What overseas costs can you claim?
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Overview
The Australian R&D Tax Incentive program includes provisions for businesses to claim certain “incidental and ancillary” overseas costs, even without an advance finding. Such expenditure must be relatively insignificant in the context of the broader Australian based R&D activities and expenditure. Let’s explore this further with some worked examples.
Find detailed information about the R&D Tax Incentive in the ATO’s guide.
Incidental and Ancillary Expenditure
In certain circumstances, the Australian Tax Office (ATO) allows deductions for “incidental and ancillary” expenditure on overseas R&D activities. These are expenditures that naturally assist or go with the achievement of the Australian R&D purpose. They must be minor and insignificant in quantitative terms in the context of the broader Australian R&D activities and spend.
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Worked Examples – Eligible Expenditure
Example 1: Medical Device Developer
Consider ‘MediTech Solutions’, an Australian firm developing a novel medical device. As part of their R&D project, they needed to purchase a piece of off-the-shelf equipment from overseas.
- Equipment Purchase – MediTech Solutions procured this equipment from the United States because it was not readily available in Australia.
- R&D Activities – The equipment was instrumental for the testing and validation of their medical device prototype in Australia.
- Claiming Expenditure – MediTech Solutions included the cost of the overseas-purchased equipment in their R&D Tax Incentive claim as it was incidental and ancillary to their Australian R&D activities.
Example 2: Software Development
‘CodeCorp’, an Australian software development firm, utilised an overseas server for the development of their new product.
- Server Usage – CodeCorp used an overseas server because of its unique features that facilitated their product development.
- R&D Activities – Data stored and processed on the server was crucial for their Australian R&D activities.
- Claiming Expenditure – CodeCorp claimed the cost of overseas server usage under the R&D Tax Incentive. The costs were incidental and ancillary to their Australian-based R&D activities.
Example 3: Wind Turbine Technology
An Australian firm ‘Wind Power Innovations’ is researching advanced wind turbine technologies. To stay abreast of global advancements, they send a team to a conference overseas.
- Conference Attendance – Staff from Wind Power Innovations attend a conference on wind turbine technologies in Germany.
- R&D Activities – Knowledge and insights gained at the conference assist in the company’s Australian R&D activities.
- Claiming Expenditure – The costs associated with attending the conference (travel, accommodation, registration fees) are claimed under the R&D Tax Incentive as they are incidental and ancillary to the Australian-based R&D activities.
Understanding and interpreting R&D tax incentive rules can be complex. As a business owner, you can benefit from seeking professional advice.
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Worked Examples – Ineligible Expenditure
Example 4: Specialised Consultancy
An Australian agtech company, ‘AgroTech Co.’, is working on soil health solutions. They engage a highly specialised consultant based in France to provide advice on their R&D project.
- Consultancy Services – AgroTech Co. contracts the French consultant for their specific expertise which they couldn’t find in Australia.
- R&D Activities – Though the consultancy work directly influences the Australian R&D activities, the consultancy service itself is not conducted in Australia.
- Claiming Expenditure – The cost of this overseas consultancy service would generally not be eligible under the R&D Tax Incentive, as the consultancy activities are neither incidental nor ancillary to the Australian-based R&D activities.
Example 5: Custom Parts Purchase
An Australian robotics company, ‘RoboWorks’, is developing an innovative drone. They purchase custom-made drone parts from a manufacturer in China.
- Parts Purchase – RoboWorks buys these specific parts from China because they meet the unique requirements of their project.
- R&D Activities – These parts are integral to the drone being developed in Australia.
- Claiming Expenditure – The custom-made parts, despite being crucial to the R&D activities in Australia, are overseas expenses and not incidental or ancillary to Australian R&D. Therefore, they would generally be ineligible under the R&D Tax Incentive.
Example 6: Overseas Prototyping
‘PharmaGenius’, an Australian pharmaceutical company, outsources the creation of a prototype for a new drug delivery device to an overseas firm.
- Prototyping – PharmaGenius contracts an overseas firm to produce a prototype because they offer a quicker turnaround time.
- R&D Activities – The prototype will be used in R&D trials in Australia.
- Claiming Expenditure – Though the prototype is key to their Australian R&D project, the cost associated with the overseas prototyping would generally not be eligible as they are not incidental or ancillary to R&D activities carried out in Australia.
It’s crucial to consult with experts to navigate the nuances of the R&D Tax Incentive, especially when dealing with overseas expenses.
Australia’s highest rated R&D tax consultant.
Key Advice from the ATO
In a recent affirmation of the T.D.S. Biz Pty Ltd v Commissioner of Taxation [2023] FCA 710 case, the Administrative Appeals Tribunal (AAT) has set a new precedent for companies claiming an offset under the Research and Development (R&D) tax incentive program. Here’s a quick breakdown of the key takeaways:
- Proper Documentation and Compliance – As companies seek to leverage the R&D tax incentive, they must maintain detailed records and adhere to program requirements.
- Overseas R&D Activities – The ATO Perspective – TDS claimed that their R&D activities were conducted entirely within Australia. However, the ATO audit revealed significant overseas activities, with TDS purchasing components designed and developed overseas without an Advance Overseas Finding. This finding led to a crucial amendment in the company’s 2018 income tax return.
- Penalties and Adjustments – The ATO disallowed TDS’s R&D specific deductions but permitted them as general deductions. The result? A reduction of over $700,000 in the company’s refundable offset and imposed shortfall penalties exceeding $350,000. The cause? False statements in TDS’s R&D application.
- Overseas R&D Expenditure – The Fine Print – While companies can claim an offset for R&D expenditure on overseas activities, stringent rules and limitations apply. Crucially, they must hold an Advance Overseas Finding for these activities, and the anticipated expenditure on overseas activities must be less than that on Australian activities.
Why Choose Bulletpoint?
Bulletpoint is your trusted partner for navigating the complexities of the R&D tax incentive in Australia. We’re a Melbourne-based consultancy, led by the country’s top-rated R&D tax consultant, and our expertise is based on a decade of hands-on experience.
We have a history of success, with more than 500 R&D claims lodged to date, demonstrating our consistent ability to deliver favourable outcomes for our clients. Our clear, personable approach takes the complexity out of the process, helping you understand the intricacies of R&D definitions from a government perspective.
Our dedication and passion are reflected in the testimonials of our clients who appreciate not just our expertise but also our commitment to their success. We’ve been acknowledged for unveiling grant opportunities and making the R&D claim process more manageable and less daunting.
We take pride in our 4.8-star rating based on over 250 Google reviews, a testament to our unwavering commitment to excellence. Our quest for improvement is never-ending; we continuously learn from our experiences and client feedback.
At Bulletpoint, we’re not just about getting the job done. We aim to align your perception of R&D with government eligibility criteria and help you maximise your rightful incentives.
So, if you’re seeking proven expertise, a successful track record, and a consultative approach that blends professionalism with approachability, look no further than Bulletpoint. We are more than ready to guide you through your R&D tax incentive journey, ensuring not only a successful outcome but also a pleasant experience.
Ready to unlock your business’s full potential with R&D incentives? Book a meeting with us or call 1300 658 508. Let’s begin this rewarding journey together.What
