Increasing numbers of Australian businesses are conducting international R&D and could be adding Overseas Findings to their R&D Tax Incentive (R&DTI) claims to keep their innovation budgets healthy. At the same time, cutting-edge innovation is global and some foreign-owned companies with Australian operations can also be eligible for Overseas Findings and claim the R&DTI. Earlier this year, the first-ever determination on R&DTI and clinical trials created greater certainty for domestic and foreign-owned businesses. So what is an Overseas Finding? And how can businesses with international R&D benefit?
Overseas Findings explained
Most of the time, R&D activities carried out in Australia are the only ones that qualify for the R&DTI. However, there are exceptions. And that’s where Overseas Findings come in. You can lodge an Overseas Finding application with AusIndustry to establish whether your company’s offshore research is eligible under the R&DTI.
Overseas Findings include something called an Advance Finding. Advance Findings are binding decisions about the eligibility of your R&D activities, before you register them for the R&DTI. The beauty of Advance Findings is that they give businesses surety about their R&DTI eligibility before they splash the cash on R&D. Companies with R&D can apply for an Advance Finding for their Australian R&D and an Overseas Finding for eligible R&D they’re conducting offshore.[1]
You can do so as part of the one application process. And AusIndustry can decide whether your R&D activities are eligible.
Key takeaway
Whatever the outcome, Advance and Overseas Findings don’t equal registration. Even if you receive a positive Overseas or Advance Finding, you still need to register and apply with AusIndustry for the R&DTI.
When are overseas R&D activities eligible?
Overseas R&D can be eligible for an Overseas Finding and the R&DTI if you can meet four requirements.
1. Your overseas R&D must meet the definition of an eligible R&D activity under AusIndustry rules, either as a core R&D activity or a supporting R&D activity.
Read our blog about R&DTI eligibility and what constitutes core R&D and supporting R&D activities.
2. There must be a significant scientific link between your overseas R&D and your eligible core R&D here in Australia.
Once you’ve established that connection, you need to demonstrate that you can’t complete the Australian core R&D activity without carrying out the overseas R&D.
3. You must show that you’re unable to conduct the overseas R&D either in Australia or its external territories for one of the following four reasons.
- Your R&D activity needs expertise, equipment or facilities which are not available in Australia.
- The activity would breach a quarantine law.
- Your activity involves a population of living things not available in Australia. An example of this would be a specific cohort for in-human clinical trials.
- Your R&D activity needs to have access to geographical or geological features that aren’t found in Australia.
4. The costs of your overseas R&D activities must be less than the expenditure incurred on the related R&D activities in Australia.
You also need to supply your estimated expenditure on the overseas R&D activity for every income year the project will run for.
Timing is critical
Remember, when it comes to Overseas Findings, there is zero flexibility and no extensions available for late applications. You must apply for Overseas Findings before the end of the first income year when you begin the overseas R&D activity. So if your income year is the financial year, that’s before 30 June.
Which companies can access Overseas Findings?
If your overseas R&D activities pass AusIndustry’s four qualifying requirements for offshore R&D, your business still needs to be an eligible entity under the R&DTI rules to apply for Overseas Findings. Your business is an eligible entity if it is:
- incorporated under an Australian law
- incorporated under a foreign law but an Australian resident for income tax purposes
- incorporated under a foreign law, but is both a resident of a country with which Australia has a double tax agreement and is carrying on business in Australia through a permanent establishment as defined by the double tax agreement. The double tax agreement of the foreign country where the entity is incorporated must include a definition of permanent establishment.*
The eligible entity rules enable international businesses with operations in Australia such as US pharmaceutical innovator, BioFactura, to also successfully apply for and receive Overseas and Advance Findings on overseas in-human clinical trials.
Under the rules, eligible entities can apply for Overseas and Advance Findings but they can also engage their registered tax agent or their Research Service Provider to apply on their behalf.
What are the benefits?
There are three key benefits of Overseas Findings.
- Certainty: AusIndustry rulings on Advance Findings are binding on the ATO for up to three income years and Overseas Findings apply for the duration of the activity. So you have a cast-iron guarantee that your R&D activities reviewed and included in the Advance and Overseas Finding will be eligible for the R&DTI.
