Division 355 - Research and Development  

Subdivision 355-D - Notional deductions for R & D expenditure  

SECTION 355-220   R & D activities conducted for a foreign entity  

For the purposes of paragraph 355-210(1)(c) , the conditions for an *R & D activity conducted for one or more foreign residents are as follows:

(a) the R & D activity is conducted solely within Australia;

(b) if the R & D activity is a *supporting R & D activity, each corresponding *core R & D activity must be:

(i) an activity conducted, or to be conducted, solely within Australia; and

(ii) an activity for which the *R & D entity is or has been registered under section 27A of the Industry Research and Development Act 1986 , or could be registered for an income year if that core R & D activity were conducted during the income year;

(c) when the R & D activity is conducted:

(i) each foreign resident is *connected with the R & D entity; or

(ii) for each foreign resident - either the foreign resident is an *affiliate of the R & D entity or the R & D entity is an affiliate of the foreign resident;

(d) the R & D activity is conducted:

(i) in accordance with a written agreement binding on only the R & D entity and each foreign resident; and

(ii) either directly by the R & D entity, or indirectly by another entity under an agreement binding on the R & D entity;

(e) the R & D activity is not conducted in connection with an agreement covered by subsection (2).


An example of conducting an R & D activity indirectly under a contract is conducting the R & D activity under a subcontract, or one of a chain of subcontracts, under the contract.

An agreement is covered by this subsection if:

(a) the agreement is binding on the R & D entity (the first entity ) and an R & D entity that:

(i) is *connected with the first entity; or

(ii) has the first entity as an *affiliate, or is an affiliate of the first entity;
while the *R & D activity is conducted; and

(b) the R & D activity is to be conducted under the agreement by the first entity or by an entity:

(i) who is not bound by the agreement; and

(ii) who is to conduct the R & D activity directly or indirectly under another agreement to which the first entity is, or will become, bound.

One effect of this subsection is that, even if the R & D entity has an agreement with the foreign resident for conducting the R & D activity, the R & D entity cannot deduct expenditure incurred:

  • (a) for conducting the R & D activity as a subcontractor under a subcontract with an affiliated R & D entity; or
  • (b) if the R & D entity is a subcontractor to an affiliated R & D entity - for further subcontracting the conducting of the R & D activity.

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