R&D under contract

If R&D is being conducted as part of a service contract, where one entity pays another entity to conduct activities, then only one of the entities is able to claim for the costs. This avoids a situation where one entity claims the costs it incurs to a service provider, and the service provider claims the costs of undertaking the activities. This would result in the same expenditure being claimed twice.

This is different from a collaboration or joint project where each entity incurs its own costs and claims independently for the different expenditures. Again, there must be no overlap, so none of the costs are claimed twice.

To determine which entity is eligible to claim the costs, there is a three-part ‘for whom’ test:

  1. Who effectively owns the outcome of the activity?
  2. Who has control over the direction that the R&D takes?
  3. Who bears the financial risk?

The answers are assessed ‘on balance’ so effectively if 2 or more conditions are satisfied in favour of one entity, that entity has the right to claim the eligible R&D expenditure. That might be the entity doing the work (e.g. if it is paid a fixed price for successful results regardless of the time taken, determines the method of solving the problem and retains the IP generated in the method), or it might be the contracting entity (e.g. if the work done is paid by the hour, the technical decisions are made by them, and the IP forms part of the delivery of the solution).

If this is uncertain, please provide us copies of contracts so that we can assess them. If you are establishing a contract with a customer or service provider and want to understand how the terms would affect eligibility for R&DTI, please let us know, as it might be possible to renegotiate these terms before agreeing on the contract.

Note that this assessment is enforced even if the eligible entity is not intending to claim the expenditure.

If the contracting entity is a foreign parent company, this test is not applied, and the Australian subsidiary is able to claim all eligible expenditures even if the activities are owned or directed by the offshore parent. Note that the expenditure not at risk clause may mean that compensation for the R&D needs to be excluded if it is reasonably expected to be paid regardless of the success of the R&D.