• R&D activities conducted for you

    In most cases, before you can claim a notional deduction under the R&D tax incentive, an R&D activity must be conducted for you either:

    • solely within Australia or an external Territory
    • overseas if the R&D activity is covered by a finding from Innovation Australia (under paragraph 28C(1)(a) of the Industry Research and Development Act 1986).

    If parts of an R&D activity conducted for you are within Australia or an external Territory and parts are overseas, you must have a relevant finding from Innovation Australia for those parts conducted overseas.

    Working out whether R&D activities are carried out for you involves working out the extent to which those activities are conducted for your benefit rather than the benefit of another entity.

    Relevant factors to consider in working this out include who:

    Whether an R&D activity is conducted for you is a matter of fact. It is determined by whether the activity is conducted, in substance, to provide the majority of knowledge benefits arising from the activity, such as access to know-how or intellectual property, to you.

    This requires a weighing up of all the relevant factors.

    Example: R&D activities conducted for an R&D entity

    Under the terms of an agreement Company U, a company incorporated in the United States (US), agrees to conduct R&D activities solely in the US for Company A, an Australian company. The agreement specifies that Company A will benefit from all of the intellectual property obtained from the activities and will control how the activities are conducted.

    Before the agreement begins, Company A obtains a favourable finding from Innovation Australia that those R&D activities could not be conducted in Australia, under paragraph 28C(1)(a) of the Industry Research and Development Act 1986.

    As Company A will benefit from all of the intellectual property obtained from the activities, and controls the conduct of those R&D activities, the activities are being conducted solely for Company A. Therefore, if Company A meets the other eligibility criteria, they will be able to claim the R&D tax incentive.

    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 cannot claim the R&D tax incentive. If Company Z meets the other eligibility criteria, they will be able to claim the R&D tax incentive.

      Last modified: 25 Oct 2016QC 26121