About R&D activities
R&D activities can be conducted for an associated foreign corporation if certain conditions are met.
If you are an R&D entity conducting R&D activities for one or more foreign corporations, each being a resident of a foreign country that has a double tax agreement with Australia, you must first consider whether you meet the following further conditions:
- The R&D activity must be conducted solely in Australia or an external territory.
- If the R&D activity is a supporting activity, each corresponding core activity must be conducted solely within Australia or an external territory and be an activity for which you have registered or could register for the R&D tax incentive for the income year.
- When the R&D activity is conducted, each foreign resident must be either:
- connected with you
- an affiliate of you or you must be an affiliate of each foreign resident.
- The R&D activity must be conducted in accordance with a written agreement binding only on you and each foreign resident, specifying that the R&D activities are to be conducted either:
- directly by you
- indirectly by another entity under an agreement binding on you (for example conducting the R&D activity under a subcontract).
Any R&D entities conducting these activities as a subcontractor under a contract with a related R&D entity are ineligible for the R&D tax incentive.
These conditions are in addition to other requirements that must ordinarily 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).
You cannot claim a notional deduction for R&D activities conducted for a foreign entity that is not a foreign corporation.
When working out whether the R&D activity is conducted for one or more foreign corporations, 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, then it is ineligible for the purposes of the R&D tax incentive (refer to subsection 355-210(2).
You can assess the extent the R&D activity is conducted for the benefit of the foreign corporation by considering the extent the foreign corporation has:
- effective ownership of the results from the R&D activities
- a degree of control over the R&D activities
- borne the financial burden or risk arising from the R&D activities.
Expenses incurred on overseas R&D activities
Expenses incurred on overseas R&D activities cannot be claimed if the R&D activities are conducted for a foreign resident corporation.
Australian supporting R&D activities also cannot be claimed if the corresponding core R&D activity was conducted overseas. If a subsidiary incurs these kinds of R&D expenses, it is essential to correctly identify if the R&D is conducted for the subsidiary or for its foreign parent or another related entity.
These expenses cannot be claimed where contractual arrangements show a foreign corporation has the major benefit of the R&D. These expenses also cannot be claimed if in substance a foreign corporation will benefit from the ownership or exploitation of the results of the R&D, and funds and/or controls the conduct of the R&D activities.
Aggregated turnover
If you have foreign residents that are connected or affiliated with you, their income must be taken into account when you calculate your aggregated turnover to determine if you can claim the refundable or non-refundable tax offset. For more information see Step 3 – Calculate your aggregated turnover.
Example 1: R&D activity for a foreign company
Company J is a company incorporated in the UK. Company J establishes an Australian subsidiary. The subsidiary, Company K, is an Australian company wholly owned by Company J and qualifies as an R&D entity.
Under an agreement between the two parties, Company K agrees to undertake R&D activities in its Perth office solely for the benefit of Company J. The consideration is at arm's length and will be paid even if the R&D is not successful. Company J is legally entitled to all intellectual property arising from the R&D activities.
Company J is a foreign resident incorporated under foreign law and a resident of the UK, being a country Australia has a double tax agreement with. Company J is also connected with Company K, as Company J controls Company K.
The R&D activities are being conducted solely for Company J. Therefore, Company K 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
Example 2: R&D conducted for a foreign corporation
Company O is a large company incorporated in the UK with an annual turnover that exceeds $50m. Company O establishes an Australian subsidiary on 1 July 2020. The subsidiary, Company A, is an Australian company wholly owned by Company O and qualifies as an R&D entity. Most directors of Company A are also directors of Company O.
Under an agreement between the two parties:
- Company A agrees to undertake R&D activities for Company O
- Company O funds the R&D activities
- Company O legally owns all intellectual property arising from the R&D activities and benefits from the use and exploitation of the R&D results
- Key decisions regarding the conduct of the R&D activities are to be made by Company O.
Company A has no other business activities and subcontracts out all the R&D activities to other unrelated parties with other agreements. Core R&D activities 1 and 2 and supporting R&D activity 3 are undertaken in Australia and other activities are undertaken overseas.
Expenditure incurred on the R&D activities by Company A in the 2021 income year are as follows:
- Australian core R&D activities – $2,500,000
- Australian supporting R&D activity – $20,000
- Overseas activities – $800,000.
Company O is incorporated and a resident of the UK, with which Australia has a double tax agreement. Company O is also connected with Company A, as Company O controls Company A.
The R&D activities are being conducted solely for the benefit of foreign Company O because Company O has effective ownership of the results, controls the conduct of the R&D activities and bears the financial risk of the R&D activities. Company A can claim the R&D tax incentive for core R&D activities 1 and 2 undertaken in Australia provided all other requirements for claiming the R&D tax incentive are satisfied.
As the R&D activities are conducted for a foreign company:
- Company A cannot claim the R&D tax incentive for expenditure incurred on overseas activities.
- the expenditure incurred on the Australian supporting activity can only be claimed if it corresponds to the Australian core R&D activities and other requirements for claiming the R&D tax incentive are met.
When working out Company A’s aggregated turnover to determine if it can claim the refundable or non-refundable R&D tax offset, Company A must include:
- Company A’s annual turnover
- Company O’s annual turnover – as it is a connected entity
- the annual turnover of any other connected or affiliated entities.
This results in Company A’s aggregated turnover being greater than $20 million and therefore it cannot claim the refundable R&D tax offset. Instead, Company A can claim the non-refundable R&D tax offset for expenditure on eligible R&D activities.
End of exampleMore information can be found by referring to:
- section 355-210 of the ITAA 1997 for who R&D activities can be conducted for
- section 355-220 of the ITAA 1997 for conditions that must be satisfied for R&D activities to be conducted for one or more foreign entities
For the definition of:
- 'connected with' refer to section 328-125 of the ITAA 1997
- 'affiliate' refer to section 328-130 of the ITAA 1997.