The ATO has updated its guidance on R&D Tax Incentive (RDTI) claims by Australian subsidiaries conducting R&D activities for, or in connection with, associated foreign corporations. The updated guidance (last updated 13 July 2026) provides significantly more prescriptive indicators for determining who R&D activities are conducted for – a critical threshold question for multinational groups with Australian R&D operations.
This article summarises the key changes and our recommended actions for businesses operating within multinational group structures.
Background
Under Division 355 of the Income Tax Assessment Act 1997, an Australian subsidiary may claim the RDTI for R&D activities, provided certain conditions are met.
The fundamental question underpinning eligibility is: who is the major beneficiary of the R&D activities? This is assessed by reference to three principles – effective ownership of results, appropriate control over the R&D activities, and bearing of the financial risk.
What has changed
1. Specific positive and negative indicators
The ATO's updated guidance sets out detailed indicators under each of the three principles to help Australian subsidiaries determine on which side of the line a particular arrangement falls.
Effective ownership of results
The ATO’s view is that the Australian subsidiary is likely to have effective ownership of R&D results if:
- it will be paid in full and at arm's length for any products, goods or services arising from the successful results which it later provides to the foreign entity;
- the foreign entity's procurement of products, goods or services from the subsidiary, arising from successful results, is at a price comparable to another third-party service provider; and
- the subsidiary is able to genuinely benefit from or commercialise the results, separately from its arrangements with the foreign entity.
Further, the ATO’s guidance states that the foreign entity is likely to have effective ownership if:
- the ownership is explicitly captured in an agreement with the subsidiary;
- only the foreign entity can benefit from or commercialise the results, formally or in practice; or
- the foreign entity has the primary right, from the start, to exploit and manage intellectual property developed by the subsidiary.
Control over the R&D activities
The ATO’s guidance provides that the Australian subsidiary is likely to have appropriate control if it (or its employees, contractors or third-party advisers) is not under the direction, control or influence of the foreign entity in relation to the specific R&D activities. Importantly, the ATO clarifies that ordinary parent company governance and oversight does not count as effective control.
The ATO’s view is that the foreign entity is likely to have control if it has direct control or decision-making authority over the R&D activities. This must be over and above the control ordinarily exercised by an arm's length customer. Crucially, the ATO states that control or authority does not need to be captured in a formal agreement – control exercised in practice still constitutes effective control.
The ATO also flags that if the subsidiary is contracting with or acting like a research service provider for a foreign associate, it is likely that the foreign entity has effective control.
Bearing the financial risk
The ATO’s view is that the Australian subsidiary is likely to bear the financial risk if:
- it has paid for the R&D with money that belongs to it (e.g., from business revenues or a third-party loan); and
- any financial support (debt or equity) received from a foreign associate is on an arm's length basis, is provided as working capital (not specifically for conducting the R&D), and has repayment obligations that are not conditional on the R&D being successful (both in the written agreement and in practice).
In contrast, the ATO’s guidance states that the foreign entity likely carries the financial risk if it is:
- covering the subsidiary's costs for conducting the R&D (including cost overruns); or
- paying a non-arm's length value for products, goods or services the subsidiary later provides, where that value is calculated to cover the costs of the R&D activities.
2. Enhanced focus on artificial arrangements
The updated guidance expressly flags the ATO's concern about arrangements designed to present the Australian subsidiary as the major beneficiary of R&D where this is not genuinely the case. The ATO provides the specific example of a licensing agreement that gives the subsidiary a formal right to most income from commercialisation of R&D, but with conditions that prevent the subsidiary from ever accessing that entitlement. The ATO’s view is that such arrangements are ineligible and may attract the application of the anti-avoidance powers in Part IVA of the Income Tax Assessment Act 1936.
3. Risk indicators for subsidiary claims
The ATO now expressly states that it looks closely at claims by Australian subsidiaries exhibiting any of the following characteristics:
- no physical presence in Australia;
- no substantial business activity;
- directors under the direction or wishes of the foreign parent;
- no qualified employees to conduct or supervise the R&D activities; or
- incorporation near the end of the income year.
4. Written agreement requirements clarified
The updated ATO guidance provides additional clarity on the requirements for written agreements. It confirms that:
- the agreement must be binding only on the subsidiary and each foreign entity;
- the agreement must specify that R&D activities are conducted either directly by the subsidiary, or indirectly by another entity under an agreement binding on the subsidiary (such as a subcontract);
- the agreement may take the form of a contract for services, or other types such as agreements for delivery of goods and services or intellectual property (IP) agreements, provided they are clearly linked to the R&D activities; and
- any R&D entities conducting activities as a subcontractor under a contract with a related R&D entity are ineligible for the RDTI.
Part IVA risk
The ATO has explicitly stated that arrangements designed to present the Australian subsidiary as the major beneficiary – where this is not genuinely the case – attract the general anti-avoidance rules under Part IVA. Since 1 July 2021, the R&D tax incentive offset is expressly included as a "tax benefit" for Part IVA purposes, meaning the ATO can cancel the offset entirely.
Recommended actions
These changes raise the standard of evidence and documentation required to support RDTI claims within multinational structures. The publication of this guidance coincides with what we have observed in practice upon the ATO reviewing claims for the RDTI. To put themselves in the best position to ensure RDTI claims are accepted by the regulators, we recommend that multinationals with claims for the RDTI:
- Manage – Ensure someone in the organisation is responsible for R&D compliance and constructively engage with the Department of Industry, Science and Resources (DISR) and the ATO, including in responding to requests for further information and documents;
- Review existing arrangements – Undertake a health check of existing RDTI claims against the ATO guidance, including a review of intercompany agreements and IP arrangements to ensure they reflect genuine commercial substance. Related-party funding that is conditional on R&D success, or that is structured to reimburse R&D costs dollar-for-dollar, may indicate that the Australian subsidiary does not bear the financial risk;
- Retain contemporaneous records – Ensure that contemporaneous records document the subsidiary's independent decision-making, expenditure on R&D (including resource allocation), and financial commitment to R&D.
- Consider transfer pricing alignment – The indicators described by the ATO (arm's length pricing, comparable service provider benchmarks) will require alignment with the group's transfer pricing documentation and outcomes.
- Consider strategies to mitigate against adverse financial and tax risk – Options available include:
- in relation to go forward claims: evaluate whether obtaining a private binding ruling from the ATO, or a legal opinion will be useful to provide certainty on complex arrangements;
- in relation to historical claims: evaluate strengths and weaknesses of the position and consider whether making a voluntary disclosure is appropriate if arrangements do not satisfy the legislative criteria.
This article focuses on the integrity provisions but it is prudent to also consider other issues such as whether activities are eligible to be registered as core or supporting activities and your organisation’s ability to substantiate its R&D expenditure.