Effective ownership of results
To work out whether you have effective ownership of the results you must look at the circumstances in which the R&D activities are conducted and what practical, as well as formal, rights you have to the results from those activities, such as the intellectual property, the know-how, or similar results arising from your R&D activities.
This does not necessarily mean that you must be the proprietor of a piece of intellectual property in any formal sense. These rights may not be available, or the formal owner of the resulting intellectual property may hold it on terms that you have all the advantages of ownership. For example, you may not be the formal holder of the patent but have the right (without further fee or payment) to:
- use a patent
- require the patent to be licensed
- restrict or direct further development based on the patent.
In most cases, a company with all those rights would have effective ownership of the results in question.
You may give some nominal rights of ownership to intellectual property or results to others without denying your effective ownership of them. For example, you might completely control results of R&D activities yet permit the contract researcher some exclusive scientific publication rights.
In some cases, use of results may only be possible in limited ways or for limited purposes, so that limited rights may amount to effective ownership. For example, exclusive rights of commercial use and development for only a few years might amount to full effective ownership in an area of R&D that is short-term.
Example: effective ownership of results
Company C is an R&D entity carrying out its business and R&D activities solely in Australia. Company C enters into a contract with a buyer, Company Z, to supply a new product meeting certain specifications. Both companies know that Company C will need a program of R&D to fulfil its contract. In fulfilling the supply contract, Company C is under no obligation to supply working papers or background research to Company Z.
Even if Company Z is the sole purchaser, or one of only a few potential purchasers, of the intended product, Company C effectively owns the results of the R&D. This is because Company C alone controls and uses the R&D results. Therefore, Company C can claim the R&D tax incentive, subject to meeting other requirements.
End of exampleFunding a project with other R&D entities
If you fund a project of R&D together with other eligible R&D entities as an R&D partnership, there are special rules about who the R&D activities of the partnership are conducted for.
If you are one of a number of entities that funds an R&D project as a group, but not as an R&D partnership, in order to satisfy the effective ownership test it is essential for each contributor to the project to have a proper and effective interest in the R&D results. Examples of situations where a number of entities may fund a R&D project include members of industry associations or members of certain a joint ventures.
Each member of the group eligible to claim the R&D tax incentive must separately register with the Department of Industry, Science and Resources.
Contributions to R&D activities can take many forms. For example, a contribution may be of money, services (provided free or for less than a proper fee), or the use of depreciating assets or premises. A contribution may also take the form of existing research results. The key to comparing contributions in money and in-kind is that contributions in-kind are valued when contributed, not in hindsight after the contributions have been used in R&D activities.
If you and a number of other entities share results of an R&D project or their use, when working out if the effective ownership test is satisfied you must consider whether each party's individual share in those results equates to their contribution made.
Whether each party's individual share in those results equates to their contribution made is a question of fact which will depend on the individual circumstances of the arrangement.
Example 1: R&D conducted jointly
Company X and Company Y both operate in the same industry and decide to pool their resources and undertake R&D activities jointly in a field of common interest. They both contribute equally to a pool of funds to fund the R&D activities. They agree that they will both have the same right to use the results of those activities in their businesses on completion of the activities.
Despite conducting R&D activities jointly, Company X and Company Y are not partners for income tax purposes. They do not carry on a business in common and are not in receipt of any income jointly.
The interests of Company X and Company Y in the 'know-how' (developed from the expenditure on the R&D activities) are the same and equate with their respective expenditures. As a result, both entities have effective ownership of the results arising from their own expenditure.
The expenditure of each company is not a recoupment or reimbursement of the other's expenditure, so Company X and Company Y each bear their share of the financial burden of the R&D activities. While the R&D activities might be said in one sense, to be conducted for them both, their joint input into what activities are carried on, their sharing of the financial burden and the nature of their respective interests in the results, where neither can restrict use by the other, means that their individual contributions are not on R&D activities conducted to a significant extent for the other.
End of example
Example 2: members of industry associations
Members of industry associations may effectively be co-owners of the R&D results obtained on their behalf. Free individual use of results is practical for them. Co-ownership of this kind is consistent with the R&D having been carried out for the members, with each having a proper and effective separate interest in the results. If each member makes a contribution, even if the contributions vary somewhat, those contributions would not usually be regarded as having been made for the purpose of carrying out R&D activities for another.
