Many of our clients undertake the development of their software with at least a component of overseas development. So a common questions that we receive is: ‘can we claim overseas development in the R&D Tax Incentive?’ Unfortunately the answer is a mixture of yes and no. We’ll first address why you can’t claim R&D done overseas and then explore the exceptions to this rule:
When can’t I claim?
Overseas R&D is determined by the location of the R&D activity taking place. In software development this usually means where the software developer is sitting in the world when they undertake R&D. This means that even if an Australian company employs the developer and they are a resident for tax purposes, the R&D would still be overseas based if they happened to be overseas at the time that they created it.
This is an area that you need to be extra careful of when employing software development contractors who may employ overseas developers or outsource development overseas.
When can I claim?
There is one major mechanism that Ausindusty offers to claim overseas R&D, it is the Advanced Overseas Finding. The advanced finding allows you to claim overseas R&D if the conditions are met as well as provide more certaintity as to the eligibility of your R&D. An advanced finding can apply in the current financial year as well as up to two future financial years. It won’t be able to be obtained for previous financial years. The conditions to claim Overseas R&D are as follows:
- The overseas activity must have a significant scientific link to one or more core(experimental) activities conducted or to be conducted in Australia.
- There must be a strong reason why the activity can’t be conducted in Australia, such as the expertise/equipment is not available in Australia, quarantine rules would prevent it or there is a living population, geological or geographical feature that is not available in Australia.
- The total amount spent in all income years on the project must have a higher Australian basis than overseas basis. Ie most of the project costs must still be in Australia.
Obviously these conditions will rule out most software development conducted overseas as most software development skills are readily available onshore even if they come at a significant price. The difference in cost of software development overseas compared to Australia is not a sufficient reason by itself to be able to claim the overseas expenditure in the Advanced Overseas Finding.
An advanced finding usually requires providing advanced knowledge of the projects as well as future projections of costs, it is therefore not recommended without a significant amount of overseas expenditure that meets the criteria.
Overseas activity that is acceptable without an Advanced Overseas Finding:
There are a few types of expenditure that is acceptable without an advanced overseas finding. Incidental and ancillary expenditure such as attending overseas seminars or training sessions relating to your project is acceptable. Also equipment, tools and direct expenses purchased overseas that are used in the project can also be claimed when eligible.
Why do these rules exist?
The R&D Tax Incentive was set up to encourage companies to conduct more Australian based R&D, while its more common for an R&D project to be conducted in many different countries. The scheme will always be biased toward Australian R&D. If you have any questions or queries about Overseas R&D, please feel free to contact us at Innercode, Contact@innercode.com.au