This article is intended to help international businesses understand that a research and development (R&D) tax incentive is available in Australia, and to give a high level overview of how it works. It looks in particular at how the incentive applies where R&D is carried on in Australia by a foreign owned subsidiary, or through the Australian permanent establishment of a foreign company. It is general information only. It is not advice on any particular set of facts and it does not take account of the circumstances of any specific business. Eligibility turns on the detail of each arrangement, so we would encourage you to obtain specific advice before registering activities or lodging a claim.
Australia’s R&D Tax Incentive is a broad based entitlement program. Any company that meets the eligibility conditions can claim, irrespective of industry classification. It is one of the more accessible forms of government support available to a business establishing operations in Australia. The rules summarised in this article reflect the law as it currently stands. Changes have been announced and are dealt with separately towards the end of this article.
International businesses that conduct research and development (R&D) activities in Australia may be eligible to claim the R&D tax incentive. However, additional eligibility requirements apply when an R&D entity conducts R&D activities for an associated foreign corporation or when a foreign body corporate conducts R&D activities through a permanent establishment in Australia.
Understanding these rules helps you determine whether your R&D activities meet the requirements before making a claim. The program is self assessed in Australia and the ATO and the Department of Industry, Science and Resources (DISR) may review a claim after it has been lodged. The onus of demonstrating eligibility, and of holding records that support it, rests with the taxpayer.
How the incentive works and what it is worth
The incentive is delivered as a tax offset rather than as a cash grant, and it is administered by two agencies. Activities are registered with the DISR and the related expenditure is then claimed through the company income tax return and the R&D tax incentive schedule, which is where the Australian Taxation Office (ATO) has its role. Registration must be lodged within 10 months of the end of the income year. This deadline is the single most common reason an otherwise valid claim is lost.
Only an R&D entity can claim. That means a company incorporated in Australia, a company incorporated overseas that is an Australian resident for income tax purposes, or a company that is a resident of a country with which Australia has a comprehensive double tax agreement containing a definition of permanent establishment, and that carries on business in Australia through such a permanent establishment. Trusts and partnerships are not R&D entities. This is a point worth settling before an Australian holding or operating structure is put in place, rather than afterwards.
There are two forms of offset.
Refundable offset: For an R&D entity with ‘aggregated turnover’ of less than $20 million that is not controlled by income tax exempt entities, the offset is refundable and is set at the company tax rate plus 18.5 per cent.
Non-refundable offset: For all other R&D entities the offset is non-refundable and is set at the company tax rate plus a premium on notional R&D expenditure. The premium does not apply to notional R&D deductions above $150 million in an income year, and a minimum of $20,000 of notional deductions is generally required. Unused non-refundable offsets can generally be carried forward to later income years.
‘Aggregated turnover’ is where foreign owned groups should have a particular attention. Aggregated turnover is not limited to Australian income. It is the sum of the annual turnover of the R&D entity and the annual turnover of every entity connected with it or affiliated with it, wherever that entity is resident. Where an Australian subsidiary sits beneath a substantial offshore parent, the group’s worldwide turnover is brought to account, the $20 million threshold is usually exceeded, and only the non-refundable offset is available. This practically means that an Australian entity in a tax loss position in those circumstances does not receive a cash refund. It carries the offset forward until it has Australian tax to pay against it.
Can R&D conducted for an associated foreign corporation be claimed?
An R&D entity can claim the R&D tax incentive for R&D activities conducted for an associated foreign corporation if it satisfies specific eligibility conditions. The associated foreign corporation must be a resident of a foreign country that has a comprehensive double tax agreement with Australia. The R&D activities, whether supporting or core in nature, must also be conducted solely within Australia or Australia’s external territories.
At the time the R&D activity is conducted, the foreign resident must be connected with the R&D entity or be affiliates. The R&D activities must also be conducted under an appropriate written agreement.
How does the ATO determine who the R&D activities are conducted for?
The ATO determines who the R&D activities are conducted for by considering which entity is the major beneficiary of the R&D outcomes.