End of example
Example 3: shareholders of a company conducting R&D activities
A number of Australian companies establish and become shareholders of another company (also incorporated in Australia). This jointly owned company conducts R&D activities, or has them carried out. Those activities may be funded by the shareholder companies. The fact that shareholders expect an indirect benefit by way of dividends does not mean that the shareholder companies effectively own the results of the R&D. Further, it does not mean that the company in which they hold shares conducts its R&D activities for them.
End of exampleAppropriate degree of control
An appropriate degree of control over the conduct of R&D activities exists where you can:
- choose the project of R&D activities
- decide on major changes in direction of those activities
- stop an unproductive line of research
- decide whether to follow up (or not) an unexpected result
- decide to end a project.
If a researcher carries out a program of R&D activities for several companies as a group, these companies must maintain control over the conduct of the R&D activities. Any terms of the arrangement between the companies and the researcher that regulate how control is exercised must not preclude the companies' control in practice.
In some circumstances, activities undertaken for a group of companies are overseen by a committee. Where companies have R&D activities carried out for them, they may be able to exercise proper control over the conduct of those activities through a committee they have chosen (which includes people selected by each company to represent their interests).
Financial risk
If R&D activities are carried out for you, we would generally expect that you would bear the financial risk of the R&D activities. An example of an R&D entity bearing the financial risk in relation to R&D activities is where both of the following apply:
- The activities are merely incidental to the supply of a saleable product for a fixed price.
- That price bears no relationship to the extent of R&D activities the entity may need to conduct to produce the product.
Loans from related parties could also indicate that the entity is not bearing the financial risk, see Taxpayer Alert TA 2023/4 Research and development activities delivered by associated entities. If you do not bear the financial risk, but effectively own the results of R&D activities and control the way the activities are carried out, we may still regard the activities as being carried out for you (and not to a significant extent for someone else). In these cases however, if the 'expenditure not at risk' provisions apply to you it may not be possible for you to claim all or part of the R&D tax incentive. You may also need to apply the clawback adjustment provisions, resulting in additional income. For more information, see:
- section 355-405 Expenditure not at risk
- section 355-440 Clawback of R&D recoupments.
You are not entitled to a notional deduction under Division 355 of the ITAA 1997 for R&D expenses you incur if all of the following apply:
- you conduct the R&D activities under contract for another entity.
- you do not effectively own the results of the R&D activities.
- you do not bear the financial risk of the R&D activities you conduct because your expenditure is reimbursed by another party or recouped (including for example, by a government grant) This is irrespective of whether you produce successful results.
Example: contract to conduct R&D activity
Company A Pty Ltd and Company B Pty Ltd are both R&D entities. They both enter into a contract under which Company B Pty Ltd is to carry out specified services that qualify as R&D activities under Subdivision 355-A of the ITAA 1997.
Company A Pty Ltd has no expertise in the particular R&D field but has given broad direction in the contract to Company B Pty Ltd about the specifications it wants achieved by the services. Company A Pty Ltd is obliged to pay Company B Pty Ltd for the cost of those services, irrespective of the results obtained.
Company A Pty Ltd receives the major benefit from the R&D expenditure it has incurred because only it can access intellectual property arising from the R&D activities to use for its own commercial purposes. Company B Pty Ltd does not benefit at all in relation to this intellectual property or any other knowledge benefits gained. Company B Pty Ltd conducts the R&D activities for Company A Pty Ltd and not to any extent for its own purposes.
End of example
Example: supply of a product for a fixed price
Company G is an Australian company that carries on business in Australia. Company G carries out R&D activities that are incidental to the supply of a saleable product for a fixed price. The fixed price bears no relationship to the extent of the R&D activities the company may need to conduct in order to produce the product. Company G bears the financial risk for R&D activities.
End of example
Example: fee for design and testing of a product
Company E is an Australian company that carries on business in Australia. Company E supplies a saleable product to another company, Company F. Company E receives a fee for the design and testing of the product. The associated R&D expenditure is recouped wholly or in part by this fee. In these circumstances, Company E does not bear the financial risk for the R&D activities.
End of exampleFor more information, see:
- section 355-405 of the ITAA 1997 for expenditure not at risk
- section 355-435 of the ITAA 1997 for clawback
- Clawback of recoupments (government grants and reimbursements).