RDTI: Deadline to claim overseas R&D activities fast approaching

With the 30 April registration lodgement date now in the rear-view mirror, it is timely to consider the next approaching deadline of note, that of lodging an application for an Advance and Overseas Finding (AOF).

With less than two months to go, this is relevant for companies conducting or planning eligible R&D activities in Australia which ‘would be incomplete’ without overseas activities such as manufacturing, trials, or contract work. 

With a positive AOF, the scope of an RDTI claim may be extended to such expenditure incurred on related activities carried on overseas, under certain conditions. Companies can also seek an Advance Finding just for Australian activities.

Critically, where overseas activities have commenced, applications for an AOF must be lodged before the end of the company’s income year. Therefore, for most Australian entities the deadline is 30 June 2025 to enable relevant expenditure incurred from 1 July 2024 to be eligible. As emphatically confirmed by the Federal Court decision in T.D.S Biz Pty Ltd v Commissioner of Taxation [2023] FCA 710 (the TDS Biz case), otherwise eligible R&D expenditure on overseas R&D activities will not be eligible in the absence of a positive AOF.

Nonetheless, with the end of the financial year approaching, there remains adequate time for companies with a 30 June year end to lodge an AOF application and allow potentially eligible overseas costs incurred since 1 July 2024 to be captured in RDTI claims.

What is an AOF?

An AOF is effectively a ruling or finding by the Department of Industry, Science and Resources (DISR) providing a taxpayer with certainty in respect of the eligibility of a company’s Australian and/or overseas R&D activities and the costs incurred in the income year in which the application for the AOF was lodged, and at least two subsequent income years.

Although a positive AOF from DISR is only binding on the Commissioner of Taxation for up to three income years from the start of the income year of AOF lodgement, the ATO have also provided guidance that if the facts and circumstances of the AOF are not materially different, the AOF can continue to cover activities after the three year period ends, but will not be binding on the Commissioner.

Practically, this means that an AOF must be lodged soon to ensure that ongoing costs incurred on eligible Australian and/or overseas R&D activities carried on since 1 July 2024 can potentially be eligible for the RDTI.

Types of overseas activities?

It is important at the outset to understand that an AOF is not required where the overseas aspect of the wider project is merely a sales contract for acquisition of off-the-shelf goods or components. This must be distinguished from a contract which requires the offshore performance of development activities which is creating the components acquired to conduct the R&D.

This distinction contrasts the accepted understanding that the costs of merely arranging the acquisition and import of components for use in Australian R&D activities are eligible, unlike the situation where a contract relates to substantive R&D activities being carried on overseas.

Where a potentially eligible overseas R&D activity is occurring or planned, all of the following statutory conditions must be considered and satisfied to be eligible for an AOF:

1. The overseas activity must itself meet the legislative criteria for a core or supporting R&D activity;
2. The R&D activities must all be Australian-owned R&D activities since foreign-owned RDTI claimants are not entitled to claim any activities being undertaken outside of Australia. Effectively this means that the activities being undertaken overseas must be undertaken ‘for’ the RDTI claimant applying for the AOF. That is, the claimant needs to bear the financial risk, own or have rights to exploit the R&D being undertaken and control the R&D activities and the way in which they are being conducted;
3. At least one Australian core activity cannot be completed without the overseas activity; and
4. The overseas activity could not be conducted in Australia due to the R&D activity requiring access to a facility, expertise, equipment, population of living things, and/or geographical feature not available in Australia; and/or contravention of a quarantine law if conducted in Australia.

In addition, the total expenditure incurred and reasonably anticipated on the relevant Australian R&D core activities (and the Australian supporting R&D activities) must exceed the equivalent spend on all related overseas activities across all relevant income years (not on an annual basis).

Notably, as evidenced in the TDS Biz case, any commercial drivers for undertaking activities offshore, such as lower labour or manufacturing costs, will not satisfy the criteria to apply for an AOF. Rather, the following examples indicate the types of scenarios where an AOF may be successful:

• The manufacture of a specialist drug delivery device is required for a clinical trial to proceed in Australia, but the manufacturing capability does not exist in Australia;
• The development of a novel critical mineral processing capability in Australia is dependent on a processing plant scale that only exists offshore; or
• A clinical trial for a rare disease requires enrolment of a quantity of patients which exceed the potential patient population in Australia.

Lastly, it is worth being aware of Taxpayer Alert TA 2023/5 which discusses ATO concerns surrounding situations where an AOF has been obtained but on the basis that the R&D activities were being conducted for the R&D entity's own benefit, and those activities were in reality being conducted for (or to a significant extent, for) a foreign entity, and therefore foreign-owned (thereby invalidating the AOF).

Next steps?

For costs incurred since 1 July 2024, eligible R&D entities with a June income year end must ensure they lodge an AOF application with DISR prior to 30 June 2025.

Given increased documentation requirements and written responses of the current AOF application form, it may also be worth early planning to obtain an AOF for Australian core R&D activities where associated overseas activities may be planned in the coming income years.

Practically, the stages of preparing to lodge an AOF include the following:

• Accessing and understanding the requirements of the AOF Application form questions, with additional guidance in DISR’s AOF Application Notes.
• Collating the key documentation required to complete the AOF Application (full details here) – this could include a wide range of documents including:
  • The projected budget across the life of the wider project, including a breakdown between expenditure incurred on Australian and Overseas activities with evidence to support these allocations (i.e. quotes, contracts).
  • Examples of background research on existing knowledge and to inform activity design.
  • Licensing or IP agreements for assets utilised in or generated by the R&D activities
  • Financial statements for the most recent income period (i.e. Profit & Loss, Balance Sheet, General Ledger detail and Payroll summary).
  • Evidence / independent opinion on why overseas activity/ies cannot be conducted in Australia.
  • A rationale for why Australian R&D activities would be incomplete without the overseas activities.
  • Transfer pricing documentation where relevant.
  • Invoices for all relevant R&D expenses incurred.
  • A list of all sites where R&D activities will be undertaken.
  • Evidence of the period over which the R&D activities will be conducted and need to be covered by the AOF (i.e. project plans, tender, recruitment, purchase or hiring documents, contracts, protocols, correspondence).
  • Final contracts with all service providers engaged in the R&D activities, evidencing that the taxpayer bears the financial risks and has day-to-day strategic control over the R&D activities.
  • A corporate structure diagram.
• Ensuring that an AOF application is lodged in DISR’s R&D Tax Incentive Customer Portal in advance of the 30 June 2025 deadline.

Due to the statutory wording of the provisions not specifically forming a deadline date, DISR have confirmed that extensions cannot be provided beyond the final date of the income year even if 30 June falls over a weekend. Since 30 June 2025 falls on a Monday, this will not be an issue, but it would be recommended to consider lodging by close of business on 27 June 2025 to avoid any last-minute delays or technological issues with lodgement.

How can RSM’s R&D Tax and Government Incentives team assist?

RSM has STEM, legal and corporate tax R&D specialists with extensive experience in preparing a wide range of AOF submissions for companies across a diverse range of sectors. We can assist in navigating the relevant legislative provisions and publicly released guidance from the ATO and DISR in preparing and lodging a timely and robust AOF application.

If you would like an assessment of whether your overseas activities are likely to satisfy the requirements for an AOF or would like to discuss assistance with preparing an application before 30 June 2025, please do reach out to RSM’s R&D Tax and Government Incentives team for an initial discussion.