Australia’s R&D Tax Incentive (RDTI) is one of the more generous schemes of its kind. A company with group turnover under $20 million can claim a refundable offset worth 43.5 per cent of eligible R&D spend, which for a pre-revenue business often lands as a cash refund. (The turnover threshold is proposed to rise to $50 million from 1 July 2028.) That is a real pull for global groups doing development work in Australia, or thinking about it.

A common question we get at Standard Ledger is: our parent company sits in the US (or the UK, or Singapore), can our Australian arm still claim? The short answer is yes. The longer answer is that it only works if the structure and the paperwork are right from the start.

What you need in place before the R&D starts

For the most common and cleanest route – an Australian subsidiary conducting R&D for itself – you want all of this locked in before any R&D begins:

• The right entity: usually an Australian Pty Ltd with at least one Australian-resident director.
• Clear ownership of the R&D results by the Australian company, with a licence from the parent for any background IP it needs, as well as for the IP developed during the R&D activities.
• Genuine control by the Australian company over how the R&D is run.
• A funding arrangement that keeps the Australian company actually at risk, rather than reimbursed regardless of outcome.
• Arm’s length pricing on every related-party dealing, documented.

The rest of this article explains why each of those matters.

Who can actually claim?

The RDTI is claimed by an “R&D entity”, which has to be a company. For a foreign group the usual path is simple: set up an Australian-incorporated company – a local Pty Ltd owned by the overseas parent. It is the cleanest structure and gives you the most control over the points below.

There are other ways to be an eligible R&D entity – a foreign company that is an Australian tax resident, or a foreign company from a double-tax-agreement country operating here through a permanent establishment – but these are more complex and more heavily scrutinised.

The big one: who is the R&D “conducted for”?

This is where most overseas-parent claims live or die. You can only claim for R&D that is conducted “for” your company, and not to a significant extent for someone else. The ATO decides who the work is really for by asking who gets the major benefit, looking at three things:

• Who has beneficial ownership of the results – the know-how and IP the work generates.
• Who controls how the R&D is carried out.
• Who bears the financial risk of undertaking the R&D activities.

If the Australian subsidiary is just running experiments and handing all the IP straight to the parent, on the parent’s instructions, funded on a guaranteed cost-plus basis, then the R&D is being conducted for the parent – not for the Australian company. In that case you have no RDTI claim.

To pass, structure the Australian company so it is genuinely conducting R&D for itself. In practice that means:

• The subsidiary holds the right to exploit the new IP it develops from the R&D.
• Where it needs to build on the parent’s existing IP, the parent grants it a licence to that background IP, rather than the subsidiary silently developing on the parent’s behalf.
• The subsidiary has a real say in how the work is run, even where specialists are contracted to do parts of it.
• The subsidiary actually carries the financial risk of the project’s R&D activities.

When the parent later wants to use or commercialise that IP, the transfer or licence back happens at arm’s length and for market value, so the Australian company earns taxable income here. That last point matters to the ATO: the incentive is meant to build an Australian business, not just subsidise an offshore one.

The second hurdle: expenditure “not at risk”

Even if you clear the “conducted for” test, there is a second test that specifically bites related-party funding. You cannot claim expenditure that is “not at risk” (section 355-405 of the tax law, explained in the ATO’s ruling TR 2021/5).

Expenditure is not at risk if you, or an associate, have received or could reasonably expect to receive money as a result of incurring it, regardless of how the R&D turns out. The classic example is exactly the arrangement many groups default to: the overseas parent agrees to reimburse the Australian subsidiary’s costs plus a margin, whether or not the project succeeds. That guaranteed reimbursement means the Australian company is not carrying the risk, so the underlying spend is not at risk – and it drops out of the claim.

This does not mean the parent cannot fund the work. It means how it funds the work matters. Funding provided as equity, or as a genuine loan the subsidiary has to repay, is very different from a guaranteed cost-plus service fee tied to the R&D.

Transfer pricing sits underneath all of it

Because these are related-party dealings, the intercompany terms – the IP licence fees, the funding, any service charges – have to be at arm’s length. The ATO looks closely at R&D and cross-border groups, and has issued specific alerts about arrangements where Australian R&D benefits flow offshore. Pricing the IP licence back to the parent, and the funding into the subsidiary, on defensible arm’s length terms protects both the RDTI claim and the group’s wider tax position.

The bottom line

An overseas parent is not a barrier to claiming R&D in Australia – plenty of global groups do it well. But the incentive is deliberately built to reward a real Australian R&D business that benefits from its own results and carries its own risk, not an offshore-controlled cost centre. Set up an Australian Pty Ltd that genuinely conducts R&D for itself, put the IP rights, control and funding in place to match, and price the related-party dealings properly. It is a fair amount of thinking to get right – but do it properly and the claim is clean.

Disclaimer: This article is for general informational purposes only and does not constitute financial, legal or tax advice. Please speak with a qualified adviser (hey, that’s us!) before making decisions based on your specific circumstances.