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Acquisitions of goods and services as supporting R&D activities

19 July 2023

4 min read


Published by:

Nikhil Sachdev

Acquisitions of goods and services as supporting R&D activities

The recent decision of the Federal Court in T.D.S. Biz Pty Ltd v Commissioner of Taxation [2023] FCA 710 emphasises that the acquisition of a good or service that is not off the shelf can constitute a supporting R&D activity requiring registration for the research and development tax incentive (RDTI).

In the decision the Federal Court upheld the Commissioner of Taxation’s (Commissioner) decision to deny T.D.S. Biz Pty Ltd’s (TDS) RDTI claim because a supporting R&D activity was carried out overseas, however, was not covered by an overseas finding as required – TDS had understood that overseas acquisitions of components for its electric tricycle prototype was a mere acquisition of components required for activities solely undertaken in Australia, and therefore, did not constitute an “activity” for the purpose of the RDTI.

The decision is a reminder to seek advice early in the RDTI process and ensure that the legal requirements are clearly satisfied before making a claim.


In this case, TDS had commenced designing and developing an electric tricycle in the 2014 income year and had registered aspects of the activities undertaken to do so as R&D activities.

TDS acquired some vehicle and electrical components from China that were customised by a service provider located in China for TDS to use according to TDS provided specifications. TDS claimed expenditure of approximately $1.6 million for amounts paid to the Chinese service provider for those services (Overseas Expenditure).

To be eligible for the RDTI, an R&D activity that is conducted for an R&D entity solely outside of Australia must be covered by an overseas finding that is obtained in advance of the activity being undertaken. That is, where an overseas finding is not obtained in advance of activities being undertaken there is no discretion or power to allow one to be obtained at a later date. TDS did not have an overseas finding for the work undertaken in China.

The Commissioner undertook a review and determined that the vehicle and electrical components purchased from China constituted a supporting R&D activity that ought to have been registered. Amended assessments were issued to TDS denying the Overseas Expenditure as R&D expenditure and allowing it as a general deduction instead.

TDS contended that the Overseas Expenditure was for the “mere supply of parts and components from China for the dominant purpose of supporting the core R&D activities”. Accordingly, an overseas finding was not applicable as no R&D activities were conducted outside Australia. TDS objected to the Commissioner’s amended assessments on that basis but the objection was disallowed.

On review in the Administrative Appeals Tribunal (AAT), it was found that the development of the component parts were supporting activities conducted entirely overseas and that as there was no overseas finding they were not eligible for the RDTI. In the AAT, a finding of fact was made that the activities were much more than ‘mere supply’ and involved the ‘design, development and fabrication… for the assembly of the project’s prototypes.’

That decision was appealed to the Federal Court with the Federal Court also deciding in the Commissioner’s favour. The Federal Court’s reasoning differed focusing on the breadth of the meaning of “supporting R&D activities” and finding that it could extend to activities that produce goods or services, stating:

“… supporting activities do not necessarily have to involve any actual research and development if other criteria are met as set out in s355-30(2)… so long as supporting R&D activities are directly related to core R&D activities, they may extend to activities that are not themselves core R&D activities… or to activities that produce goods or services, or to activities directly related to producing goods or services, provided that they are undertaken for the dominant purpose of supporting core R&D activities”.

Key takeaways

The decision is a reminder to seek advice early in the RDTI process – before activities are commenced – and ensure that the legal requirements are clearly satisfied before making a claim.

The decision has clarified the meaning of what constitutes a supporting R&D activity for RDTI purposes –adopting an expansive definition that will be of benefit to most RDTI claimants. That noted, the nexus of supporting R&D activities to core R&D activities is still very much a focus of the enquiry and one that does often required detailed and careful analysis.

For those using overseas suppliers the decision does mean that caution should be exercised in claiming expenditure related to those supplies and advice should be sought earlier to understand whether an overseas finding ought to be sought. 

Holding Redlich regularly assists businesses undertaking R&D. We bring a wealth of expertise and experience and are well placed to advise taxpayers throughout the RDTI process on all matters related to legal interpretations of the requirements, and in any audits or engagements with AusIndustry or the ATO and litigation stemming from the same.

If you have any questions about this article, please get in touch with our authors below.

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Nikhil Sachdev

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