Many Australian software companies have developers overseas, as employees of a subsidiary, through an agency or as freelancers. The R&D Tax Incentive is an Australian program: work done outside Australia is not claimable unless it is covered by a positive overseas finding, a binding decision made by AusIndustry before the claim. Most offshore development never gets one, and much of it could not.
The four conditions
AusIndustry's current guidance sets out four conditions, all of which must be met.
- It is R&D. The overseas activity must itself be an eligible core or supporting activity. Routine feature work offshore fails here before anything else is considered.
- It serves an Australian core activity. At least one core activity must be conducted solely in Australia, meaning every part of its systematic progression happens here, and must be unable to finish without the overseas work. The overseas activity must deliver its outputs before the Australian activity is completed.
- It cannot be done solely in Australia. The allowed reasons are a facility, expertise or equipment not available here; a conflict with the Biosecurity Act 2015 or quarantine law; access to a population of living things; or geographical or geological features. AusIndustry says plainly that "financial reasons are insufficient". You must also show reasonable efforts to find the resource here.
- It costs less. Total actual and projected expenditure on the overseas activities must be less than on the related Australian core and supporting activities. This is the rule often called the 50% test: overseas spend must stay below the Australian figure, which means under half of the combined total.
For software, condition 3 is where most cases end. Developers with general skills are available in Australia at a price, and price does not count. Lower rates do not disqualify work that meets an allowed reason for some other, evidenced cause; they simply cannot be that cause.
Timing is absolute
Apply before the end of the income year in which the overseas work is conducted, or planned. AusIndustry cannot accept late applications or grant extensions. Its average processing time is 90 days, an average rather than a promise, so applying early in the year matters. The ATO says a finding starts from the beginning of the income year in which the application is made, and AusIndustry says it lasts for the overseas activities it covers, unless they change materially from the certificate's description.
A finding is not a registration. The activities are still registered each year, with the certificate number, within 10 months after year end. An advance finding is a separate decision about eligibility in general.
Traps peculiar to offshore teams
- Foreign related entities. The ATO says a finding can only be relied on for activities conducted for your company, not for a connected or affiliated foreign corporation. Taxpayer Alert TA 2023/5 targets R&D conducted overseas that is claimed as the Australian company's own but is in substance conducted for a connected or affiliated foreign entity.
- Associates. An offshore subsidiary or related contractor can be an associate: amounts count only when paid, and at market value. See associate payments.
- Location, not invoice. The question is where the work is done, not who sends the invoice.
- Mixed teams. Australian engineers' work stays claimable in the ordinary way, and keeping their records separate from offshore work makes the expenditure comparison possible.
Software companies weighing offshore work against their Australian activities can start with the overview for SaaS companies.
Our record keeping guide covers the records to keep for offshore work as well as local work.