R&D tax offset for foreign companies

July 26th, 2014

 The Australian 43.5% R&D tax offset is available to some foreign companies who undertake R&D in Australia.

Who is eligible?

Foreign entities may be eligible where they have setup:

  • an Australian resident company;
  • a corporation that is an Australian resident for taxation purposes; or
  • a permanent establishment in Australia.

What’s it worth?

The amount that a foreign entity can claim through the R&D Tax Incentive depends on the turnover of the company and whether it has recorded a profit or loss in the financial year in which it claims. The benefits range from a tax reduction of 10 cents for every dollar spent on R&D for profitable companies who turn over more than $20 million, to a cash refund of 43.5 cents in every dollar spent on R&D for companies in loss who turnover less than $20 million. The following table provides a more specific overview:

Condition Requirement
Group Turnover Less than $20 Million
Tax Position Australian Company is in Tax Loss
Benefit 43.5 cents in the dollar refund

Example 1:

  • An Australian subsidiary company, (Company K) may be eligible for the R&D tax incentive, where:
  • Company K, is an Australian company wholly owned by Company J and qualifies as an R&D entity;
  • its parent company (Company J) is a foreign resident incorporated under foreign law and is an incorporated in a country that has a double tax agreement with Australia;
  • Company J controls Company K;
  • Company K and J and any other companies that two companies are associated with, have a collective aggregated turnover of less that AU$20 million;
  • Under an agreement, Company K agrees to undertake R&D activities in its Australian office solely for the benefit of Company J;
  • In the agreement, Company J does not own any Intellectual Property (IP) generated out of Company K but is legally entitled to all IP arising from the R&D activities;
  • Company K incurs $100,000 in R&D expenditure for the 2017 Financial Year;
  • The R&D activities are being conducted solely for Company J;
  • The consideration between the two companies is at arm’s length and will be paid even if the R&D is not successful.
Example: Expenditure
Company J’s R&D expenditure $100,000
Company J’s R&D Tax Incentive Benefit $43,500 Cash Refunded to Company J

Requirements for setting up an Australian Company

Foreign companies will need to set up an Australian company, and expect the following:

  • Costs to setup the company to not exceed AU$2,000 to incorporate an eligible Australian entity in order to claim the R&D Tax incentive.
  • Company incorporation within Australia can take between  2-3 weeks.
  • Foreign entities will require the availability of an Australian resident director
  • The Australian Financial year runs from 1 July to the 30 June, however foreign entities can submit an application to the ATO for a substitute financial year to align with their parent company’s timeframes.

How do I claim my expenditure?

  • Eligible Australian subsidiaries will need to register their activities with AusIndustry no later than 10 months after the Australian companies year end.
  • R&D expenditure is claimed through the lodgement of an R&D Tax Incentive claim as part of their annual income tax return.

If you are a foreign entity interested in claiming the R&D Tax Incentive in Australia and applying for Research and Development grants, contact us to determine your eligibility and discuss your options.