An Australian company can claim for R&D it does here, including work done for its overseas parent. What it gets back depends on the size of the whole group and how the work is paid for.
Prime Innovation is the R&D practice of Prime Partners, chartered accountants in North Sydney and Orange. We work with the Australian companies of overseas groups on the claim, the group questions behind it and the tax around it, and we report to head office in terms its finance team will recognise.
The R&D Tax Incentive is claimed by the company in Australia, never by the overseas parent. It can include R&D the company does for its parent, where the parent owns it and is resident in a country Australia has a tax treaty with. Turnover is counted across the whole group worldwide, so whether the Australian company receives the offset as cash or as a credit against tax depends on the size of the group, not the size of the Australian company. And only work done in Australia counts, because a foreign-owned company cannot use an overseas finding. On the ATO’s figures, about 7 per cent of the companies claiming in 2022-23 were foreign owned, which is around 900 companies, derived from its transparency report.
A company incorporated in Australia can claim. So can a company incorporated overseas that is resident in a country Australia has a tax treaty with and carries on business here through a permanent establishment.
The overseas parent cannot claim directly. The staff, the contracts and the invoices for the work need to sit with the Australian company from the start.
The Australian company registers its activities with AusIndustry within ten months of the end of its income year, before the offset goes into its tax return.
The evidence of the work, the hypotheses, the results and the time records, has to support the Australian company’s claim, even where the project is run from head office.
A company can usually only claim for R&D it does for its own benefit. The rules make an exception for foreign-owned companies: the Australian company can claim for R&D it does for its overseas parent, even though the parent owns the results, where three things are true.
Aggregated turnover adds in every connected and affiliated company, in Australia and overseas. If the whole group turns over less than $20 million, the Australian company receives the refundable offset as cash. If it turns over more, the non-refundable offset applies.
Plenty of overseas groups are under the line worldwide, from start-ups with no sales yet to established businesses that are still small. Their Australian company receives the 43.5 per cent offset as cash, even while it is making a loss, which is why so many overseas biotechs run early trials here.
The company tax rate plus a premium of 8.5 per cent on R&D spending up to 2 per cent of total expenditure, and 16.5 per cent above that. The rates and a worked example are on our page for larger companies.
A non-refundable offset only reduces tax the Australian company pays. A company that earns a small margin on its work for the group, or makes a loss, may not be able to use the offset in the year, and carries it forward instead. That timing belongs in the group’s forecast.
Where the Australian company is paid an amount that covers its R&D costs whatever the result, the at risk rule can reduce or remove the claim. A cost plus service fee from the parent is the usual way this happens.
Funding the R&D through share capital or a loan, under an agreement written with the rule in mind, usually keeps the claim intact. It needs settling before the money moves, because it cannot be rearranged afterwards.
Payments between the Australian company and the rest of the group have to be at arm’s length. The R&D claim and the transfer pricing file need to tell the same story, so we prepare them side by side.
Where the parent owns the intellectual property, the agreement between the companies should say so plainly, along with what the Australian company does and who bears the cost.
Many foreign-owned companies have permission to use a different income year, so their accounts line up with the group’s, often ending on 31 December. The R&D registration deadline follows the company’s own year: ten months after it ends. For a year ending 31 December that is 31 October, rather than the 30 April most Australian companies work to. Missing it usually means losing the claim for that year.
Which activities qualify, AusIndustry registration, the R&D schedule and the company tax return, prepared together so the figures agree.
Who is connected and affiliated across the group, which offset applies and what it is worth to the Australian company in the year.
How the parent funds the work and what the agreement between the companies says, settled before the work starts.
The arm’s length position on payments within the group, consistent with the R&D claim.
A short, plain account of the claim for the group’s finance team, and figures prepared for the group accounts on its timetable.
The fee is agreed before the work starts and does not depend on the size of the offset.
Most of what decides the claim is settled before the work starts: who owns what, how it is funded and where it is done. The sooner we start, the more of it we can get right.
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