Are you eligible to claim overseas R&D expenditure?

By Deepika Gunasekaran | Senior Consultant, R&D Services Our clients often ask us if they can claim overseas expenditure as part of their Australian R&D Tax Incentive claim. Generally, only R&D activities conducted in Australia qualify for the R&D Tax Incentive. However, in some circumstances and subject to special rules, R&D activities conducted overseas may qualify. Australian companies that meet certain conditions for overseas R&D activities are entitled to up to 43.5 cents in the dollar. However, understanding whether or not your company qualifies for the R&D Tax Incentive for overseas expenditure isn’t always straightforward. Let us explain why.

Introducing the Advanced Overseas Finding

In order for companies to claim eligible overseas R&D activities and associated costs, there are specific rules that apply. These rules are in the form of a special finding developed and managed by Innovation Australia, and are more commonly known as ‘Advanced Overseas Finding’. Innovation Australia uses Advanced Overseas Finding to determine whether a company’s overseas R&D activities are eligible.

Demonstrate eligibility

To achieve a favourable Advanced Overseas Finding, a company needs to demonstrate the following: Firstly, is the R&D activity eligible? When it comes to assessing overseas activity, the same R&D principles apply. For example:
  • Are these activities undertaken for the purpose of generating new knowledge?
  • Are they experimental in nature and undertaken in a systematic process?
  • Can the outcome of the experiments be determined in advance?
Secondly, is there a significant scientific link? There must be a justifiable or reasonable scientific link back to core registered R&D research activities that would be simultaneously conducted in Australia. Thirdly, is there a strong reason as to why the R&D activity can’t be conducted in Australia? It’s this question that’s the most important but also the most difficult to determine. Whilst AusIndustry allows companies to claim overseas R&D activities, it’s generally reserved for companies that can prove that Australia can’t offer all the necessary R&D expertise, research facilities or manufacturing capacity to meet industry needs. You should also consider the following questions:
  • Is the location of the R&D activities solely driven by cost considerations?
  • Do you need access to a manufacturing facility that’s only available overseas?
  • Do you need specialist skills that are not easily available in Australia?
  • Do you need access to a population greater than Australia?
  • Do you need access to geographical features not available in Australia?
  • Would conducting the R&D activity in Australia contravene a law relating to quarantine?
  • Are the costs of the overseas activities less than 50% of the total project costs?

Review the location of your R&D personnel

If a company engages a contractor who is an Australian resident for tax purposes, but is based overseas whilst conducting R&D activity, then this type of outsourcing arrangement is generally ineligible. However, if the contractor offers specialist skills that are considered critically low or non-existent in Australia, such as Automotive or Civil Engineering, for example, there’s a chance of eligibility.

Determine costs

It’s a legal requirement for the majority of project costs, i.e. greater than 50%, to be spent on Australian based R&D activities. So when completing an Advanced Overseas Finding, a company must ensure that the majority of costs are spent here in Australia. Advanced Overseas Finding usually requires proving advanced knowledge of the projects as well as providing future projections of costs.

Provide supporting documentation

It’s imperative for companies to implement regular R&D documentation and record keeping processes throughout the year. Much like R&D Tax Incentive claims made for Australian based activity, companies must have sufficient records to substantiate its overseas R&D activities and all costs associated. With Advanced Overseas Findings, companies will need to go the extra mile to demonstrate precisely why they’re unable to conduct their R&D activity in Australia. The type of documentation required depends on the reasoning for going overseas and the type of industry the company is associated with. In essence, a company needs to prove why certain conditions are not available in Australia and also show it conducted a reasonable Australia-wide search for these specific requirements.

Understand claim periods

An Advanced Overseas Finding binding decision provides companies with certainty about its overseas R&D activities and associated R&D expenditure. The Advanced Overseas Finding Application allows companies to include overseas activities for up to three income years. However, recent guidance released by AusIndustry states that companies are allowed to claim overseas R&D activities for the full duration of the activity should it exceed beyond the initially registered period of three income years. A new Advanced Overseas Finding Application may be required where activities are materially different to the description in the original application – either because the activities have changed and no longer match what was originally described, or, were undertaken in a different manner. For example, if a company is undertaking a new clinical trial and recruiting patients in different overseas territories to test an oncology indication, then this would require a new Advanced Overseas Finding Application. Findings on these activities are not backdated and only have effect from the start of the income year in which the subsequent application is made.

Review timings

The Advanced Overseas Finding Application is required in the year of income of which the overseas activity was undertaken. For example, for any overseas R&D activity undertaken in the year ending June 2018, an application must be lodged by June 30 2018. An Advanced Overseas Finding is only a pre-condition that allows companies to register their overseas activity. As with local R&D activity, you must also register your overseas activity through an annual registration process by submitting an R&D application within 10 months of your income year-end.

Consider ancillary overseas expenditure

There are some forms of expenditure that are acceptable without an Advanced Overseas Finding. These include any incidentals or ancillary expenditure such as attending overseas seminars or training sessions relating to the R&D project being undertaken. Additionally, small equipment, tools and electronic componentry purchased overseas don’t need an Advanced Overseas Finding. However, there are still certain rules that apply to the amount you can claim for such incidental and ancillary overseas costs.

Are you conducting R&D activity overseas?

As we’ve shown, there are a range of scenarios where a company may have incurred R&D expenditure outside of Australia. In addition, Advanced Overseas Finding takes plenty of time and preparation and you’re always best to speak with someone who has a thorough knowledge of the process and application. If you believe that you’re entitled to the R&D Tax Incentive and have completed R&D activity overseas, then speak with CharterNet today.