Organisations that have undertaken R&D activities in foreign jurisdictions in the year ending 30 June 2020 may be eligible to claim the R&D tax incentive.
While there is typically a 30 June deadline to apply for an overseas finding, disruption from COVID-19 means R&D entities now have until 30 September 2020 to submit their overseas finding, provided they make a provisional application by 30 June 2020.
When can overseas activities be included in an R&D tax incentive claim?
Broadly, only R&D activities conducted in Australia are eligible to qualify for the R&D tax incentive. However, where certain conditions are satisfied an entity’s overseas R&D activities may also qualify for the incentive. To make a claim in relation to overseas R&D activities, entities are required to apply to the Department of Industry, Science, Energy and Resources (AusIndustry) for an overseas finding. R&D entities are required to submit an overseas finding application prior to the end of the income year in which the expenditure has been incurred.
If an overseas activity is not covered by a current overseas finding, an R&D entity is only permitted to claim ancillary and incidental expenditure incurred overseas on eligible R&D activities (i.e. minor overseas travel).
When can overseas activities be included in an R&D tax incentive claim?
Before applying for an overseas finding, an R&D entity must meet all of the following conditions:
Condition 1: The overseas activity must be an eligible R&D activity.
Condition 2: The overseas activity must have a significant scientific link to an eligible core R&D activity that has been undertaken solely within Australia.
Condition 3: The overseas activity cannot be performed in Australia for one of the following reasons:
(a) undertaking the activity requires access to a facility, expertise or equipment not available in Australia;
(b) undertaking the activity in Australia would contravene a law relating to quarantine;
(c) undertaking the activity requires access to a living population that is not available in Australia or
(d) undertaking the activity requires access to a geographical or geological feature that is not available in Australia.
Condition 4: The total actual and reasonably anticipated expenditure incurred in all income years on the overseas activities is estimated to be less than the total expenditure incurred on the activities undertaken solely in Australia. This assessment is made at the time the R&D entity is looking to apply for an overseas finding.
When considering an overseas finding, AusIndustry thoroughly examines the reasons why the R&D entity is looking to conduct part of its R&D activities overseas and will only issue a positive finding where it is satisfied that the R&D entity could not access the necessary expertise and facilities here in Australia. Importantly, cost efficiency would not, of itself, be sufficient to justify an overseas finding in respect of R&D activities overseas.
Timing is critical
As outlined above, a R&D entity is required to prepare and lodge an overseas finding application with AusIndustry before the end of the first income year in which the activities are undertaken.
As a business support measure due to COVID-19, AusIndustry will be accepting provisional applications for income years ending 30 June 2020 before 30 June 2020. However, the R&D entity will be required to provide all further information required to assess the application prior to 30 September 2020.
The overseas finding does not replace the annual R&D tax incentive application and the R&D entity must, therefore, continue to register R&D activities covered in a provisional application within 10 months after the end of the income year in which the activities are undertaken.
Documentation is important
Contemporaneous documentation must be maintained to demonstrate how the R&D entity meets each of the four conditions outlined above. In our experience, this documentation is critical to obtaining a positive ruling from AusIndustry in relation to an overseas finding application.
What are the next steps?
Pitcher Partners can assist you I to determine whether your organisation satisfies the key eligibility requirements for an overseas finding, and can assist with preparing and lodging an overseas finding application, identifying eligible expenditure and reviewing documentation to determine whether it satisfies the requirements of both regulators (AusIndustry and the Australian Taxation Office).