- Increased R&D tax refund: A positive Overseas Finding is a sure-fire way to a larger R&DTI claim because you’re able to include eligible overseas R&D. The additional cash flow spells good news for your company’s future capital position.
- Competitive edge and faster speed-to-market: Overseas Findings are recognition of the often global and highly specialised nature of R&D. Having the certainty of a binding ruling and qualifying for an additional tax incentive on eligible R&D enables Australian innovators to tap into a global pool of R&D talent and resources. This gives businesses that qualify a competitive edge because they can fast-track their R&D and get to market faster.
Recent changes
In March 2022, AusIndustry and the Australian Tax Office (ATO) made some changes to the R&DTI.
Classification codes
Updated rules for both the R&DTI regulations and decision-making principles came into effect in March. The new legislation is largely in line with the previous rules to ensure consistency and continuity. But there were a few minor adjustments, one of which is relevant to Overseas and Advance Findings. The updated regulations have adopted the 2020 Australian and New Zealand Standard Research Classification (ANZSRC) code Field of Research (FoR) classifications in all application forms; superseding the 2008 ANZSRC FoR codes previously used. All applications for Findings made from 29 June 2022 must use the 2020 ANZSRC FoR codes, and those made before the June changeover date had to use the 2008 ANZSRC FoR codes. But once you register the R&D activities covered by a Finding made before 29 June and apply for the R&DTI, you will need to update the classifications you used to align with the 2020 ANZSRC FoR codes.
Determination
The Department of Industry, Science & Resources handed down the first-ever determination under the R&DTI for certain types of clinical trials. Phase 0, I, II, III, pre-market pilot stage, and pre-market pivotal stage clinical trials are now automatically deemed core R&D activities. Health and medical innovators have certainty and clarity about how the R&D Tax Incentive can support some of their clinical trials. Companies with these types of clinical trials can also rely on the determination when applying for an Advance or Overseas Finding.
But there are a few important caveats to be aware of. The determination can only be used for your Overseas Finding application if 100% of your core R&D activity happens in Australia. If you undertake any part of the activity overseas; even if you send the evaluation or conclusions to an overseas parent company, then you won’t qualify for a positive Overseas Finding. Under the strict rules, AusIndustry and ATO will deem your overseas R&D activities not to be an Australian core activity.
Another important consideration if you’re conducting clinical trials is this. Even if your research isn’t covered by the R&DTI determination, it may still be a core R&D activity under the general eligibility rules. If you think that’s the case, you’ll need to show your activities meet the eligibility rules separately. You can’t use the determination to streamline the process for you. Read AusIndustry’s Clinical Trials Determination Guide for more information.
Things to consider
The onward march of digitalisation hasn’t bypassed Overseas and Advance Findings. So the upshot is that you can apply for these rulings via the same AusIndustry customer portal you use for the R&DTI. It’s important to reiterate that once you receive a positive Overseas Finding, it’s not time to kick back and relax. You still need to include it in your annual R&DTI application. Dot the i’s and cross the t’s when it comes to your record-keeping. Being able to provide contemporaneous documentation can be the difference between receiving a positive decision or missing out. For more information, check out our blog on how to keep contemporaneous records.
Overseas Findings and R&D finance
If you have a positive Overseas Finding – and add it to your R&DTI registration and claim – you can apply for a Radium Advance that includes your overseas R&D expenditure. This means your offshore research activities can benefit from the same consistent cash flow benefits and fast access to non-dilutionary capital that Radium provides for your Australian R&D. For more information, or to get started on a Radium Advance, contact our friendly R&D finance experts today.
[1] Australian Government Business. 2021. Application guidance – Advance/Overseas Finding. [ONLINE] Available at: https://business.gov.au/grants-and-programs/research-and-development-tax-incentive/apply-for-an-overseas-finding.
* Radium Capital is a specialist R&D financier. In assessing your eligibility for Advance and Overseas Findings and preparing your RDTI claim, we recommend you seek the advice of an R&D tax consultant.