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Overseas R&D Claims: What Australian Companies Often Miss | Link R&D Advisory

You are here: Home Practical Reflections Overseas R&D ClaimsOverseas R&D Claims – What Australian Companies Often Miss

Each year there is a common conversation of founders, CFOs, and accountants who tell some version of: "We had overseas development costs, so we couldn't claim them."

Sometimes that's true. Often, it's incomplete.

Australia's R&D Tax Incentive does allow certain overseas R&D activities to be claimed, but only where strict conditions are met and where an advance overseas finding has been obtained from DISR.

The difficulty is that this option is frequently:

not well understood,
considered too late (after the income year has ended), or
dismissed without being properly assessed.

This article sets out, in practical terms, when overseas R&D may be claimable, when it is not, and what businesses should be thinking about before the next financial year begins.

The starting point is that overseas R&D is excluded by default.

Under the R&D Tax Incentive rules, R&D activities conducted overseas are not eligible unless the company first receives an overseas finding.

Without that approval:

the activities themselves are excluded, and
the related expenditure must be removed from the claim calculation.

This is where many businesses stop.

However, the legislation does provide a pathway for overseas work to be included, but provided the conditions are satisfied and approval is obtained in advance.

What is an “overseas finding” (in practical terms)?

An overseas finding is a formal determination from DISR that allows specific overseas R&D activities to be treated as eligible for the R&D Tax Incentive.

It is:

a separate application process (though still through the same DISR R&D Portal), and
more detailed than the standard R&D registration (though eventually included in the standard R&D registration, once obtained).

In practice, it operates similarly to an advance ruling but on eligibility for the overseas component of a project.

Once approved, the overseas activities (and their associated expenditure) can be included in the R&D claim for the relevant income year(s).

The key eligibility condistions (simplified).

To obtain an overseas finding, the company must generally demonstrate that:

1. The activities are genuinely R&D.

They must meet the same core and supporting activity tests as Australian-based R&D..

2. The overseas work is directly linked to Australian R&D activities.

The overseas activities must be part of a broader R&D program that is also being conducted in Australia.

Purely offshore development, with no technical linkage to Australian experimentation, will not qualify.

3. There is genuine reason the work must be done overseas.

DISR will expect evidence that the activity cannot be conducted in Australia because of factors such as:

access to specialised facilities or equipment,
location-specific data or environments,
regulatory constraints,
unique technical expertise only available overseas.

Cost alone is not sufficient.

4. Australian expenditure must exceed overseas expenditure.

As a general rule, more than 50% of the total R&D expenditure must be incurred in Australia.

This threshold catches many companies by surprise, particularly software and hardware businesses that outsource substantial development offshore.

These four requirements come directly from the IR&D Act and current DISR guidance, and are applied strictly in practice.

A practival trap is that not all overseas costs are treated the same.

In practice, the treatment depends on what is actually being purchased:

Off-the-shelf items (e.g. SaaS tools, standard software licences, commercial components) are often still eligible if they relate to Australian R&D, and are not treated as overseas R&D activities.
Custom development, prototype manufacture, testing, or engineering performed offshore is treated as overseas R&D activity.
Work performed by overseas contractors or employees is also treated as overseas R&D activity.

This distinction alone changes the outcome for many claims.

Many businesses assume all overseas expenditure needs an overseas finding. In reality, only activities performed overseas require approval. Purchases from overseas suppliers that do not involve the supplier conducting R&D can still be claimed without a finding, provided the expenditure otherwise qualifies.

A recent AAT example.

A recent Administrative Appeals Tribunal case involved $1.6 million paid to an overseas manufacturer for prototype development and fabrication. The company argued it was merely purchasing components to support Australian R&D.

The Tribunal disagreed, finding the overseas party was performing development activities (therefore overseas R&D) and the expenditure was denied without an overseas finding.

This case illustrates how easily development work can be misclassified, and how costly the mistake can be.

Why overseas claims are often missed in practice.

From experience, overseas R&D is commonly overlooked because:

finance teams focus on the tax return timeline rather than the project lifecycle,
seperation between the technical teams and those lodging the R&D applications,
it is known but seen as too difficult or time consuming,
technical teams do not realise their offshore contractors are performing R&D activities,
accountants or advisors remove overseas costs without exploring whether approval is possible,
businesses only learn about the rules after the year has closed.

By that stage, it is usually too late to apply for the relevant overseas finding for that income year.

A common scenario.

A typical example looks like this:

an Australian company designs and experiments locally,
part of the development or testing is outsourced overseas,
the overseas costs are excluded from the claim,
no one considers whether an overseas finding could have been obtained.

In some cases, this can reduce the benefit materially. Particularly where offshore development is significant.

Timing matters.

The overseas finding application must be lodged by the end of the first income year in which the overseas activities are conducted.

This means:

FY26 overseas work needs to be assessed during FY26, not after 30 June,
project structure and expenditure mix should be reviewed early,
technical documentation needs to be prepared in parallel with development, not retrospectively.

This is why overseas R&D is best treated as a planning issue, not a tax compliance issue.

Practical guidance for businesses.

If your business uses overseas developers, engineers, laboratories, or testing facilities, it is worth asking:

Are these activities experimental in nature?
Are they technically connected to Australian R&D?
Why must this work occur overseas?
Will Australian R&D expenditure exceed offshore expenditure?

If the answer is "possibly" to several of the above, the opportunity should be reviewed early.

Final thoughts.
Overseas R&D claims are not simple, and they are not suitable for every business.

But they are far more common and viable than many companies realise.

The biggest risk is not rejection, it is never looking at the option at all.

If you would like to discuss whether overseas R&D may be relevant to your business, or how to structure projects going into the next financial year, feel free to get in touch.