establishment in Australia and the R&D activities are conducted for you and not for the permanent establishment.
R&D partnerships
If you are a partner in an R&D partnership:
- special rules apply when working out who the R&D activities of the partnership are carried out for
- the R&D tax incentive rules treat
- R&D activities conducted by or for the R&D partnership as if they were conducted by or for the partner in a corresponding way
- relationships that the R&D partnership has with other entities that relate to the R&D activities as if the partner had corresponding relationships with those other entities
- things done by or for the R&D partnership that relate to the R&D activities as if they were instead done by or for the partner.
The R&D activities are also treated as if they are not conducted by or for the R&D partnership, or for any other partner of the R&D partnership.
These deeming rules mean an R&D entity that is a partner of an R&D partnership can satisfy the requirement that the R&D activities are conducted for that R&D entity and not for another.
For more information about:
- who the R&D activities can be conducted for, see subsection 355-210(1) of the ITAA 1997
- R&D partnerships and who the R&D activities are conducted for, see section 355-515 of the ITAA 1997.