How to Successfully Navigate the Overseas Finding Process for R&D Tax Incentives
Introduction
The Overseas Finding process is a crucial component of the Research & Development Tax Incentive (RDTI) in Australia, enabling companies to access a tax benefit for overseas activities that relate to an Australian R&D program. This guide explores the Overseas Finding process, the key conditions for eligibility, and recent ATO concerns as outlined in taxpayer alerts. We also highlight a successful case study with a cyber security innovator, Internet 2.0, to illustrate effective strategies for securing an Overseas Finding.
What is an Overseas Finding?
An Overseas Finding is an official determination from AusIndustry confirming whether R&D activities conducted overseas are eligible for the RDTI. A positive Overseas Finding provides assurance that overseas R&D activities will qualify for tax offsets and is binding on the Australian Tax Office (ATO).
Without this finding, you cannot claim overseas expenditure under the RDTI program.
Key Conditions for an Overseas Finding
To obtain an Overseas Finding, your overseas R&D activities must meet the following conditions:
R&D Activity Requirement - The overseas activity must qualify as either a core R&D activity or a supporting R&D activity under the RDTI program.
Scientific Link to Australian R&D - You must demonstrate a clear connection between the overseas activity and an eligible Australian core R&D activity. The overseas activity must be essential for completing the Australian R&D.
Cannot be conducted solely in Australia - You must show why the activity cannot be conducted solely in Australia due to specific reasons such as unique facilities, expertise, or equipment, legal constraints, or geographical features.
Cost Comparison - The cost of conducting the overseas R&D activities must be less than the cost of conducting the related Australian R&D activities.
Application Process
Submission - Applications for an Overseas Finding must be submitted to AusIndustry before the end of the income year in which you conduct or plan to conduct the activity. Late applications are not accepted.
Documentation - Ensure your application is complete and includes all necessary supporting documents to avoid delays.
Review and Verification - AusIndustry will review your application, conduct background research, and may request additional information.
Outcome - The possible outcomes are:
All activities are eligible.
Activities do not meet the conditions and are ineligible.
Some or part of the activities are eligible.
Refusal to make a finding.
A notice or certificate of the finding will be issued, and a copy will be sent to the ATO.
Our experience with the Overseas Finding process
We often tell clients that going through the Overseas or Advance Finding process is the equivalent of asking AusIndustry to audit your activities. Because AusIndustry is required to make a formal finding that is binding on the ATO, the process requires preparation and submission of information beyond what is needed for an annual Australian RDTI claim.
Our experience has shown that a strategic approach is crucial to successfully managing this process. These are some of the key strategic points to be considered:
It’s essential to structure your R&D project and application in a manner that ensures it meets the stringent requirements for an Overseas Finding to be secured. This includes defining the scope of each activity and where they occur, detailing how they interconnect, and compiling an anticipated budget for the activity. We’ve found it useful to prepare and provide project plans, timelines, and evidence of ongoing and future activities as attachments to the application. Its particularly important to demonstrate the significant scientific link between the activities or, in other words, why the Australian activity cannot be completed without undertaking the overseas activity.
The Overseas Finding process often involves back-and-forth interactions with AusIndustry or their representatives, requiring a strategic approach to how you present and support your claims. This includes preparing detailed, clear, and well-organised documentation and being ready to provide additional information or clarification as requested.
To satisfy the requirement that the R&D activities cannot be conducted solely in Australia, you must provide evidence of specific reasons for undertaking R&D activities overseas such as unique expertise, facilities, or geographical features unavailable in Australia. For our clients, this has involved contacting Australian research institutions or suppliers for expert opinions, reviewing existing literature, or otherwise documenting the lack of necessary resources or technologies in Australia. This information is then required to be attached to the submission.
Because of the requirement that more than 50% of expenditure be incurred on Australian R&D activities, accurate and detailed budgeting is crucial. You need to calculate and compare the anticipated costs of the overseas R&D activities with the costs of the related activities conducted solely in Australia. Ensure that your budget reflects realistic estimates and includes all relevant project expenses to support your claim. If you have started the activities and can attach quotes or contracts, this can be worthwhile.
A Successful Overseas Finding - Internet 2.0’s 5th Column AI platform to identify inauthentic social media accounts
The Client
Internet 2.0 Pty Limited (“Internet 2.0”) is a leading Australian cyber security organisation dedicated to defending clients from advanced cyber threats. Their core products include Cloaking Firewall, Malcore, and 5th Column, with a focus on building intellectual property through sophisticated intelligence consulting.
Despite working with another advisor to make R&D tax claims for their Australian activities, Internet 2.0 had not fully explored the potential for claiming R&D tax offsets for their overseas work. Of particular interest was their ongoing investment in 5th column - an AI-powered platform that uses machine learning algorithms to identify inauthentic social media accounts. Due to requirements for large datasets and specific AI expertise, Internet 2.0 was carrying out a portion of the project outside of Australia.
The Process
When assessing the eligibility of Internet 2.0’s R&D activities for an R&D tax offset, we cast the net widely and discussed the nature of both the Australian and overseas activities. Following technical discussions and review of documentation (contracts, invoices, project plans, etc.), Internet 2.0 and Intellect Labs worked to develop a clear strategy for an Overseas Finding Application.
As part of this process, Intellect Labs assisted Internet 2.0 to gather the necessary information to support the Application. This included reviewing publicly available data repositories and differentiating available datasets from Internet 2.0’s needs, as well as contacting a local University to assess availability of expertise in Australia.
After analysing the project to confirm that it met the requirements for an Overseas Finding, we prepared the initial application and submitted it to AusIndustry before the end of the income year.
The Result
AusIndustry appointed Proximity Advisory Services, a private consultancy firm, to evaluate Internet 2.0’s Overseas Finding application. The assessor’s review process was thorough and included follow-up questions to clarify uncertainties and ensure that all aspects of the application met AusIndustry’s criteria.
Internet 2.0 successfully secured a positive finding for both their Overseas and related Australian R&D activities. Following the finding, we assisted Internet 2.0 to prepare and lodge its claim for the first income year covered by the finding. This resulted in a significant tax refund that has now been released and will be used by the company to reinvest in its R&D program.
Internet 2.0 CEO David Robinson and company shareholders were thrilled with the outcome. “Engaging Intellect Labs proved to be a game changer for us. Their support has far exceeded the level of service we got from our previous advisors, and their fixed fee approach has provided us with certainty and tremendous value” David said.
Recognising the value of a formal finding for the company’s investors and future, Intellect Labs is now supporting Internet 2.0 to pursue additional Advance Finding applications as part of its R&D claim strategy.
Conclusion
Navigating the Overseas Finding process is essential for companies seeking to include their overseas R&D activities in their R&D Tax Incentive claims. Understanding the eligibility conditions, adhering to best practices, and staying informed about recent ATO concerns are crucial for success.
The case illustrates how a well-prepared Overseas Finding application can lead to significant financial support and increased investor confidence. It underscores the importance of strategic planning and thorough documentation in the R&D tax incentive process.
By learning from successful case studies like Internet 2.0’s, businesses can better manage the Overseas Finding process and secure valuable tax benefits for their innovative projects.
If you would like to talk more about how we can help you foster your ideas, please don’t hesitate to reach out.