Claiming R&D Tax Offsets for Activities Outside Australia

The Research and Development Tax Incentive (R&DTI) is an Australian Government program that provides a tax offset for eligible R&D activities. The program is designed to encourage businesses to invest in R&D and innovation to help boost Australia’s economic growth and create local jobs.

While the program is mainly focussed on R&D activities that happen in Australia, the R&DTI also allows businesses to claim some eligible overseas R&D activities.

To claim overseas R&D activities, businesses must first obtain an Advance Overseas Finding from the Department of Industry, Science and Resources (DISR).

What is an Advance Overseas Finding?

An Advance Overseas Finding is a decision from DISR that confirms whether an overseas activity is eligible for the R&DTI. The decision is binding on the Commissioner of Taxation and can provide businesses with certainty about their eligibility before they commence activities and incur expenditure.

Importantly, the application is separate from the normal R&DTI registration process and businesses must apply before the end of the income year in which they start to undertake the overseas R&D.

What overseas R&D activities are eligible?

To be eligible for an Advance Overseas Finding, an overseas activity must meet the following four conditions: 

1.    It must be an R&D activity under the tax definition.

2.    It must have a significant scientific link to an Australian core R&D activity. This means that the overseas activity must be essential to the completion of the Australian core R&D activity.

 3.    It must not be able to be conducted in Australia or its external Territories for one of the following four reasons:

o   It requires facilities, expertise, or equipment that are not available in Australia.

o   It would contravene a law relating to quarantine.

o   It requires a population (of living things) that are not available in Australia.

o   It requires access to geographical or geological features that are not available in Australia.

4.    The costs of the overseas R&D activities must be less than the costs of related R&D activities undertaken solely in Australia.

Do I need an overseas finding?

The requirement for an Advance Overseas Finding relates to overseas R&D activities and, consequently, expenditure incurred on overseas R&D activities. The ATO considers the physical location of where the work is conducted in determining where an activity is undertaken.

The bottom line is that if you have undertaken R&D activities overseas, you cannot register these activities nor claim expenditure on these activities without an Advance Overseas Finding.

Superseded guidance from the ATO indicated that ancillary, incidental, or insignificant expenditure on overseas activities could be claimed without an Advance Overseas Finding. The ATO has seemingly changed its interpretation on this point and it should now be considered that any overseas R&D activities require an Advance Overseas Finding.

What are the consequences of claiming expenditure on overseas R&D activities without an Advance Overseas Finding?

A recent case gives an example of what can go wrong for a business that doesn’t correctly and transparently distinguish between Australian and overseas R&D activities.

The Federal Court ruled that a business had to repay over $700,000 in tax benefits plus a ~$350,000 penalty because of incorrect information in their R&DTI application.

In the case, the Court determined that the acquisition of a good or service that is not off the shelf can constitute a supporting R&D activity requiring registration. This contrasts with the taxpayer’s argument it was merely purchasing overseas components for activities solely undertaken in Australia, and therefore, did not constitute an “activity” for the purpose of the R&DTI.

The Court’s finding of fact on this point was that the activities were much more than ‘mere supply’ and involved the ‘design, development and fabrication… for the assembly of the project’s prototypes.’

Key takeaways:

• When seeking to claim the costs of overseas R&D activities, companies must ensure that they have a positive outcome for an Overseas Finding Application lodged with DISR.

• The acquisition of an overseas good or service that is not off the shelf can constitute an R&D activity requiring registration.

• When purchasing goods or services from overseas for Australian R&D activities, a careful analysis and assessment should be made of the work that is being conducted overseas in producing those components, and whether an overseas finding is required.

• Being transparent where costs and activities occur overseas is the right approach and might help avoid or reduce penalties associated with lack of disclosures.

Overseas R&D activities are a complex area of the program and the right advice is critical. Reach out to our team if you have any questions about your R&D undertaken overseas.