The R&D entity test comes before any question about the work itself. If the claimant is not an R&D entity, no amount of genuine experimentation produces an offset.
The three ways to qualify
Section 355-35 recognises three kinds of body corporate:
- one incorporated under an Australian law;
- one incorporated under a foreign law that is an Australian resident for income tax purposes;
- one resident in a country whose double tax agreement with Australia defines a permanent establishment, carrying on business here through such an establishment. This third kind is an R&D entity only to the extent it does business through that establishment.
The trustee of a public trading trust also qualifies. Subsection 355-35(3) shuts out any exempt entity, and the ATO adds individuals and corporate limited partnerships to the list of those who cannot claim.
Groups, partnerships and who the work is for
In a consolidated or MEC group, the group is treated as one entity for income tax, and the head company registers and claims for activities members conduct while they are in the group; a member's own registration for that period has no effect (s 31 of the IR&D Act). An R&D partnership cannot claim in its own name; its partners that are R&D entities may.
Being an R&D entity is necessary but not sufficient. The activities must also be conducted for that entity, not to a significant extent for someone else, which is the conducted-for rule. It matters most for companies with an overseas parent, where the parent may own the results.
How it affects the rate
Entity status decides whether you can claim; aggregated turnover and ownership decide what you get. A company controlled by exempt entities, for example one owned mainly by a university or a charity, can be an R&D entity yet receive only the non-refundable offset. Check the structure before the first registration, because once the registration deadline has passed AusIndustry allows only a short list of variations, and changing the applicant is not among them.