R&D done outside Australia counts for the R&D Tax Incentive only if the Australian company obtains an overseas finding. The application must be made before the end of the income year in which the overseas work is done, with no late applications. The work must be linked to Australian core R&D, impossible to do in Australia for a listed reason, cost less than the related Australian R&D, and be conducted for the Australian company.
Foreign-owned companies often have part of their R&D team, testing or laboratory work outside Australia. By default, only R&D conducted in Australia can be claimed. An overseas finding from the Department of Industry, Science and Resources is the only way to bring overseas work into the claim, and the rules are strict. This guide is part of our series on the R&D tax incentive for foreign-owned subsidiaries.
The four tests
Under the Industry Research and Development Act 1986 (s28D), the department can make a positive finding only if all of these are met:
- It is an R&D activity in its own right.
- It has a significant scientific link to core R&D activities conducted in Australia, meaning the Australian activities cannot be completed without it.
- It cannot be conducted in Australia because of one of the listed reasons:
- the necessary facility, expertise or equipment is not available in Australia;
- Australian biosecurity or quarantine law prevents it;
- Australia does not have a large enough population, for example enough patients for a clinical trial;
- Australia lacks the geographical or geological features needed.
- Overseas spending is less than the Australian spending on the related core and supporting activities.
Cost is not a reason. The department says "financial reasons are insufficient": that the work is cheaper, or that the team already exists overseas, does not satisfy the test.
The deadline is absolute
Apply before the end of the income year in which you conduct, or plan to conduct, the overseas activities. For a 30 June year-end, that means by 30 June. The department cannot accept late applications or grant extensions under any circumstances. Processing takes about 90 days on average, and a finding takes effect from the start of the income year in which the application is made. Plan overseas work at the start of the year, not at claim time.
The overseas work must be conducted for the Australian company
This is where foreign-owned groups most often go wrong. Even with a finding, the Australian company can only claim overseas activities that are conducted for it. The ATO says: "If you're a subsidiary, you can only claim expenses incurred on overseas R&D activities if they were conducted for you, not for a foreign resident corporation." The exception for R&D done for a foreign parent (s355-210(1)(c)) requires the work to be done solely in Australia, so it does not help here.
The ATO's Taxpayer Alert TA 2023/5 describes arrangements where an Australian company claims for overseas R&D that is funded by, directed by and benefits a foreign related party, and says it is reviewing them. If the overseas team works to the parent's agenda and the parent owns the results, expect the claim to be challenged.
Common situations
| Situation | Likely position |
|---|---|
| Clinical trial sites overseas because Australia lacks enough eligible patients | A recognised ground (population). Apply before year-end; see clinical trials. |
| Testing at a specialist overseas facility with no Australian equivalent | A recognised ground (facility or equipment), if the link to Australian core R&D is shown. |
| Offshore software developers who are cheaper than Australian hires | Cost is not a ground. Not claimable. |
| The parent's overseas R&D team working on the parent's product | Conducted for the parent, not the Australian company. Not claimable. |
Before you apply
- Register and describe the related Australian core activities first; the finding hangs off them.
- Show why the work cannot be done in Australia, with evidence (for example, facility searches or patient numbers).
- Budget the overseas and Australian spend to show the overseas amount is lower.
- Make sure the contracts show the Australian company commissions, controls and owns the overseas work.
We prepare overseas finding applications as part of our R&D tax incentive service.
Frequently asked questions
When is the deadline for an overseas finding?
Before the end of the income year in which the overseas R&D is conducted or planned. For a 30 June year-end that is 30 June. There are no late applications or extensions.
Can we claim overseas R&D because it is cheaper?
No. Cost is not a permitted reason. The work must be impossible to do in Australia because of a missing facility, expertise or equipment, biosecurity or quarantine law, population size, or geographical or geological features.
Can an Australian subsidiary claim R&D its parent's team does overseas?
No. Overseas activities can only be claimed if they are conducted for the Australian company. Work done for a foreign parent is not claimable, even with an overseas finding.
How long does an overseas finding take?
About 90 days on average. A finding takes effect from the start of the income year in which you apply, so apply early in the year.
This content is general information only and is not legal, financial or tax advice. Laws and regulations change often. For advice on your circumstances, speak to a qualified adviser.