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.

Find out more

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.

End of find out more
    Last modified: 25 Oct 2016QC 24779