The ATO considers three key factors:
Effective ownership of the results
Control over the R&D activities
Financial risk associated with the R&D activities
Effective ownership of the results
An R&D entity is more likely to have effective ownership of the R&D results if it can genuinely benefit from or commercialise the results. This may include situations where the R&D entity provides products, goods, or services arising from successful R&D results to the foreign corporation at an arm’s length price.
Control over the R&D activities
The R&D entity is more likely to have appropriate control over the R&D activities when it is not under the direction, control, or influence of the foreign corporation in relation to the specific R&D activities. Normal parent company governance and oversight does not generally represent effective control but should be further reviewed and documented.
Financial risk associated with the R&D activities
The R&D entity is more likely to bear the financial risk of the R&D activities when it funds the R&D using its own money. Financial support received from a foreign associate may still be acceptable where the funding is provided on an arm’s length basis, is used as working capital rather than specifically to conduct the R&D, and repayment obligations do not depend on whether the R&D succeeds.
Is the R&D expenditure at risk?
Satisfying the 'conducted for' test is necessary, but it is not sufficient. In the Australian Tax Law there is a 'at risk' rule, which denies or reduces a notional deduction where, at the time the R&D entity incurs the expenditure, there is a consideration received or receivable regardless of the results of the R&D activities. Where the consideration equals or exceeds the expenditure, the notional deduction is denied in full.
This is the provision that most often reduces or removes the value of a claim by an Australian subsidiary funded from offshore. Where a foreign parent meets the subsidiary’s costs or funds a project through a loan that is drawn down and repaid irrespective of the research outcome, the “at risk” rule needs to be worked through carefully before a claim is prepared.
What the ATO is currently reviewing
In December 2023 the ATO issued two taxpayer alerts that are directly relevant to inbound groups. Taxpayer Alert TA 2023/4 concerns R&D activities delivered by associated entities. Taxpayer Alert TA 2023/5 concerns R&D activities conducted overseas for foreign related entities. The ATO has said that it is reviewing arrangements of this kind.
An important point to note is that where an arrangement was entered into for the purpose of obtaining the tax offset, the general anti-avoidance provisions may be considered. Groups with existing claims built on the Australian owned characterisation would be well advised to review those claims against the risk factors described in the alerts to ensure that the activities are not considered to be for foreign entities but for R&D entity.
Can overseas R&D activities be claimed?
An R&D entity that is a subsidiary can only claim expenses for overseas R&D activities when those activities are conducted for the R&D entity itself and are covered by a finding in force under provisions of Industry Research and Development Act 1986. Such a finding must be applied for in advance and is not readily granted. It requires that the activity could not be conducted in Australia, and that the overseas expenditure be less than the Australian core R&D expenditure.
Can foreign companies claim the R&D tax incentive through a permanent establishment?
A foreign body corporate carrying on business through a permanent establishment in Australia may claim the R&D tax incentive for eligible R&D activities conducted by that permanent establishment, provided the activities are conducted for the foreign body corporate and not for the purposes of the permanent establishment itself. Assessment of having a permanent establishment should be carried out as per relevant double tax agreement between Australia and the country of residence.
What conditions apply to R&D activities conducted by a permanent establishment?
The R&D activities must be conducted solely within Australia, which for this purpose includes Australia’s external territories. If the R&D activity is a supporting R&D activity, the corresponding core R&D activity must also be conducted solely within Australia.
The foreign body corporate must also have written evidence showing that the R&D activities are conducted for the foreign body corporate and not for the purposes of the permanent establishment. These requirements apply in addition to the standard R&D tax incentive requirements, including registration, eligible activities, and eligible expenditure. In practice the written evidence requirement needs careful thought, because a permanent establishment and its head office are the same legal entity and cannot contract with one another. The evidence will therefore usually consist of internal documentation, such as project approvals, board or management resolutions, internal research mandates, functional descriptions and cost allocation records. That documentation should be consistent with the basis on which profits are attributed to the permanent establishment. A foreign body corporate claiming through a permanent establishment will also need an Australian Business Number and a tax file number, will register the activities in its own name, and will lodge an Australian income tax return.
How does the ATO determine eligible R&D activities by a permanent establishment?
