Applying for an advance finding for overseas activities
Generally only R&D activities conducted in Australia will qualify for the R&D Tax Incentive. If certain conditions are met, however, companies can make claims for expenditure incurred on overseas activities where advance approval from government has been obtained. This concession is given in recognition of the fact that Australia does not always have all the necessary R&D expertise and facilities to meet R&D requirements and that research is increasingly global in nature.
To seek and obtain this advance approval, a company needs to lodge an overseas/advance finding application in the first income year that the overseas activities are to be conducted (i.e. in June 2020 at the latest for activities carried out during the standard July 2019 – June 2020 financial year). The approval of the application is contingent on the company’s ability to demonstrate that the following four (4) conditions have been met:
Condition 1
The overseas activity must be covered by an advance finding that the activity in question is an eligible R&D activity.
Condition 2
The overseas activity must have a significant scientific link to one or more core R&D activities conducted in Australia (Australian core activities). Those Australian core activities must be registered with Innovation Australia, or reasonably likely to be conducted and registered in the future.
Condition 3
The overseas activity cannot be conducted solely in Australia because:
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- conducting it requires access to a facility, expertise or equipment not available in Australia;
- conducting it in Australia would contravene a law relating to quarantine;
- conducting it requires access to a population (of living things) not available in Australia; or
- conducting it requires access to a geographical or geological feature not available in Australia.
Condition 4
The total R&D costs (actual and reasonably anticipated) to be incurred in all income years do not exceed 50% of the total R&D project cost.
Can you claim overseas based R&D activities without an overseas or advance finding?
“Incidental and ancillary” expenditure does not require Innovation Australia’s approval.
The ATO will accept deductions of certain minor amounts of “incidental and ancillary” expenditure on overseas R&D activities without the need for companies to seek an overseas finding. In this respect, the overseas activities and the expenditure to be claimed in respect of them must be relatively insignificant in the context of the broader Australian based R&D activities and spend.
The Guidance from the Regulators suggests that this ‘’incidental and ancillary’’ exception could be relied upon where R&D staff are sent overseas to observe techniques and/ or trials or to attend seminars and conferences on subject matter that is relevant to the R&D project.
There is limited case law and/or rulings that can provide any insights into how the courts might otherwise interpret the meaning of the term ‘’incidental and ancillary’’. Tax Ruling 2015/1 in considering what might be regarded as an ‘’incidental and ancillary’’ purpose states that:
“A purpose is incidental and ancillary…if it tends to assist or naturally goes with, the achievement of that purpose.”
Interestingly, the same Tax Ruling goes on to state that an ‘’incidental and ancillary’’ purpose should not be taken to ‘’mean a purpose that is minor in quantitative terms’’ (citing Navy Health Limited v. Federal Commissioner of Taxation (2007) 163 FCR 1; [2007] FCA 931 at paragraph 65).
There might therefore be some scope to consider that contributions that are somewhat more significant than attending an overseas trial or conference, could still legitimately be characterised as ‘’incidental and ancillary’’.
That being said, we must acknowledge that the application of the ‘’incidental and ancillary’’ allowance in respect of the expenditure incurred and claimed on the overseas R&D activities has always been predicated on sums that are absolutely ‘’minor in quantitative terms’’.
This interpretation dates back to when the exception was first enshrined in a Tax Ruling (IT2442, since withdrawn). While the Commissioner of Taxation has since continued the practice of accepting minor amounts of expenditure on overseas R&D activities in the absence of a finding, our experience and the published Guidance in this area gives us no reason to doubt that quantitative considerations would continue to be a determining factor in this regard.
If you’d like to know more about the eligibility of your overseas based R&D activities, please feel free to get in touch today.
