An Australian subsidiary of a foreign company can claim the R&D Tax Incentive on eligible R&D it conducts in Australia. Aggregated turnover includes the whole group worldwide: under $20 million the offset is refundable (43.5% for most companies); at $20 million or more it is non-refundable (33.5% to 46.5%). R&D done for a connected foreign parent can still qualify if the parent is resident in a double tax agreement country and there is a written agreement.
Australia's R&D Tax Incentive (RDTI) is open to any company incorporated in Australia, whoever owns it. That makes it one of the most valuable tax measures available to overseas groups that run research, engineering or clinical work here. But the rules were written with groups in mind, and a subsidiary's claim turns on questions a stand-alone local company never has to ask: whose turnover counts, whose R&D it really is, who owns the results and where the work happens.
This page sets out those questions in the order we work through them with clients, with a detailed guide for each. For how the program works in general, see our R&D Tax Incentive guide for foreign companies; for early-stage companies, see R&D for foreign startups.
The five questions that decide a subsidiary's claim
| Question | Why it matters | Detailed guide |
|---|---|---|
| 1. What is the group's aggregated turnover? | The whole group worldwide counts. It decides between a cash refund and a non-refundable offset. | Aggregated turnover for foreign groups |
| 2. Who is the R&D conducted for? | The claimant must get the major benefit, unless the work is done for a foreign group company that meets the treaty-country rules. | R&D for a foreign parent company |
| 3. Who owns the IP and how is the subsidiary paid? | IP ownership, control and financial risk point to whose R&D it is. Payments to related parties are capped and timed. | Intercompany agreements, IP and transfer pricing |
| 4. Where is the work done? | Only Australian work counts, unless an overseas finding is obtained before the end of the income year. | Overseas findings |
| 5. Is it a clinical trial? | Phase 0 to III trials of unapproved therapeutic goods are treated as core R&D by a specific determination. | Clinical trials in Australia |
Which offset does a foreign-owned subsidiary get?
The offset rate is the company's tax rate plus a premium (s355-100 ITAA 1997). Which version applies depends on aggregated turnover, which includes the turnover of every connected entity and affiliate, Australian or foreign. The ATO is explicit that annual turnover "includes income on a worldwide basis, regardless of whether it is subject to tax in Australia".
| Group position | Offset | Rate |
|---|---|---|
| Aggregated turnover under $20M, base rate entity (25% tax) | Refundable | 43.5% |
| Aggregated turnover under $20M, more than 80% passive income (30% tax) | Refundable | 48.5% |
| Aggregated turnover $20M to under $50M, base rate entity | Non-refundable | 33.5% (R&D intensity up to 2%), 41.5% above |
| Aggregated turnover $50M or more (30% tax) | Non-refundable | 38.5% (intensity up to 2%), 46.5% above |
| Controlled 50% or more by tax-exempt entities | Non-refundable only | As above, by tax rate and intensity |
R&D intensity is the subsidiary's notional R&D deductions divided by its total expenses for the year (s355-115). The higher premium applies only to the part of the R&D spend above 2% of total expenses. Notional deductions above $150 million a year earn only the company tax rate. There is no annual cap on cash refunds: a $4 million cap was proposed in 2018 but never became law.
Worked example: a subsidiary of a large group
A UK group with worldwide turnover of about AU$300 million runs an engineering team in Sydney through its Australian Pty Ltd. The subsidiary's total expenses are AU$5 million, of which AU$2 million is eligible R&D. Its tax rate is 30% because group turnover is over $50 million.
- 2% of total expenses is AU$100,000, which earns 38.5%: AU$38,500.
- The remaining AU$1.9 million earns 46.5%: AU$883,500.
- Total non-refundable offset: AU$922,000, in place of an ordinary AU$2 million deduction worth AU$600,000 at 30%. The net gain is about AU$322,000 a year.
Because the offset is non-refundable, it reduces tax payable. If the subsidiary has no tax to pay, the unused offset carries forward, subject to the carry-forward rules. This is why transfer pricing matters: a subsidiary paid on a cost-plus basis usually has taxable profit to absorb the offset.
Worked example: a subsidiary of a small group
A US software company with group turnover of AU$12 million sets up an Australian Pty Ltd that spends AU$2 million on eligible R&D. It is a base rate entity, so the refundable offset is 43.5%: AU$870,000. If the subsidiary is in tax loss, the ATO pays the excess as a cash refund after the tax return is lodged.
Whose R&D is it?
