The R&D tax incentive program provides companies with a tax offset on eligible expenditure related to their R&D activities. The incentive was set up to encourage companies to conduct more Australian based R&D, however Innovation Australia also “recognises the fact that Australia does not always have the necessary R&D expertise and facilities to meet industry needs and that research is increasingly global in nature”.
In certain circumstances, R&D activities conducted overseas may qualify to claim the R&D tax offset at the same rate as a company’s Australian based R&D, however overseas activities are subject to additional criteria and the issue of the ‘Overseas Finding’.
As with the Australian R&D activities, only companies incorporated in Australia are eligible to apply for the Overseas Finding. Companies need to apply prior to the end of the first financial year in which the overseas activities are being undertaken. That is, for companies undertaking overseas R&D activities with a financial year end of 30 June 2016, you must apply for the Overseas Finding prior to the 30 June 2016 deadline.
Eligible companies may also apply in advance of the company conducting the R&D activity overseas as a precertification of the R&D activity, to assist with planning future R&D activities.
Additional criteria for claiming overseas R&D activities
There are four conditions to be met to enable R&D activities conducted overseas to be eligible under the R&D tax incentive.
Condition 1: Activities must meet the definition of ‘Core R&D activities’
The overseas activity must be covered by an Overseas Finding that the activity is eligible under the section 355-25 of the Income Tax Assessment Act. That is, the overseas activity must meet the definition under the relevant legislation of ‘Core R&D activities’. These activities must be undertaken for the purpose of developing new knowledge, be experimental in nature and undertaken in a systematic process, in which the outcome of the experiment/s cannot be determined in advance.
Condition 2: Significant scientific link to Australian R&D Activities
The overseas activity must have a significant scientific link to one or more Core R&D activities conducted in Australia. Those Australian Core activities must be registered with Innovation Australia or reasonably likely to be conducted and registered in the future.
That is, the R&D undertaken overseas must be strongly related to the experimental activities in Australia.
Condition 3: Cannot be conducted in Australia
The overseas activity cannot be conducted solely in Australia because:
- it requires access to a facility, expertise or equipment not available in Australia
- it would contravene a law relating to quarantine
- it requires access to a population (of living things) not available in Australia, or
- it requires access to a geographical feature not available in Australia.
AusIndustry has released guidance material on the meaning of ‘not available in Australia’ in the context of seeking an Overseas Finding for activities.
Condition 4: Less than 50% of total cost of the project
The total amount of the overseas R&D activities (actual and reasonably anticipated) to be spent in all income years, by the company on the overseas must be less than the total amount spent on the Australian based Core and Supporting R&D activities.
Incidental R&D expenditure overseas
Incidental and ancillary R&D expenditure incurred overseas such as overseas seminars, training sessions or small equipment, tools and direct items purchased overseas do not need to apply for the Overseas Finding and can be picked up as part of the Australian R&D tax claim.