The ATO considers whether the R&D activities are conducted for the foreign body corporate or whether another entity benefits from the activities considering the same three principles:
Effective ownership of the results
Control over the R&D activities
Financial risk associated with the R&D activities
If an entity that does not meet the relevant eligibility conditions benefits significantly from the R&D activities, the R&D tax incentive cannot be claimed.
Changes expected to the R&D Tax Incentive
Everything set out above describes the regime as it applies today. On 12 May 2026, as part of the 2026-27 Federal Budget, the Government announced a substantial redesign of the R&D Tax Incentive. The measures are not yet law, and they are proposed to apply from 1 July 2028.
For a business planning an Australian R&D programme that will run beyond the 2028 income year, a key point to consider from the proposed changes is that the value attaching to expenditure on supporting R&D activities is expected to be not available for any tax incentive. So records and project documentation should already distinguish clearly between core and supporting activities rather than treating them as a single pool.
Other tax matters to review or consider
The R&D Tax Incentive rarely sits in isolation. For an inbound group the following matters should be considered alongside the claim itself, because a position taken in one area can readily undermine a position taken in another.
Transfer pricing: Subdivision 815-B of the Income Tax Assessment Act 1997 and the R&D characterisation need to tell the same story. A subsidiary remunerated on a cost plus basis for contract research is difficult to reconcile with a claim that the R&D is conducted for that subsidiary itself. The functional analysis, and in particular the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangibles, should drive both positions.
Payments to associates: Expenditure incurred to an associate is only notionally deductible in the income year in which it is actually paid, not the year in which it is accrued. Intercompany service, secondment and management charges left outstanding at year end are a common source of deferred or lost claims.
Feedstock, grants and clawback: Feedstock adjustments, and the recoupment and clawback rules in Subdivision 355-G, can reduce the net benefit where outputs of the R&D are sold or where a government grant has been received for the same project.
Anti-avoidance: Since 1 July 2021 the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 has treated an R&D tax offset as a tax benefit.
Intellectual property ownership and migration: Where results are assigned or licensed to a foreign parent, capital gains tax, transfer pricing and royalty withholding tax consequences all require attention. The arrangement will also inform the answer to the question of who the activities are conducted for, so the two analyses should be done together.
Financing: Where the programme is funded by related party debt, the thin capitalisation rules and the debt deduction creation rules need to be considered, as does the interest withholding tax position.
Global minimum tax: For groups within the scope of Pillar Two, the treatment of a refundable R&D offset as a qualified refundable tax credit affects the effective tax rate calculation, because such a credit is treated as income rather than as a reduction in covered taxes.
Excluded activities: Certain activities cannot be core R&D activities, including market research, market testing, management studies, and the development of software for the internal administration of the business. These exclusions are a frequent source of disagreement on review.
Records and review: Because the programme is self assessed, contemporaneous records of both the activities and the expenditure are essential. The ATO and the DISR conduct compliance reviews and audits, and the Commissioner has a period in which to amend an assessment after it is made.
What should you consider before claiming the R&D tax incentive?
International businesses should review their R&D structures, agreements, and operational arrangements before submitting a claim. An R&D entity conducting activities for an associated foreign corporation or a foreign body corporate operating through a permanent establishment must demonstrate who owns the R&D results, who controls the activities, and who bears the financial risk. Clear written agreements and supporting commercial evidence can help demonstrate that the R&D activities satisfy the ATO’s eligibility requirements.
If you have questions about your eligibility or how the R&D tax incentive applies to your business, ABN Australia can help you understand the requirements and support you throughout the claim process.
This article is general in nature. It summarises the law and the announced measures as at the date of publication and it does not constitute tax advice. It should not be relied upon in place of advice tailored to your own circumstances.
Last updated: 17th Aug 2026
About the Author
Rahul Chawla is ABN Australia’s Head of Tax and Associate Director, with more than 15 years of experience advising businesses on Australian and cross-border tax matters. Having held senior roles with EY, KPMG and PwC across Australia, Malaysia and India, Rahul specialises in international tax, transfer pricing, indirect tax, business structuring and tax compliance. He is a Fellow Chartered Accountant, Chartered Global Management Accountant, Associate Chartered Management Accountant and Certified Practising Accountant, with a Bachelor of Laws.
Rahul Chawla
Head of Tax, Associate Director