An activity only counts if it is conducted for the claimant (s355-210). The ATO asks which entity gets the major benefit, looking at who effectively owns the results, who has appropriate control over the work and who bears the financial risk. Where a foreign parent funds the work, directs it and owns the IP, the R&D is usually conducted for the parent, not the subsidiary.
That is not always fatal. The law lets an Australian subsidiary claim for R&D conducted solely in Australia for a connected or affiliated foreign company that is resident in a country with which Australia has a double tax agreement, under a written agreement (s355-210(1)(c) and s355-220). Our guide to R&D for a foreign parent company sets out each condition and the ATO's own example of a UK parent and its Perth subsidiary.
The ATO also lists warning signs it looks for in subsidiary claims: no physical presence in Australia, no substantial business activity, directors who act on the parent's wishes, no qualified employees, and a company incorporated near the end of the income year.
Where the work is done
R&D must be conducted in Australia. Overseas activities count only if the Department of Industry, Science and Resources issues an overseas finding, applied for before the end of the income year in which the overseas work happens. Late applications are not accepted. Overseas work done for a foreign parent can never be claimed: the ATO says a subsidiary can only claim overseas expenses "if they were conducted for you, not for a foreign resident corporation". See overseas findings.
Paying related parties
Group structures create related-party costs, and the RDTI has specific rules for them. Amounts owed to an associate count only in the year they are actually paid. Spending with an associate, or on non-arm's length terms, is limited to market value. And where a connected group company supplies goods or services for the R&D, its profit margin is removed from the claim. These rules sit alongside Australia's transfer pricing rules. See intercompany agreements, IP and transfer pricing.
Deadlines for subsidiaries
- Registration: register the year's activities with the Department of Industry, Science and Resources (through the R&DTI customer portal) within 10 months after the end of the income year. For a 30 June year-end that is 30 April. Subsidiaries with an ATO-approved substituted accounting period, such as a 31 December year-end to match the parent, register for that period, which puts the deadline at 31 October.
- Overseas findings: before the end of the income year in which the overseas work is done. No extensions.
- Extensions to registration: a request for 14 days or less made before the deadline is approved automatically; longer extensions are limited.
- Records: keep records for five years, in English, made at the time the work is done. The ATO says backdated records are not appropriate.
Changes announced for 2028
The 2026-27 Budget announced changes from 1 July 2028. They are not yet law. As announced: core R&D offset rates rise by 4.5 percentage points and supporting activities stop being eligible; the intensity threshold falls from 2% to 1.5%; the refundable turnover threshold rises from $20 million to $50 million, but cash refunds are limited to companies less than 10 years old; the expenditure ceiling rises from $150 million to $200 million; and the minimum spend rises from $20,000 to $50,000. For subsidiaries of large groups, the higher core rates and the loss of supporting activities matter most.
How we help
AusBusinessRegister.com.au works with foreign-owned Australian companies from entity setup to the R&D claim. We confirm group turnover and the offset that applies, review or draft the intercompany R&D agreement, register activities, prepare the R&D schedule and support the claim through any ATO or department review. See our R&D tax incentive service, or if you do not have an Australian entity yet, our company formation service.
Frequently asked questions
Can a foreign-owned company claim the R&D tax incentive in Australia?
Yes. Any company incorporated in Australia can be an R&D entity, regardless of who owns it. A foreign company that is an Australian resident, or a treaty-country resident with an Australian permanent establishment, can also claim. The activities must be conducted in Australia (or covered by an overseas finding) and for the claimant or a qualifying foreign group company.
Does the foreign parent's turnover count towards the $20 million threshold?
Yes. Aggregated turnover includes the annual turnover of connected entities and affiliates, including foreign ones, and counts their income on a worldwide basis. If the group turns over $20 million or more, the Australian subsidiary gets the non-refundable offset.
What rate does a subsidiary of a large multinational get?
A non-refundable offset of the company tax rate plus 8.5 percentage points on R&D spend up to 2% of the subsidiary's total expenses, and plus 16.5 points on the excess. At the 30% rate that is 38.5% and 46.5%.
Can our Australian subsidiary claim for R&D it does for the parent company?
It can, if the work is done solely in Australia, the parent is connected or affiliated with the subsidiary, the parent is resident in a country with which Australia has a double tax agreement, and there is a written agreement between them. Otherwise, R&D done for someone else does not count.
Is there a cap on the cash refund?
No. A $4 million annual cap on refunds was proposed but never legislated. The limit that applies is the $150 million expenditure threshold, above which only the company tax rate is available.
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.