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  • Attention


    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    For whom are R&D activities conducted?

    Entitlement to the R&D tax incentive offset is based on an eligible company having incurred expenditure on R&D activities that it can notionally deduct.

    Generally, expenditure on R&D activities conducted – to a significant extent – for another entity will not be notionally deductible.

    There are some exceptions to this where the R&D activities are conducted for associated foreign corporations.

    The requirement that a company's eligible expenditure be on R&D activities conducted for it and not – to a significant extent – for some other entity is intended to limit claims to cases where the company receives the major benefit from its expenditure on those activities.

    In some cases it will also prevent duplication of claims by different entities where essentially the same R&D activities are involved.

    Working out whether your company receives the major benefit from the R&D activities involves working out the extent to which it conducted those activities for itself rather than for another entity. You can assess this by considering who:

    • 'effectively owns' 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 burden of carrying out the R&D activities.

    Whether an R&D activity is conducted for your company is a matter 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.

    Effective ownership of results

    To decide whether a company has effective ownership you must look at the circumstances in which R&D activities are conducted and what practical, as well as formal, rights the company has to the results from those activities, such as know-how and intellectual property.

    Having effective ownership does not necessarily mean that your company is the proprietor of a piece of intellectual property in any formal sense. Such rights may not be available, or the formal owner of the resulting intellectual property may hold it on such terms that the company has all of the advantages of formal ownership. For example, it might have the right to use a patent over the R&D results, without further fee or payment, for the expected useful life of the patent.

    You may give some theoretical rights of ownership, in relation to intellectual property or results, to others without denying your effective ownership of them. For example, you might completely control the commercial results of R&D activities, yet permit the contract researcher some exclusive scientific publication rights.

    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 if it can:

    • choose the project of R&D
    • decide on major changes of direction in those activities
    • stop an unproductive line of research
    • decide whether to follow up an unexpected result
    • decide to end the project.

    Who bears the financial risk?

    Where R&D activities are carried out for a company, it would generally be expected that it would bear the financial risk of the R&D activities undertaken. If a company does not bear the financial risk, but effectively owns the results of R&D activities and controls the way the activities are conducted, the activities may still be regarded as being carried out for the company. However, under either of the following provisions of the Income Tax Assessment Act 1997 (ITAA 1997), a company's notional deduction may be reduced:

    An example of an R&D entity bearing the financial risk in relation to R&D activities is where the activities are merely incidental to the supply of a saleable product for a fixed price, and that price bears no relationship to the extent of R&D activities the entity may need to conduct to produce the product.

    An R&D entity is not entitled to a notional deduction under Division 355 of the ITAA 1997 for R&D expenses it incurs, if all of the following apply:

    • it conducts the R&D activities under contract for another entity
    • it does not own the results of the R&D activities
    • it does not bear the financial risk of the R&D activities it conducts because it can recoup its expenditure on those activities irrespective of whether they produce successful results.


    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

    Foreign corporations and permanent establishments

    If certain conditions are met, your company may be eligible for the R&D tax incentive for R&D activities conducted for one or more associated foreign corporations.

    For more information about R&D activities being conducted for a foreign corporation, and foreign corporations carrying on business through a permanent establishment, refer to section Eligibility in Guide to the research and development tax incentive.

    More information

    For information on registration, eligibility of R&D activities and findings, contact AusIndustry

    • Visit the ‘Contact Us’ page on the website for details on how to contact AusIndustry via phone (13 28 46), email or web chat.

    For information on eligible entities and amounts you can claim, contact the ATO

      Last modified: 28 Feb 2017QC 24779